Definition of Operational Risk

Operational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events. It is a type of risk that arises from the day-to-day operations of an organization. It can be caused by human error, system failure, fraud, natural disasters, or other external events. Operational risk management (ORM) is the process of identifying, assessing, and mitigating operational risks.

Examples of Operational Risk

Examples of operational risks include data breaches, cyber attacks, IT system failures, employee misconduct, regulatory violations, and natural disasters. These risks can have a significant impact on an organization’s reputation and financial performance. For example, a data breach could lead to a loss of customer trust and a decrease in sales. A cyber attack could result in the theft of confidential information or disruption of services.

Managing Operational Risk

Organizations should take steps to identify and manage operational risks. This includes developing policies and procedures to prevent and mitigate risks, as well as implementing controls to detect and respond to incidents quickly. Organizations should also conduct regular reviews to ensure that their operational risk management processes are effective. Additionally, organizations should consider investing in insurance coverage to protect against potential losses.