Quantitative Risk Analysis: What Companies Must Have First

The goal of my blog has been and will always be to distill ERM concepts into actionable insights for anyone interested or who is tasked with risk management in their organization.

If you browse around, you will find that I discuss qualitative risk analysis methods like scenario planning, root cause analysis, and just plain old conversations quite extensively.

However, quantitative methods like modeling, Monte Carlo simulation, and other assessment methods are concepts I rarely discuss in any depth.

There are big reasons for this…

Most of the organizations I work with are not ready for this advanced level of ERM.

When I first speak with a potential client, most of them have informal ERM practices in place or nothing at all.

As I explain in a recent article on the importance of governance, organizations I work with typically have different trouble spots that need to be resolved before they are ready for ERM. Some of these organizations do not have established corporate governance policies, a strategic plan, or even decision-making fundamentals!

Now I don’t want to imply that I think modeling and quantitative ERM is inferior to the qualitative methods I’m more familiar with – absolutely not!

Quantitative methods can provide great (and sometimes, unexpected) insights…

In fact, the number results from modeling can help you determine the best response your organization should choose to take the right amount of risk to ensure your organization is successful, both in the short- and long-term.

One of the ways in which quantitative methods can be so helpful is the recognition that there is not a single definitive impact of a risk. Instead, it is a range of impacts that vary based on the likelihood of the risk. This simple, but huge, difference is why some people are ardent advocates of quantitative risk analysis.

A few weeks ago, I discussed ERM outputs and how you have to keep your audience’s needs and preferences in mind. Some people, especially those in a financial or actuarial role, are simply more comfortable with having hard numbers in hand to make a decision.

If you want to learn more about modeling, Monte Carlo simulation, and other quantitative ERM concepts, I recommend checking out Hans Læssøe’s book, Prepare to Dare, as a good starting point. (Hans is also working on a new book, Decide to Succeed, that will discuss the practical application of risk and opportunity into the decision-making process.) You can also take a look at presentations by David Vose (of Vose Software), Duncan Harwood, and others at Risk Awareness Week 2019.

In the year ahead, expect to see more on quantitative ERM as I share insights from other experienced ERM professionals via guest articles and interviews.  (I don’t want to mention any names since logistics are still being finalized…)

Does your organization use modeling and other quantitative assessment methods to understand risk and opportunities? How have you found it useful?

I’m always interested in learning more, so please don’t hesitate to leave a comment below or join the conversation on LinkedIn.

Don’t get the impression that if you require quantitative-based assessments that I can’t help you. I’m already making progress on some big changes for 2020, one of which is expanding my team with complementary skill sets. With this broader range of skills and knowledge, we will truly be able to provide solutions for your organization’s decision-making and strategic planning challenges.

Therefore, if your organization requires a more numbers-based approach for understanding its risks, contact me to discuss your specific situation and how we can help address your challenge.

Featured image courtesy of  Stephen Dawson via Unsplash.com

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4 Comments. Leave new

  • ismail akinkunmi
    January 14, 2020 7:33 am

    Dear Carol,
    Sorry for the late response to your article. The issues of not have a valid structure for corporate governance, strategic planning and decision making fundaments are common with private establishments and some public limited liability companies. They believed having an ERM in place is another cost to their organization but been myopic about the benefits of the ERM to their organization. ERM help management to understand better the importance of corporate governance to the company, and the decision-makers. spell out issues that may affect the operation process and mitigates the identified issues. my own conclusion is just to continue engaging them till they will fully understand what we are offering them, the benefits to the business and stakeholders.

    • No need to apologize ismail, thank you for your perspective. You’re correct about private organizations not having a good handle on their governance and strategic planning – I’ve run into this. To put it a little differently, many execs see ERM as just another compliance exercise. One way to overcome this is to find an executive champion – someone who understands the value ERM can provide in helping the company succeed, not just avoid failure. Another way is to find projects in the company and see how ERM can help. If you can demonstrate how ERM helped a project be more successful or reach its goals sooner, executives may take notice.

  • Hans Læssøe
    January 23, 2020 4:33 am

    Relying on qualitative risk assessment is infected by human biases and potentially dangerous. When approach by a company that wishes to have some ERM program, I start by asking “why . what do you wish to achieve”.

    It/when is (and it sometime is) just a matter of making a board and/or an auditor happy that you have something – the qualitative is fast, easy and probably sufficient. It will not help you run perform better, so waste as little effort on this as possible.

    If/when (and that is fortunately the most common) it is a request to make better decisions and improve performance – there is no avoidance of quantitative approaches – including Monte Carlo simulation. This will require skilled people and effort – but also add the value of enhancing performance. As Benjamin Franklin stated mor Ethan 200 years ago “By failing to prepare, you are preparing to fail” – and intelligent risk taking is a matter of preparing.

    • I certainly agree that quantitative methods are what companies should aim for as that eliminates human bias. Two points I would make though – one, the quality of models are only as good as the data you have to put in.

      Two, in my experience, qualitative is the first step in a journey, but by no means the final step. As I explain in the article, organizations must have foundational pieces in place before they can even begin to use quantitative methods effectively. When they don’t know what they don’t know, they can’t come to a consultant and ask us to help them make better decisions because they don’t know they’re making bad ones. At best, they know they’re making bad decisions, but don’t know why.

      Therefore, you need to take a step back and lay a good foundation…address those weaknesses before you can use Monte Carlo simulations and other number-based approaches effectively.


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