Risk management: new challenges, opportunities, and software

By Michael McCaw | 2 July 2019

Over the past few decades, the way banks, financial institutions and corporates have approached risk management has changed seismically.

While risk management departments have sprung up at larger organizations the risk function has embedded itself as a core function, shaping policies, corporate decision-making processes and the way each firm approaches current and future strategies. Crucial to the formation of much of these plans and the scope of the organization is the risk management software and risk management solutions that shape and inform management’s risk tolerance. Because of the importance now placed on risk assessment, the selection of the best risk management systems has become paramount. Gone are the days when risk managers would rely on a simple risk analysis matrix, with risk correlation and real time information and the proliferation of external and internal data driving demand for risk management software’s refined functionalities.

And risk management vendors have realised this is the case, with the market growing in size and complexity, and many working with the most advanced and adaptable technologies. Over the past few years, vendors have moved from off-the-shelf models to building bespoke risk management systems tailored for each client, according to specific requirements. Artificial intelligence, automation and key alerts have all factored into today’s risk management software offerings – and are now built into the fabric of each market participant’s organizational decision tree.

In years gone by, risk management was considered the categorization of the potential harms facing an organization. Now however, strategic decision-making involves the analysis of different opportunities inherent in various risks faced by the firm, with advanced risk management software vendors offering creative and forward-looking risk appraisals in line with pre-established, variable criteria based on a range of exposures.

The human element – prioritization of risks

After identifying the various risks facing the organization, stakeholders must agree on the risk attitude they will adopt. This is a crucial decision, as it will feed through the company’s movements at strategic level and filter across all divisions in management’s plans and assessment criteria. The criteria that shape these decisions are varied, but will feed into the formulation of the risk management software’s many variables.

In creating the firm’s risk attitude, management will assess – in many instances with external consultants – three key attributes. Risk appetite is the degree of uncertainty an organization is prepared to accept in pursuit of its objectives. Risk tolerance is the amount or volume of impact an organization is willing to assume on certain risks. Finally, the risk threshold is the level of uncertainty an organization or individual within the organization is willing to assume of the risk.

These three key attributes tie together and will inform the prioritization of the firm’s risks, which will in turn inform the risk management software’s make up. Based on the firm’s risk attitude, which is in itself a top line agenda, risk prioritisation will be created, unbundling the variables that will later form plans and mitigation strategies. Fundamental to that – and a cornerstone of the value of risk management software – is risk tracking.

Risk tracking and assessment

Each and every risk must be continually tracked and assessed, and the latest risk management systems enable a smooth, quantitative approach to the variables as outlined by the firm. Software capabilities are now at the point at which risks are tracked and assessments reported on a real time basis, allowing firms to make swift and informed pivots according to the predefined variables and criteria, as well as changes to other correlated risks and events identified by the software.

With firms storing much more data than in previous years, making full use of the rich data resources has become a strain. However, many risk management software packages offer state of the art modelling of the data, almost instantly streamlined in order to inform management of any changes to the risks based on the predefined and assessed criteria. With many vendors moving to provide cloud solutions as well as software as a service (SaaS), firms' abilities to negotiate and add value to large data sets in a flexible and agile way has increased substantially. Further, most risk management software providers focus on building state of the art and user-friendly dashboards, to allow management to assess the risks they face with ease, and execute plans accordingly.

Risk management systems and the market

Traditionally one of the most pervasive of risks – and one that keeps management awake at night – economic risk can be as difficult to quantify as it is to predict. Previously, management monitored certain economic indicators and data in the regions in which they were present in order to assess likely peaks and troughs of performance. For retail and investment banks, as well as financial institutions such as insurers, gross domestic product (GDP) and similar indicators were monitored closely in order to assess demand fluctuations, as well as changes to the price of the markets which make up their product or service base. Now, many risk management systems correlate such economic data in order to feed into other risk parameters.

For insurers, assessing economic risk and the threat of economic loss can be the difference between a successful business model and a failure. Many risk management solutions inspect a variety of economic data with a high degree of granularity, taking a scientific rendering of potential exposures and fluctuations with strong and real time data capture capabilities.

A core element of any business is of course interest rate fluctuations. And while that may seem like a straightforward, easily calculatable risk for an organization working within a single jurisdiction, the impact of changes to a single interest rate can be seismic across the supply chain in today's complex market place. For multinational firms though, alterations – no matter how big or small – can have a huge impact on the firm’s performance. With many risk management solutions, interest rate changes and likely future scenarios are played out to allow the organization to be flexible and much more predictive as to how it will perform in the coming trading periods. A crucial benefit to the capabilities a risk management solution can provide is again the correlation of different interest rate fluctuations – with different scenarios played out against the state of the firm’s exposures, as well as both internal and external risk states.

Compliance and reporting

Compliance with new and existing rules in single or multiple jurisdictions has become a significant matter for all departments and projects in today’s modern organization. From anti-money laundering (AML) to data protection and financial market transparency, firms have been struggling to keep up with rules and regulations for some time now. But many are finding the solution in risk management systems.

Gone are the days when firms could easily comply with rules put together by national regulatory bodies. To operate in today’s markets, firms must show they are capable of controlling the risks they are exposed to, while avoiding what rule-makers deem excessive risk to the system.

While previous iterations of the risk management system market simply offered reporting capabilities – with portals designed to connect with authorities – the latest tools on the market do so automatically, and can also attune the firm’s behaviour based on the regime in which the firm operates.

Growth and spread

Using the volume of data at the firm’s disposal – in many cases forced by the hand of the regulator – many have had to ramp up data management capacity over the past few years. Now, with the assistance of automation and artificial intelligence, risk management solutions offer predictive and forward-looking analytics of all the firm’s risks – and in many cases they utilize the cloud to allow for fluctuations in activity.

The cloud facilities and software as a service (SaaS) arrangements now offered by risk management solutions providers aim to offer flexibilities, as well as high accuracy predictive analytics. The market for risk management solutions has burgeoned over the past few years, providing buyers with a wide range of options to drive business forward.

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