Special Report: The New Analytics of Risk

Increasingly, data modeling is enabling companies to gauge risks like terrorism and price volatility.
David KatzDecember 2, 2013

Traditionally, companies depended on business-unit leaders “to monitor, assess and report risks to their senior management teams,” write John Bugalla and Kristina Narvaez, the authors of a birds-eye view on new uses of risk analytics and risk modeling in this Special Report. But in recent years, the growth in the volume of risk-related data has accelerated exponentially.

SR_RiskAnalytics_GraphicFacing mountains of information, business-unit leaders are often finding it impossible to gather critical risk data, much less provide it in palatable form for CFOs and the rest of the C-suite to make enterprise-level risk decisions. Enter risk analytics.

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Risk analytics, the authors explain, gathers a panoply of different types of a corporation’s risk data into “one definitive system,” providing “a clear method for identifying, assessing, understanding and managing the company’s risks.” In short, it supplies a benchmark CFOs can readily use to manage risk.

Following such impossible-to-anticipate catastrophic events as the September 11, 2001 terrorist attacks and the global financial collapse beginning in 2008, however, a single, relatively stable system for analyzing risk just doesn’t fit the bill anymore. That’s because it doesn’t encompass data that might not have existed before, or not been combined in such new ways as the possibility that terrorists could attack the United States by hijacking passenger planes and flying them into tall buildings or that market conditions might drive banks to assume mortgages with almost no collateral behind them.

To get a handle on such perils, corporations need to enlist the aid of risk modeling, which takes risk analytics one step further. Using existing corporate risk data, risk modelers create various scenarios that might play out in the future. Building on such scenarios, companies are doing such things as using game theory to anticipate the movements of “intelligent adversaries” such as terrorists.

Less dramatically, perhaps, corporations are also starting to use risk modeling do such things as manage the volatility of their risk management and insurance programs. Overall, Big Data, in the form of risk analytics and modeling, may eventually provide finance chiefs with a weapon to fight the enemy they dread the most: the unexpected.