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C24 Q24.1

A

ALEX_AK

Member
Point 4 of the solution mentioned that active management of operational risk has no inherent upside potential. (I didn’t find this point in LAM or Sweeting)
But solution to Q24.2 mentioned that the distinct benefit of operational RM is minimising reputational damage, day to day losses, etc.
The 2 seems to be contradicting each other.
What does the solution mean by “upside potential”? Seems like it does not mean “benefits”.
Anyone has any insights?
 
"Benefits" and "upside" are not quite the same.

For example, if you insure your car, the benefit of the insurance is that if you crash, you will be reimbursed for your loss (ie it protects against downside risk). There is no upside to car insurance - you do not get back more than the loss you have suffered.

Similarly, the benefit of managing operational risk is that you do not suffer reputational damage, loss of productivity etc. There is no upside in that stakeholders expect the company to be run well, managing operational risk does not produce additional/enhanced returns - it protects against downside risk.
 
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