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Cracking Open Key Risk Indicators

Everyone wants to know what the future will bringand this is especially true in the world of risk management, where professionals are dedicated to identifying current and future sources of risk or loss and eliminating or mitigating such potential loss through the application of controls.

By Denise Tessier | Updated on May 21, 2012

Everyone wants to know what the future will bring—and this is especially true in the world of risk management, where professionals are dedicated to identifying current and future sources of risk or loss and eliminating or mitigating such potential loss through the application of controls.

In this process, key risk indicators (KRIs) are metrics or pieces of data serving as early warning signs of areas of increasing risk. KRIs portend future trends, losses and opportunities. When managed efficiently, they can be used by risk managers to proactively monitor operational processes and identify potential business, legal, financial or other environmental risks that may affect the company—long before they can occur.

The Benefits and Importance of KRIs

Developing effective KRIs is crucial to the success of any risk-management program. First, as they assist in predicting potential risk events, they are most useful in identifying key areas in which additional controls or mitigation might be needed.

For example, the risk of “financial loss due to breach of underwriting authorities” may be partially predicted by a KRI of “number of times in a month a scheduled peer review was not conducted” or “failure to seek management approval to underwrite a class of business outside of an assigned underwriting authority.” These types of violations may call for renewed focus on the peer-review process and shoring up of management-review protocols.

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