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FRM Part II · FRM Exam Part II · Risk Reporting

An operational risk team reports to the board that the number of loss events fell from 400 to 320 year on year, and presents this as an improvement. Total net losses rose from USD 8 million to USD 12 million, and one event of USD 5 million was caused by a control failure that remains unremediated. Which statement best describes the weakness of the report?

Frequency alone is misleading. Events fell 20% but net losses rose 50%, driven by a USD 5 million event with an unremediated control failure. A sound report pairs frequency with severity, highlights large events and shows remediation status so the board sees the true risk picture.

  1. AEvent frequency is irrelevant and should be removed from all reports
  2. BThe report should show only the USD 5 million event and omit all others
  3. CThe report is sound because a 20% fall in frequency shows controls are working
  4. DFrequency alone is misleading; the report should pair it with severity, concentration in large events and the status of remediationCorrect

Explanation

Frequency fell 20% (80/400), but losses rose 50% (4/8) and the increase is driven by a large event with an open control weakness. Good reports combine frequency and severity and highlight tail events and remediation status. Omitting other events or frequency entirely would also lose information.

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