A Model Defense

From Chris Mandel

Risk modeling is the key to successful risk management. Not quite. Not even close. It has been headline news for most of this year, though. “Risk models got it wrong,” the headlines said. Billions were written off or lost. Chief Risk Officers were fired and some scape-goated.

By quick, yet unfounded extension, enterprise risk management has failed, just like so many pundits predicted.

Wrong again. Like every other component of risk frameworks, no one part is key to the whole. In fact, each part is important to a successful approach to understanding and successfully managing risk.

But what about risk modeling? No one model can be expected to give just the “right” answer.

More often, multiple and varied data points are more useful to an effective analysis. Think traditional actuarial work in casualty insurance. Most good actuaries use multiple methods or models to get to their range of predicted values.

So it is in modeling all kinds of risks. More than one model gets you to a better answer most of the time. But a better analysis doesn’t stop there. Supplemental approaches can often add a lot. One such approach is the use of expert opinion.

Continued in Risk & Insurance

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Explore posts in the same categories: Enterprise Risk Management, Financial Crisis, Modeling, Risk, risk assessment

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