RSK4801-Operational Risk
Exam Pack
,Question 1
Analyse the current structure of the risk department and recommend a re-structuring in
order for the operational risk section to be more effective. Concentrate on the typical
functions of an operational risk manager and the type of risks he/she would typically
deal with. Indicate how you would restructure the current risk department according to
typical operational risk management functions. (10 Marks)
Solution
The current risk structure is a combination of various risk types such as market risk,
operational risk and credit risk. People risk is also a separate issue, while it should be part
of operational risk according to a definition of operational risk, namely: losses due to failed
,or inadequate internal processes, systems, people and external events. This includes legal
risk, but excludes strategic and reputational risk (Basel 2003).
Typical operational risk management functions are reflected by an operational risk
management process, namely:
• Risk identification.
• Risk evaluation.
• Risk control.
• Risk financing.
• Risk monitoring (Young 2006).
A group risk organisational structure should include specialists in risk management and
should therefore be the centre of an organisation’s knowledge on risk management. As
such, a group risk function should ensure a continuous research and development ability
that would provide knowledge on leading and best practices regarding risk management.
Furthermore, the group risk function should be the hub for risk management training for all
involved role-players to be able to perform their risk management functions.
Another primary responsibility of a group risk management function is to coordinate all risk
management information on a centralised basis. This would ensure a central repository for
risk information that is accessible by all the role-players (Journal: Corporate Ownership &
Control, 2008 Volume 5)
Based on the above, a suggested operational risk management structure for the mine is as
follows:
Question 2
Identify and distinguish between the primary risks types for the mine. Indicate the main risk
factors for operational risk. (15 Marks).
Solution
Operational risk is a primary risk type and is defined as the risk of losses due to inadequate
or failed internal process, systems, people or external events (Basel 2003). Other risk types
, for the mine could include:
• Legal risk – employees could take legal action should the mine fail to provide
adequate working environment
• Reputational risk – the hazardous water being pumped into the river could have a
negative effect on the reputation of the mine.
• Financial risk – should the mine not have enough workers due to inadequate
working conditions, it could have a negative effect on the mining operations and
reduce the gross profit.
For operational risk the main risk factors for the mine are as follows:
Question 4
Insurance for mining equipment is very expensive when using a third party (Insurer).
Investigate the possibility for the mine to establish a captive and identify the benefits of
using a captive as an alternative risk financing technique. (10 Marks).
Solution
Exam Pack
,Question 1
Analyse the current structure of the risk department and recommend a re-structuring in
order for the operational risk section to be more effective. Concentrate on the typical
functions of an operational risk manager and the type of risks he/she would typically
deal with. Indicate how you would restructure the current risk department according to
typical operational risk management functions. (10 Marks)
Solution
The current risk structure is a combination of various risk types such as market risk,
operational risk and credit risk. People risk is also a separate issue, while it should be part
of operational risk according to a definition of operational risk, namely: losses due to failed
,or inadequate internal processes, systems, people and external events. This includes legal
risk, but excludes strategic and reputational risk (Basel 2003).
Typical operational risk management functions are reflected by an operational risk
management process, namely:
• Risk identification.
• Risk evaluation.
• Risk control.
• Risk financing.
• Risk monitoring (Young 2006).
A group risk organisational structure should include specialists in risk management and
should therefore be the centre of an organisation’s knowledge on risk management. As
such, a group risk function should ensure a continuous research and development ability
that would provide knowledge on leading and best practices regarding risk management.
Furthermore, the group risk function should be the hub for risk management training for all
involved role-players to be able to perform their risk management functions.
Another primary responsibility of a group risk management function is to coordinate all risk
management information on a centralised basis. This would ensure a central repository for
risk information that is accessible by all the role-players (Journal: Corporate Ownership &
Control, 2008 Volume 5)
Based on the above, a suggested operational risk management structure for the mine is as
follows:
Question 2
Identify and distinguish between the primary risks types for the mine. Indicate the main risk
factors for operational risk. (15 Marks).
Solution
Operational risk is a primary risk type and is defined as the risk of losses due to inadequate
or failed internal process, systems, people or external events (Basel 2003). Other risk types
, for the mine could include:
• Legal risk – employees could take legal action should the mine fail to provide
adequate working environment
• Reputational risk – the hazardous water being pumped into the river could have a
negative effect on the reputation of the mine.
• Financial risk – should the mine not have enough workers due to inadequate
working conditions, it could have a negative effect on the mining operations and
reduce the gross profit.
For operational risk the main risk factors for the mine are as follows:
Question 4
Insurance for mining equipment is very expensive when using a third party (Insurer).
Investigate the possibility for the mine to establish a captive and identify the benefits of
using a captive as an alternative risk financing technique. (10 Marks).
Solution
