Operational Risk Factor.

Introduction

Chapelle (2019) urged that there is an original definition and unofficial definition of operational risk as used in the banking industry, which is simply anything does not credit risk or market risk. In addition to this, Chapelle (2019) postulated that, another generational definition of operational risk is a “non-financial risk” which refers to any risk type which is not related to purely financial, like credit, market, or liquidity risk in the banking industry and an underwriting risk in insurance.

Operation Risk defined

The concentrate definition of operational risk is or has been presented by the Basel Committee (2002), which suggested that operational risk is “the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. The Basel Committee which the regulator of the banking industry, cover operational risk into seven types, as they relate to fraud, security, and error risk. Among those seven, the following list identifies the operational risks:

Ø  Internal fraud (frauds and unauthorized activities by employees).

Ø  External fraud (hold-ups, thefts, system hacking, etc.).

Ø  Employment practices and workplace safety (contract termination, disputes with

Ø  employees, etc.).

Ø  Clients, products, and business practices (client misinformation, complaints and

Ø  discounts due to errors, products misspecification, etc.).

Ø  Damage to physical assets.

Ø  Business disruption and system failures (IT breakdown, etc.).

Ø  Execution, delivery, and process management (processing error, information transfer,

Ø  data coding, etc.).

Definition of Operational Risk Factors

Having discussed or defined the term operational risk, we are now going to elaborate on the concept of operational risk factor, which does not have a single definition, but Blunden and Thirlwell (0000) identified as lack of individual’s lack of competence, lack of training as well as lack of experience (sometimes called people risk). Chapelle (2019) defined operational risk factors as the leading Key Risk Indicators which are metrics on risk drivers and are sometimes called risk causes. Examples provided by Chapelle (2019 in regard to operational risk factors include lack of vigilance, tiredness, working under the influence of alcohol.

According to Abkowtiz (2008) operational risk factor or factors, is an ingredient that alone or in combination with other risk factors will erodes into the margin of safety towards the operations of an organisation. Abkowtiz (2008) went on and said that, once the margin of safety is compromised, the situation will be free unravel to epic proportions.

The contributions by Abkowtiz (2008) provided much depth towards the definition of operational risk factors and did illustrated the bases or where the operational risk factors might arise from. He his elaboration, 10 risk factors were presented namely,

1.    design and construction flaws,

2.    deferred maintenance,

3.    economic pressures,

4.    schedule constraints,

5.    inadequate training,

6.    not following procedures,

7.    lack of planning and preparedness,

8.    communication failure,

9.    arrogance, and

10. stifling political agendas.

Contribution of humans towards the operational risk factors

Not all the operational risk factors identified above do relate to the case study, however an interesting observation is that the above listed factors do have the contribution of human element involved in each and every one of them. Taking into account of the case study, the strategic decisions made by the company from converting the cargo ship into  passenger ship is among the human contributing decision, as well the arrogance of the captain. Linking these operational risk factors to the case study will be illustrated in the following paragraphs. In his interesting discussion, Abkowtiz (2008) suggested that human contribute to the causes or impact of almost every disaster, but on the same note does have an opportunity to control these operational risk factors more effectively for optimum results or outcome. In the discussion above  Blunden and Thirlwell (0000) argued that these operational risk factors can be sometimes called the people risk, and below we are going to highlight the people risk relating to the decisions made, actions taken by the captain of the Oceanos, as well as the action he was supposed to take and opted as per his seniority and opted not to do so.

People Risk caused by actions of the Captain of the Oceanos

Ø  Arrogance –  interesting discussion by  Abkowtiz (2008), highlighted arrogance as one of the operational risk factors, that do contribute towards the people risk, which one can relate to the actions to the captain, as illustrated on the following points.

When the captain was asked if the ship had hit the bottom, he replied that it was nothing serious and that the ship had hit an underwater buoy.  Apparently, the captain was quite arrogant when more passengers asked the same question.  He dismissed the incident as not serious. Here the captain showed that he was arrogant and willing to cooperate with others and thus posed people risk. Avoiding the character of arrogance and willing to listen can also help to avoid problems like these in the future.

