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Qualitative to quantitative risk management

The approach to risk management is on the cusp of a shift towards a more unified slant from the traditional process-driven and qualitative focus. This looked good on paper however the reality that was ignored is the minefield that is human fallibility, which leads to an acceleration of potential risk incidents. The combination of qualitative and quantitative risk management allows for less of a static process and a more continuous re-evaluation throughout.

The rise of technology and automation combined with the human condition has brought with it certain significant challenges, says Volker von Widdern, MD of Marsh’s Risk Consulting division. “A small error in judgement is now often replicated quickly and spread across vast distances. Think of the phenomenon of the viral photo, post or tweet and its possible consequences. Certain human behaviours pose risks as well – such as a tendency to fall into blind routine, to avoid unpleasant truths, to use irrational measurements when choosing a course of action.”

It is the myriad of potential human or technological errors that challenge any business where the process of risk management faces a possible process failure. Quantification of risk is usually based on loss quantification, and only occasionally progresses to more structured consequence analysis and exposure scenario assessments.. “Thus with the introduction of a quantitative element, like money, insurance or loss, the risk management process gains an additional function of quantitative risk management,” says von Widdern.

The potential for a streamlined process is clear.

The advantages of using this approach are that it provides clarity in terms of accountability and mitigates the effect of human biases while also integrating with strategic risk exposure assessment and their related key performance measurements.

“The potential pitfalls, though,” says von Widdern, “are that the thinking becomes narrow, assumptions may be inadequate and results are badly interpreted, it becomes a matter of garbage in/garbage out. Quantification does not cover all risks, it is not a substitute for alert and enquiring risk diagnostics, noting that risk quantification models cannot provide for “unknown unknowns”.

Volker Von Widdern

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