By Chris Mandel
Understand the probability of loss, adjusted for the severity of its impact, and you have a sure-fire method for measuring risk.
Sounds familiar and seems on point; but is it? This actuarial construct is useful and adds to our understanding of many types of risk. But if we had these estimates down pat, then how do we explain the financial crisis and its devastating results? The consequences of this failure have been overwhelming.
Enter “risk velocity,” or how quickly risks create loss events. Another way to think about the concept is in terms of “time to impact” a military phrase, a perspective that implies proactively assessing when the objective will be achieved. While relatively new in the risk expert forums I read, I would suggest this is a valuable concept to understand and more so to apply.
It is well and good to know how likely it is that a risk will manifest into a loss. Better yet to understand what the loss will be if it manifests. But perhaps the best way to generate a more comprehensive assessment of risk is to estimate how much time there may be to prepare a response or make some other risk treatment decision about an exposure. This allows you to prioritize more rapidly, developing exposures for action. Dynamic action is at the heart of robust risk management.
After all, expending all of your limited resources on identification and assessment really doesn’t buy you much but awareness. In fact awareness, from a legal perspective, creates another element of risk, one that can be quite costly if reasonable action is not taken in a timely manner. Not every exposure will result in this incremental risk, but a surprising number do.
Right now, there’s a substantial number of actors in the financial services sector who wish they’d understood risk velocity and taken some form of prudent action that could have perhaps altered the course of loss events as they came home to roost; if only.
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