Page 36 - Risk Management Bulletin Jan- Mar 2022

RMAI BULLETIN JANUARY - MARCH 2022

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 any
of what is normally expected and have potentially
steps to mitigate it. It is usually calculated as the
severe consequences. Black swan events are typically
product of inherent likelihood times the inherent
characterized by their extreme rarity, their severe
impact of an event. Inherent risk is generally rated
impact, and the widespread belief that they are
higher than residual risk, which is the rating of a risk
unpredictable and therefore impossible to plan for.
after risk mitigations have been taken into account.
Cost of Risk
Integrated Risk Management (IRM)
A measure of the cost of managing risks and incurring
"A continuous, proactive, systematic approach to
losses. Total cost of risk is the sum of all aspects of an
identifying, assessing, understanding, acting on, and
organization's operations that relate to risk, including
communicating risk from an organization-wide,
retained (uninsured) losses and related loss adjustment
aggregate perspective." IRM is typically viewed as
expenses, risk control costs, transfer costs, and
synonymous with enterprise risk management (ERM),
administrative costs.
although some practitioners prefer the term IRM to
emphasize that the discipline is pulling together risk
Credit Risk
management practices from across an organization
Relates to the risk that an organization will incur losses
into a unified framework.
due to the default or downgrade of a counterparty (e.g.,
customer, investee , swap counterparty. As an example
Key Risk Indicators (KRIs)
if a customer does not pay an account receivable this
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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