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Tuesday, September 19, 2017

Upending Risk Velocity

The Velocity of Risk is a novel risk measure some Enterprise Risk Managers have started to toy around with and in this article, we explore its application and a method for modelling it.

A presentation that walks through what Velocity of Risk is and where it can be applied is attached to this blog.

Velocity of Risk

After a recent LinkedIn debate about "Risk Velocity" or "The Velocity of Risk" as various debaters insist, it became apparent to me at least that there is a wide and disparate set of views on what this subject matter is or should even cover at a scope level. As a Risk Framework Architect with exposure to audit, operational, credit and market risk, I am relatively broadminded and comfortable with alternate risk assessment techniques. I can also appreciate some of the benefits for developing a Velocity of Risk measure which we take to explore further in the presentation attached [ LINK ].

Before we jump in, I must note what seems to be published on Velocity of Risk elsewhere is relatively unfastened and inconsistent, so I do see why some risk practitioners are potentially confused. What we intend to do with our presentation is to break from tradition where one researches and compares notes of what's out there to what we have etc ... to deriving the measure of Velocity of Risk from the ground up.

Our presentation on Velocity of Risk which we will refer to as VoR going forwards is separated into three sections that accommodate different interests that bind the diverse community of risk management practitioners.

Part I - Explores Velocity of Risk from a risk standards perspective, aligning the concept of velocity to ISO 31000 and we demonstrate how VoR can easily coexist with the global risk management standard.

Part II - Looks at practical examples for Velocity at Risk and is ideal for risk managers who are trying to grapple with where to apply this new measure and why it might be useful to them. It is important to note that VoR is not a replacement of other risk measures but is an assessment to how fast moving a threat may become from its inception to its impact.

Part III - Walks through the steps required to develop a coherent VoR measure and a model which we will refer to as the ERM Delta measure of risk. We have made an effort to keep this delta estimate really simple to use but also statistically robust. In reality, measuring the Rate of Change for any random factor could lead a risk modeller down the road of stochastic calculus but that would also distract us from our intention to explain VoR mathematically but also from the perspective of a risk management practitioner.

Velocity of Risk Presentation | Causal Capital [ LINK ]

To ensure the presentation pitches at the usable level, I have included a real-life case study and a spreadsheet example in this VoR publication. Some statistical explanation slides remain in the presentation to ensure those interested in reviewing under the bonnet workings can do so.

Anyway, all good and as always with our blogs, I do hope you enjoy this risk management deep dive and feel free to comment away.

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