Learn more about hedging or protecting against Operational Risk through Operational Insurance.
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Operational Risk Sources
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.
- This is the basic definition of Op Risk and is the premise of more 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.
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.
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.
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.
FAQ on Operational Risk
What Are Operational Risks?
These are risks that impact the operation of a business directly or indirectly. The comprehensive management of such risks is called operational risk management and includes measuring, hedging, and monetizing any or several operational risk types.
What Is Operational Risk In Banks?
Operational Risk in Banks is more complex than that of other businesses due to its high correlation to credit risk. Various banks around the world are regulated to post capital against their operational risk exposure. This is a different type of capital charge than that related to potential credit losses. The proper use of commercial insurance by such banks to hedge against operational risk can allow them to reduce the regulatory capital allocation to operational risk, which can be a significant amount of money for the bank to use freely.
What are Operational Risks in Business?
In general, Operational Risk has a single definition which applies to all Business as mentioned above. The difference from one business to another is the type of operational risk that is most relevant along with its probability of occurrence and severity. Each industry will have a different operational risk profile, and each business within such industries will have its own profile based on its unique operational risk data.