Defining Operational Risk and Getting Expert Advice

‍Operational Risk (Op Risk) is the core of all business risks and is defined as the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events.
- Learn about hedging Operational Risk through Operational Insurance.

DeshCap · Operational Risk

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Operational Risk Sources

Chart about the general sources of Operational Risk — *Sources of Operational Risk*

This represents the base definition of Op Risk and is the premise of complex and derivative definitions used by global regulatory bodies (including the Basel Committee on Banking Supervision) and private institutions.

‍Operational Risk is the most important Business Risk statistically.

‍Managing it correctly including hedging it enhances business and investor performance.

Investor returns can be increased by 2%-4% annually and business margins can be expanded by up to 25% on average through effective Operational Risk Management.

Contact DeshCap to manage Operational Risk including measuring it, hedging it through commercial insurance, and monetizing it.

DeshCap is a licensed RiskTech and ranked online #1 for Liability Risk Management worldwide.
Our team of insurance engineers contractually guarantee results including net cost for tailored protection that we structure and trigger as business insurance consultants independently of any broker or lobbyist.

Operational Risk Examples

External Events

Cyber attacks
Political events/changes
Economic downturns/crises
Natural events/disasters

Systems

Malfunction in computers
Damage to equipment due to a failure in electronic or non-electronic systems

Process

Low Process Quality due to organizational functions (ex. tasks assigned incorrectly)
Failure of internal communications linkages
Workplace Safety issues

People

Wrong decisions made by the Board of Directors or Management (ex. M&A, financing, other decisions)
Employee or other internal Fraud (whether or not electronic in nature)
Disputes leading to lawsuits (employment / shareholder / third party /etc.)

The above operational risk types and examples can be hedged against through different types of commercial insurance products.

Any operational insurance used as a hedge has to be reworded and triggered independently of any insurance broker or company.

Operational Risk by Industry

The Operational Risk of a Bank

The operational risk in Banks is more complex than most businesses due to its relationship to other forms of key banking risks such as market risk and credit risk.

Each bank will have its own operational risk profile. For example, the operational risk measures of a bank that derives most of its revenues from residential mortgages within a particular geography will be vastly different than those of a bank deriving most of its revenues from commercial lending within a particular industry.

It is important to tailor insurance for lenders so it can be used as an effective hedge to operational risk.

Sources of Operational Risk in Banks — *Measuring and hedging Operational Risk in Banks has a direct impact on Credit Risk metrics, reserving, and earnings.*

An Investment Fund's Operational Risk

Each type of investment fund will have its own operational risk profile depending on the strategy of the fund.
Asset classes, turnover rates, underlying holdings, historical performance, etc. impact the operational risk of an investment fund.
LPs or investors in any particular fund or asset manager should do their due diligence on its fund insurance. This is to ensure that investors are redeemed by the fund or asset manager in case of an investment loss driven by an operational risk.

Sources of Operational Risk of Investment Funds — *Measuring and hedging the operational risk of investment funds will have a direct impact on annual investment returns.*

The Operational Risk in Manufacturing Business

Each type of manufacturer would have its own operational risk profile. It is important to match commercial insurance for manufacturers to such operational risk profile.

Sources of Operational Risk of Manufacturers — *Measuring and hedging operational risk in a manufacturing business will result in significant margin expansion.*

Operational Risk in Food Industry

The operational risk of the food industry has its own dynamics, and each food operator will have its own unique set of operational risk data.
A franchisor would face a different set of operational risks, which should be hedged through franchisor insurance, compared with a restaurant chain.

Operational Risk Management

Operational Risk Management is essentially the most important form of risk management for most businesses as it looks to reduce the quantum of operational risks through both the implementation of controls and the use of insurance solutions, specifically commercial insurance and financial derivatives.

Since Operational Risks are the nucleus of all business risks, tackling them essentially tackles most business risks while driving operational resilience.

Frequently Asked Questions

What is operational risk?

Operational risk is the risk of loss resulting from failed internal processes, people, systems, or external events. For decision makers, operational risk includes breakdowns that can impair margins, disrupt revenue, trigger legal liabilities, damage reputation, or affect financing and valuations.

What are examples of operational risk?

Common examples of operational risk include cyber incidents, supplier failure, employee misconduct, control failures, system outages, physical damage, regulatory breaches, and process errors that lead to financial loss or business interruption.

How do companies manage operational risk?

Companies manage operational risk by identifying key exposures, scoring risk drivers, strengthening controls, aligning contracts and procedures, stress-testing scenarios, and structuring insurance to transfer material loss exposures. The most effective approach combines operational controls with independent insurance and claims strategy.

Why is operational risk important for executives and boards?

Operational risk is important because it can directly impact profitability, liquidity, compliance, debt covenants, enterprise value, and management liability. Boards and executives are increasingly expected to demonstrate active oversight of cyber, AI, supply chain, safety, and regulatory risks.

What is the difference between operational risk and financial risk?

Operational risk arises from how a business functions day to day, such as systems, people, and processes. Financial risk relates more directly to market movements, interest rates, credit quality, liquidity, and capital structure. In practice, operational risk often becomes financial risk once losses hit earnings, cash flow, or asset values.

How can operational risk be measured?

Operational risk can be measured through risk registers, control assessments, scenario analysis, loss history, downtime metrics, incident trends, and quantified exposure models. Decision makers should focus on which operational risks are most likely to cause material financial loss and whether those risks are insurable or preventable.

Can insurance help manage operational risk?

Yes. Insurance can play a critical role in managing operational risk when coverage is engineered to match the business’s real exposures. Cyber, property, business interruption, D&O, environmental, crime, and liability policies can all respond to operational risk, but only if wording, triggers, and limits are structured properly.

What is an operational risk audit?

An operational risk audit is an independent review of the business’s processes, systems, people, controls, contracts, and insurance structure to identify where loss can occur and how it can be reduced or transferred. A strong audit links operational risk to compliance, protection, cost, financing, and valuations.

How do you reduce operational risk without slowing growth?

Operational risk is reduced most effectively by prioritizing high-impact exposures, not by over-controlling everything. Decision makers should focus on the few risk drivers that can materially affect cash flow, margins, or liability, then align controls, contracts, and insurance around those priority risks.

How can I assess operational risk in my business?

You can start by mapping your main processes, counterparties, technologies, and physical assets, then identifying where failure could cause material loss. If you want an independent review, contact our team or use your preferred audit process to benchmark operational risk against your current insurance and control structure.