Operational Risk

Operational risk is the risk of losses resulting from inadequate or failed internal processes, people and systems, or from external events. [Source: Society of Actuaries (SOA) Enterprise Risk Management Specialty Guide]

It is often difficult to deal with quantitatively. The potential risks cannot be modeled easily with statistical distributions, and ‘worst case’ scenarios frequently involve the insolvency of the enterprise. Increasingly, though, organisations such as banks are collecting historical data on operational risk losses which means that quantitative analysis will become more common. However, quantitative analysis will never be a substitute for the use of worst case scenarios: history tells us that it often takes just one such scenario to bring down a company. [Source: Institute and Faculty of Actuaries (IFoA) Enterprise Risk Management Specialist Principles (SP9) Core Reading]

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