Risk Management Metrics & Key Risk Indicators [Best Practices]

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Since the SEC ruling in February 2010, boards and CEOs (public and private) are depending more and more on operational risk management metrics.

These include key risk indicators (KRIs) at the business process level, which have the proven capability to be escalated as necessary.

Internal audit is now required to validate the most timely and significant risks, especially those that impact the achievement of the organization’s strategic objectives and key performance indicators (KPIs).

Why Are Risk Metrics & Key Risk Indicators (KRI) Important?

Risk Metrics and key risk indicators are an important way to measure effectiveness. This is because risk managers must prove they are meeting the expectations of not only regulators, examiners, and their board of directors, but also their customers, investors, fellow employees, and communities.

In the era of the see-through economy, the rapid advancement and proliferation of technologies like social media have left companies with nowhere to hide. We’re living in an age of transparency where the public is empowered to impact a company’s reputation.

Without measuring any key risk indicator, the value of the company’s Risk Management program, or the degree to which previously unidentified risks have been mitigated, is unlikely to be demonstrated.

Risk Metrics Reporting

Our Risk Reporting Software provides multiple reports to help risk managers identify gaps in assessments, mitigation and control activities, and monitoring and testing activities throughout the organization.

Moreover, LogicManager enables all of these reports to be filtered by an assessment cut level, so organizations can focus on process improvement.

Our software doesn’t just help risk managers detect gaps across the enterprise; LogicManager provides resources and methodologies that help quantify and measure the value of the ERM program.

Key Risk Indicators Examples

Below we cover some crucial top level metrics that you can look to as you develop key risk indicators that your business can implement.

#1: Total Number Of Systemic Risks Identified

Systemic risk identification detects areas of upstream and downstream dependencies throughout your organization, such as when one area of the organization is unknowingly causing strain on other areas. Additionally, this method also identifies areas that would benefit from centralized controls, eliminating the extra work of maintaining separate activity level controls and increasing organizational efficiency.

#2: Percentage Of Process Areas Involved In Risk Assessments

ERM is cross-functional in nature and cannot be performed in silos. A business is the sum of its parts. The same is true of risk. A risk event in one functional area also affects other functional areas within the business. Process owners own the risk; risk managers own the completeness, timeliness, and accuracy of the risk information. The more process owners are involved in risk assessments, the more accurate and forward-looking is the information collected.

#3: Percentage Of Key Risks Monitored

Most organizations need a greater understanding of how the business metrics they rely on daily are tied to risk and are being monitored.

If a risk or activity changes, organizations have no way of knowing how, and if, these changes will affect their metrics as well as their risk exposure. Through risk assessments and linking risks to activities, organizations can start prioritizing what increasing risk exposures need to be monitored. Regular risk assessments enable the detection of increased threat levels emerging risks (before they materialize). This prevents business metrics from being pushed out of tolerance.

#4: Percentage Of Key Risks Mitigated

Having a sense of your overall risk coverage is important; however, it is not nearly as valuable as knowing the coverage of your organization’s key risks. Because all risk assessment should be based on standardized criteria, you can determine a uniform tolerance, or cut level, throughout the organization based on resulting assessment indexes. This will help you to prioritize resources, spending them on risks that need stronger coverage rather than wasting them on low-impact risks. This gap analysis, with a tolerance level, will also help identify emerging risks as they rise out of tolerance and it becomes clear that current risk mitigation activities are no longer sufficient.

Risk Metrics: Summary

By tracking these metrics, organizations are able to more effectively mitigate existing risks and detect emerging risks long before they are able to have a detrimental impact on the organization.

Frequently Asked Questions

What Metrics Can Be Used To Manage Risk?

There are a myriad of metrics that can be used to manage risk, but there are 4 that are especially critical in measuring the effectiveness of your risk management program. First is the number of systemic risks you’ve identified. Systemic risk identification detects upstream and downstream dependencies across all levels and business areas of an organization. Secondly, it’s important to calculate the percentage of process areas involved in your risk assessments. Risk management, namely ERM, is inherently cross-functional and cannot be performed in silos, therefore a risk should be viewed as the sum of its parts. Another crucial metric is the percentage of key risks monitored. Through consistent risk assessments, you’re able to better prioritize the activities that are most in need of monitoring, and ultimately prevent business metrics from being pushed out of tolerance. Lastly is the percentage of key risks mitigated, which helps you prioritize resources, allocating them to risks in need of stronger coverage and reducing inefficiencies that come from wasting resources on low-impact risks.

How Is Risk Impact Calculated?

The impact (or consequence) of a risk refers to the extent to which the risk event could potentially affect the organization. Risk impact is often calculated by factoring in threats to the company’s security, finances, reputation, safety or operations. Assessing impact should be performed on a 1-10 scale over more commonly used high-medium-low scales. Using a 1-10 scale provides more flexibility and makes calculating residual risk more straightforward. The key is to express severity of impact in both quantitative and qualitative terms in a standardized way.

Why Are Key Risk Indicators (KRIs) Important?

Key risk indicators (KRIs) are essential in monitoring risk and staying on top of compliance requirements. There are hundreds of metrics that can be collected, which makes it crucial to prioritize the ones that are the most important. Some examples include regulatory changes, economic downturn or percentage of key risks mitigated in a given period. Tracking KRIs ensures that your most critical risks are being constantly monitored.

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