ASK MAT: My EWRA / FWRA is split between CAUSAL, INHERENT, and IMPACT risk categories. Why is this categorisation important?  

Hi Mat,

• In my firm's ENTERPRISE RISK ASSESSMENT [EWRA], or FIRM-WIDE [FW], the risk is split between INHERENT, CAUSAL, and IMPACT.
• Why is it important to know this?

Hi, thank you for a great question.

Splitting risk threats and risk vulnerabilities between CAUSAL, INHERENT, and IMPACT is crucial for several reasons, and these are outlined below:-

Clearer Risk Identification:

• Inherent Risks: Inherent risks refer to the natural or intrinsic dangers associated with any activity, environment, or situation before any controls or mitigations are applied.
• Causal Risks: A causal risk refers to a situation where one event or factor (the cause) directly or indirectly increases the probability of another event (the effect) occurring. Identifying specific events or actions that could lead to threats helps pinpoint the exact causes of potential issues and impacts.
• Impact Risks: Impact risk, or impact risk assessment, refers to the potential consequences or effects that an event, decision, or action might have on various aspects, such as people, organisations, environments, or systems. Assessing the potential consequences of threats helps understand the severity of their effects on your organisation.

Here are examples of each risk type in the context of an enterprise risk assessment:

Inherent Risk:

• Example: The risk of data breaches in a company that handles large volumes of personal information. This risk exists naturally due to the nature of the business and the data type processed, regardless of any controls in place.

Causal Risk:

• Example: A phishing attack that compromises employee credentials. This specific event can lead to unauthorised access to sensitive company data.

Impact Risk:

• Example: The potential financial loss and reputational damage if a major data breach occurs. This focuses on the severity of the consequences rather than the likelihood of the breach happening.

The question, however, is why:-

 Effective Risk Management:

• By categorising risks, you can develop targeted strategies to mitigate each type. For example, Causal risks might require immediate action plans, while inherent risks might need long-term controls and monitoring.

Resource Allocation:

• Knowing the different types of risks helps prioritise resources. High-impact risks might need more attention and resources than lower-impact ones, ensuring efficient use of your firm’s resources.

Enhanced Compliance:

• Regulatory bodies often require detailed risk assessments. Differentiating between these risks ensures that your firm meets compliance standards and avoids potential legal and financial penalties.

Strategic Planning:

• A comprehensive understanding of risks supports better decision-making and strategic planning. It helps build a resilient organisation that can anticipate and respond effectively to various threats.

Improved Communication:

• Clear categorisation of risks facilitates better communication within the organisation. It helps stakeholders understand the nature and severity of risks, leading to more informed discussions

Importance of Knowing These Risks:

Risk Identification:

• Differentiating between these types of risks helps organisations identify and categorise risks more accurately.

Resource Allocation:

• Understanding risks' nature and potential impact allows organisations to allocate resources effectively to mitigate them.

Strategic Planning:

• Knowledge of these risks supports informed decision-making and strategic planning, enhancing an organisation’s resilience and ability to achieve its goals.

Compliance:

• Knowledge of these risks supports compliance with AML/CTF/CPF regulations and helps avoid legal and financial penalties.

Understanding these examples can help you better categorise and manage risks within your firm’s enterprise risk assessment.