quantitative analysis of risk

Economic capital is so called because it measures risk in terms of economic realities rather than potentially misleading regulatory or accounting rules; moreover, part
of the measurement process involves converting a risk distribution into the amount
of capital that is required to support the risk, in line with the institution’s target ﬁnancial strength (e.g. credit rating). Hence the calculation of economic capital is a process that begins with the quantification of the risks that any given company faces over a given time period.

McNeil, Frey & Embrechts, 2005

With globalisation increasing, you’ll see more crises. Our whole focus is on the extremes now — what’s the worst that can happen to you in any situation — because we never want to go through that again.

John Meriwether, August 2000

GOVERNANCE SYSTEMS

Quantitative analysis of risk, whether it be in banking or insurance or asset management and regardless of risk type, requires advanced knowledge and extensive experience. Quantitative estimates of distributions of risk solvency and liquidity requirements are vital to effective capital management.

But analysis does not occur in a vacuum. And it is never ‘right’; models are always wrong but some are useful. The key to effective quantitative analysis is to understand the conditions under which it will be useful and conditions under which the assumptions behind it will need to be review or replaced.

Recognising that analysis occurs as part of operating and management processes is also an essential aspect of risk quantification. Understanding the use to which the analysis will be put and how it will be refreshed and revised through time makes the difference between making ‘the numbers’ and informing decision-making. Influencing decision-making requires understanding the audience and presenting the information in a way that its implications can be understood by the user – not ‘just’ analysis.

Lessons from the financial crisis from 2007 have shown that even the most advanced analysis is only as good as the utility of the assumptions on which it is built and the uses to which it is put. Because our focus is on informing decisions and because we understand the strengths and the weaknesses of the analytical techniques that others just apply unquestioningly, we can put your problems in context help you to understand what the results of the analysis mean in that context.

We don’t just do analysis; we inform decisions using the analytical techniques that fit best the problem to be solved. We solve problems; we don’t just ‘do the numbers’.

RISK CONSULTING

> RISK STRATEGY

> RISK APPETITE & TOLERANCE

> RISK FRAMEWORKS & SYSTEMS

> QUANTITATIVE RISK ANALYSIS

> RISK & ECONOMIC SCENARIOS

> RISK DISCLOSURE

> BEHAVIOUR & RISK CULTURE

INTERNAL CONTROL & ASSURANCE

FORSEEING THE FINANCIAL CRISIS