Internal loss events may be one of the most important components of the operational risk framework toolkit, for a number of reasons.
Whilst other components of the operational risk framework i.e. Risk Control Self Assessment (RCSA), Key Risk Indicators and Scenario Analysis involve varying degrees of subjectivity, internal loss event data can provide the most objective source of information because the losses can be quantified and validated.
Internal losses arise from actual events, i.e. the materialisation of operational risks, and reflect the organisation’s own experience. Therefore internal loss events have the potential to be the most relevant basis for analysis and management response.
It could be argued that losses arising from a failure or lack of control and/or some unforeseen events represent a view of the past whereas risk management should be forward looking. But, unless mitigated, events that have already happened could recur, and involve more significant impacts – especially if associated with additional control failures and/or consequential loss events. In this sense taking the opportunity to learn from hindsight can be helpful in developing foresight.
If implemented effectively, the positive outcomes of the internal loss event process are not only a better-informed response to current risks but also a better-informed management of future risks.