FRM Part II · FRM Exam Part II · Risk Reporting
A firm's risk report to the board aggregates operational losses by business line. The head of risk notices that a single USD 12 million loss event is driving the total of USD 15 million for the quarter, and the report currently displays only the total and a count of events. What is the most appropriate improvement?
The report should show the large loss separately with its causes and control lessons, alongside the total, the figure excluding it and the event count. This gives transparency about tail severity and the underlying run rate, whereas excluding or burying the event would misrepresent the firm's operational risk profile.
- AExclude the large event as an outlier so the trend appears representative
- BReport only the count of events since frequency is more reliable than severity
- CPresent the total in a footnote to reduce attention on one event
- DShow the large event separately with its causes and control lessons, alongside the total and the loss figure excluding it, with the countCorrect
Explanation
Boards need to see tail severity and not just frequency. Separately disclosing the large event, with causes and lessons, along with the total and the underlying run rate, gives a complete and transparent picture. Excluding it or hiding it misrepresents risk; count-only reporting omits severity.
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