Drivers underlying measurement

Before considering a measurement method, the important foundation is to define what the operational risk measurement has to support. Here are the drivers I think are worth aiming for:

A heightening of risk awareness in management across an organisation's diverse businesses
A consistent measure of risk allowing executive management and board reporting and response across a diverse organisation
A measure of risk (including credit and market risk) for the organisation that is able to be compared with capital required by regulators, rating agencies and investors
A measure of risk by organisation unit, product, channel and customer segment which allows risk adjusted returns to be assessed, and scarce capital to be rationally allocated
A measure of risk vs return that allows businesses and in particular new businesses (including mergers and acquisitions) to be assessed in terms of contribution to growth in shareholder value
A framework from which the organisation can determine its insurance requirements rationally

Having ambitious drivers does not necessarily make the measurement easier, but it does give a clear set of factors to use to evaluate the possible alternative measurement models. They also are worthwhile striving for and worthwhile achieving!

To Different measurement methods

Last updated:16/5/07

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