The ship returned to the harbour, and after a while the captain was pressurized by the wedding party to sail out to sea again. Arrogance from the captain again here, contributed to the operational risk factors, and avoiding such action will serve as input for responding to similar in the future.

Despite swells ranging from six to ten metres, the captain decided to depart at 17:00. He reasoned that the ship had to set sail to Madagascar the next day and if the ship did not sail, it would inconvenience the passengers and upset the schedule for the next day. These actions by the captain also shows that, his arrogance contributed towards the operational risk factors as people risk, and avowing similar actions in the future, will assist in avoiding problems like these.

When the ship sailed, it was very much against the will and advice of some of the crew. Arrogance of the captain again, was a contributing factor towards the operational risk and listening to crew member in a more democratic leadership style will help to avoid future problems of this manner.

Ø  Not following procedures – In addition to the interesting discussion  by  Abkowtiz (2008), not following procedures was hinted as one of the contributing factors towards the operational risk factors and people risks. There are many instances were procedures required for the safety of the passengers and the crew were not followed and thus the accountability will still be resting with the captain.

Upon asked by passengers if the ship had it the bottom, “a procedure  should have been followed to investigate the incident formally to determine precisely what had happened and whether the vessel had suffered any damage.  It seemed that this was not done and that the captain accepted that any damage would be identified during a standard checking procedure of all systems that is carried out before a ship sets sail.” This contributed to the people risk, and investigations in the future will avoid problems like this.

The responsible crew did not check the passenger list thoroughly and accepted that all passengers had re-embarked. Consequently, there was no formal, complete passenger list, and it was assumed that all passengers had re-embarked.

The spray was lashing the open decks. The captain was on the bridge and failed to ensure that the crew and the passengers participated in a safety drill in case of an emergency. This another action by the captain, that contributed to the operation risk, and avoid this in the future, can help in avoiding reputational risk.

However, the captain did not give the command to abandon ship. Some crew members knew what was happening and were running around in life jackets, which alarmed some of the passengers. Some of the crew were struggling to release the lifeboats, and several officers were already seated in the boats. The captain failed here, and he should have informed the crew members and passengers to disembark from the ship after having been informed by the engineer to do so. Taking the action and inform the passengers and crew will assist a lot in the future.

The ship sailed to Cape Town and back to Durban on 31 July 1991 in “huge seas”, so much  so that the pilot could not board the ship by helicopter to steer the ship out of the harbour. (Not the best season to Sail here in South Africa).  The high seas and bad weather continued until the ship docked in East London. The captain did not follow the procedure to check the weather and did not follow the protocol of not sailing in bad weather, and thus posing greater risk to the crew and the passengers.

The captain was among the first people to disembark the ship, this is another people risk based not following the procedures. Avoiding this in the future will help in reducing reputational risk. The reputational damage here would be very big, because the captain during the interview, he narrated that in the event of sinking he would be the first to be on the lifeboat off the ship. The captain was also not one of the last of the crew to be rescued and abandoned the ship while some passengers were still on board. According to a standard operating procedure, the captain and the crew of a ship must only abandon the ship after the passengers have been rescued.

Ø  Communication failure – Lack of proper communication from the part of the captain constitute a communication failure, another people risk highlighted by  Abkowtiz (2008) in his discussion about operational risk factors. Having proper and working communication system will play a greater in avoiding incidences like these in the future. The following provides list or instants where poor communication occurred:  the captain reluctantly ordered a Mayday call. However, the communications were not working (because the generators had been shut down) and the radio officers transmitted the message in Morse code. Various stations received the distress call.

However, the captain and his crew left the bridge, and nobody was manning the communications between the Oceanos, other ships and the SADF. This another action from the captain that can be avoided in the future and help avoid problems in the future.  The communication made by the passengers should have been made by the captain and correcting these mistakes in the future will help to avoid such problems.