Failing to Plan is Planning to Fail(Risk Estimation)

Enterprise must have proper method to estimate Risk, Lets explore this as below using 5W methods.

What?
    Enterprise need to estimate Risk and state in a understandable, communicable manner.

Why?
    Risk will help the enterprise determine Expected Loss, UnExpected Loss, better understanding of       core and non-core risks.

How?
   There are three ways  Risk can be estimated:-

     1) Qualitative   Estimates
                Probabilities & Consequences of events are estimated according to qualitative scaling.
                eg:- Credit Rating

     2) Semi-Quantitative Estimates
                Qualitative scaling is weighted & transformed into a quantitative scale and a P-I matrix                        synthetic score is computed.
                 eg:- PD using Credit Rating    

     3) Quantitative Estimates
                 Risk is estimated through quantitative methods using causal distribution estimation                              (subjective and/or objective methods).
                  eg:- Scenario Analysis,Decision Trees,Monte Carlo Simulation,VaR .

Which one to use?

     If you don't have all data then you have to get it from outside (like analysts, rating agencies..etc) and before you use it you have to adapt it to your needs this is the place Semi-Quantitative(eg:- IMA) , Qualitative comes into place.

    If you have all required data then time to use Quantitative Estimates :).


Appendix:-
                  IMA- Internal Models Approach.
                  VaR- Value at Risk