Page 34 - Risk Management Bulletin January-June 2023

RMAI BULLETIN JANUARY - JUNE 2023

Glossary

Risk Prevention: Fourth Party Risk:
The process of minimizing accidental loss by Similar to third party risk, fourth party risk also refers
anticipating and preventing the occurrence of to risk that arises from a firm's dealings with external
unplanned events. In its broadest form, risk prevention parties. Whereas third party risk arises from the firm's
incorporates a wide range of elements including direct interactions with external parties (e.g. suppliers,
worker safety and health, environmental affairs, vendors, agents etc.), fourth party risk arises from the
property conservation, fire protection, security, transit, relationships that those third parties have with other
product safety, third-party liability, and contractual organizations.
liability.
Inherent Risk:
Black Swan Event: represents the level of risk that would be faced if the
Black swan events are a risk events that are far outside organization were to accept the risk without taking
of what is normally expected and have potentially any steps to mitigate it. It is usually calculated as
severe consequences. Black swan events are typically the product of inherent likelihood times the
characterized by their extreme rarity, their severe inherent impact of an event. Inherent risk is generally
impact, and the widespread belief that they are rated higher than residual risk, which is the rating of
unpredictable and therefore impossible to plan for. a risk after risk mitigations have been taken into
account.
Cost of Risk:
A measure of the cost of managing risks and incurring Integrated Risk Management (IRM):
losses. Total cost of risk is the sum of all aspects of an "A continuous, proactive, systematic approach to
organization's operations that relate to risk, including identifying, assessing, understanding, acting on, and
retained (uninsured) losses and related loss adjustment communicating risk from an organization-wide,
expenses, risk control costs, transfer costs, and aggregate perspective." IRM is typically viewed as
administrative costs. synonymous with enterprise risk management (ERM),
although some practitioners prefer the term IRM to
Credit Risk: emphasize that the discipline is pulling together risk
Relates to the risk that an organization will incur losses management practices from across an organization
due to the default or downgrade of a counterparty (e.g., into a unified framework.
customer, investee , swap counterparty. As an example
if a customer does not pay an account receivable this Key Risk Indicators (KRIs):
would represent a crystallized credit risk. These are empirical metrics that indicate that a risk
event may happen in the near future (leading
Enterprise Risk Management (ERM): indicator) or that a risk event has already occurred
Enterprise risk management (ERM) is the process by (trailing or lagging indicator). For example, if a
which the board and management of an organization company has a large portfolio of variable interest rate
identify and manage risks to the organization, its debt then it has market risk related to interest rates.
strategic objectives and its stakeholders. ERM shares A key risk leading indicator in this case may be several
common perspectives with other risk management domestic central bank interest rate increases, interest
disciplines. rate increases in other countries.

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