IRM and Cambridge develop new method for evaluating consumer risk

A new method for assessing and comparing different types of risk in the consumer sector has been developed by the Centre for Risk Studies at Cambridge Judge Business School and the Institute for Risk Management.

Unveiled at the IRM’s annual Risk Leaders Conference in London today, the method uses scenarios to calculate the potential impact on corporate balance sheets over time of six groups of risks, producing a Five-year Enterprise Value at Risk model, or 5yrEV@Risk.

The Centre for Risk Studies’ professor Danny Ralph said that as consumer spending comprises more than 50% of gross domestic product in many developed countries, and more than 65% in the UK and US, risk assessment is increasingly important to the health of the overall economy.

“Enterprise Value at Risk converts any risk scenario into a loss number and puts a value on any mitigation. This is the building block for managing a firm’s resilience in a universe of risks,” he said.

The report models six explicit risk scenarios that could confront a fictional consumer business across the major risk classes:

Finance: A trade dispute involving the United States and European Union
Geopolitical: a conflict involving India and Pakistan
Technology: a cyber attack in the form of a contagious malware infestation
Environmental: flooding to a key facility
Social: an influenza pandemic
Governance: an equal pay movement

The work translates each of the major risk classes into explicit scenarios in an organisation’s risk register, representing how they could occur and how they could affect the business. It evaluates each risk scenario on the basis of at least three levels of severity.

Applying the model means creating a digital twin of the company’s five-year balance sheet with and without the six risks occurring, which provides an objective way of ranking them and exploring the most effective risk management actions.

“The scenario-based approach developed in this report will provide useful guidance to practitioners looking for robust and objective ways of evaluating and prioritising these risks in the context of the business balance sheet,” said IRM chairman and risk management director of the Reinsurance Group of America, Socrates Coudounaris.

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