Operational risk is the risk of losses caused by inadequate or failed internal processes, people, systems, or external events. It is a broad category of risk that can affect any organization, regardless of size or industry.
Operational risks can be classified into different categories in a number of ways. Here are some of the most common types of operational risks:
- Human error: This type of risk is caused by mistakes made by employees, such as data entry errors, mishandling of customer information, or inadequate risk management.
- System failure: This type of risk is caused by problems with an organization’s IT systems, such as hardware failures, software glitches, or cyberattacks.
- Natural disaster: This type of risk is caused by natural phenomena, such as hurricanes, floods, earthquakes, or wildfires.
- Terrorism: This type of risk is caused by intentional acts of violence against an organization or its people.
- Third-party risk: This type of risk is caused by problems with an organization’s third-party vendors or suppliers, such as data breaches, supply chain disruptions, or product recalls.
- Employment practices and workplace safety: This type of risk is caused by inadequate or ineffective human resource management practices, such as poor hiring practices, inadequate training, or unsafe working conditions.
- Clients, products, and business practices: This type of risk is caused by problems with an organization’s products or services, or with its relationships with its customers.
- Damage to physical assets: This type of risk is caused by damage to an organization’s physical assets, such as its buildings, equipment, or inventory.
- Business disruption and systems failures: This type of risk is caused by disruptions to an organization’s business operations, such as power outages, system failures, or natural disasters.
- Execution, delivery, and process management: This type of risk is caused by problems with the execution of an organization’s processes, such as errors in processing transactions or inadequacies in risk management.
The specific types of operational risks that an organization faces will vary depending on its size, industry, and location. However, the risks listed above are some of the most common types of operational risks that organizations face.
Operational Risk MCQs
- Which of the following is NOT a type of operational risk?
- Human error
- System failure
- Natural disaster
- Financial risk
- The correct answer is financial risk. Financial risk is a different type of risk that is caused by changes in the financial markets.
- Which of the following is NOT an example of an operational risk event?
- A data breach
- A system outage
- A natural disaster
- A change in interest rates
- The correct answer is a change in interest rates. Interest rate risk is a type of financial risk, not operational risk.
- Which of the following is the most common cause of operational risk events?
- Human error
- System failure
- Natural disaster
- Terrorism
- The correct answer is human error. Human error is the most common cause of operational risk events because it is the most difficult to prevent.
Conclusion
Operational risks are a real and present danger for all organizations. By understanding the different types of operational risks and taking steps to mitigate them, organizations can protect themselves from financial losses, reputational damage, and regulatory fines.