The Institute of Operational Risk (IOR) has published a Key Risk Indicators Sound Practice Guidance paper to address the lack of written support on the effective application of this important tool.
Covering the whole of the key risk indicators (KRI) process from their selection to their use in risk reporting and assessments, this is the fourth in the Institute’s series of sound practice papers designed to provide practical guidance on the implementation of techniques necessary to support a robust operational risk management framework.
Edward Sankey, chairman of the Council of the IOR, said: “Reporting with KRIs is the operational risk activity that is most evident to directors and business management. The impact of operational risk management depends on accurately directing management attention to the issues of the day.
“This sound practice paper drives home the key link between risk reporting on the one hand and governance and monitoring risk tolerance on the other, It provides senior managers and risk practitioners with practical guidelines on developing and using KRIs.”
In an operational risk context a KRI is a metric that provides information on the level of exposure an organisation has at a particular point in time to a given operational risk. It is, however, an area that has proven to be particularly challenging for many organisations.
The IOR’s paper outlines the sound practices in relation to the use of risk indicators to support the management of operational risk. But while risk indicators are acknowledged as a valuable tool, the guidance paper warns against over reliance on a metric driven traffic light mentality at the expense of good management judgement. The use of fixed lists or optimum indicators is also advised against as KRIs will vary both by organisations and over time and, in addition, need to be updated on an ongoing basis.
Selecting the best indicators – those that are relevant, easy to use and predictive – is crucial as any piece of data could conceivably be viewed as a metric. The paper provides guidance on establishing the specific characteristics and how to select the optimum indicators.
Implementing a set of indicators is only part of the solution the paper advises. Guidelines also need to be established on how to interpret the indicators, the actions that are required and the thresholds/limits for selected indicators.
The paper also recommends exception based reporting to avoid overloading managers with too much information so that they cannot make effective decisions. The focus should only be on those indicators that require attention.
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