Why Does Combination of Qualitative and Quantitative Risk Assessment Works Best?

When we consider risk assessment for the financial sector, there are more than one-sided views, and it often requires perspectives on both qualitative and qualitative analysis. The combined approach holds importance in today’s unsettled world, where the need for a risk-based approach to decision-making has gained prominence.

Businesses have started to take this approach into notice, particularly in the wake of multiple events like Covid-19, geopolitical unrest, digitization, and more. Organizations have adopted a broader view to improving their enterprise risk management programs.

Performing a risk assessment is one of the core activities in the overall management process. Once identified, assessment and analysis unlock a deeper insight into an organization’s risk position. Understanding these factors can give a chance to mitigate negative impacts and take initiative-taking steps to keep them minimal.

Qualitative Vs. Quantitative Risk Management

Risk managers often face a tough decision – whether to take a quantitative or qualitative approach to risk assessment. Although each method has advantages, we are biased towards the combined view.

From a practical point of view, performing qualitative or quantitative risk assessment depends on what you want to access and learn. If we take an example of a fire hazard in an organization, an initial risk assessment survey will entail questions such as:

• Is the office near a combustible unit (transformer, heating system, etc.)?
• How many incidents occurred in the past?
• What is the probability of fire risk?
• What were the casualties of such incidents?

In another example, if we consider the risks posed by vendors, we must make categories for critical and non-critical levels based on organizational assets. It may include questions like:

• Is Personally Identifiable Information (PII) available to all third parties?
• Has the third party or partner faced any cybersecurity threat?
• Is there an encryption policy?

Organizations can quickly identify those third parties that require close observation while defining risk management and control measures.

Most of the questions for risk assessment require a yes or no answer that relies on the knowledge and expertise of the assessor. Although qualitative assessments are subjective and easily influenced by the assessor’s bias and perceptions, they are essential to understanding the likelihood and severity of the risk posed.

After an initial assessment, the next logical step is to observe the associated controls. Taking the example of fire hazards, we have questions such as:

• Availability of fire extinguishers
• Availability of fire exit
• Installation of fire sprinklers
• Conducting safety drills

Preference is given to qualitative assessment during the controlled assessment of these factors.

If you need to check the effectiveness of a control measure, you must use a qualitative assessment with a scale of 1-5 or any similar method. Here 1 means the lowest level of assessment while 5 means the maximum control measure implemented.

However, if we go a step further and analyze risk exposure, this is where quantitative assessment gives the best results.

Data-driven quantitative analysis eliminates the subjectivity present in qualitative assessments. Associating any monetary value with the risk prompts risk management teams to communicate with the higher management. They must present the reports in a language that is easy to interpret with actionable options to prioritize risk levels easily.

In the context of the financial sector, the expression of loss in monetary terms helps understand risk exposures accurately and take necessary actions.

It Is All About Perspectives

Whenever risk assessment teams have a broader perspective, they get the most profound insights into risk exposures and levels. Accurate risk assessment tool Combining qualitative and quantitative methods gives an overall picture of risk levels. You may have heard the 360-degree view of risk, which is looking at risk from both sides.

Interested in seeing how your organization can manage risk levels across all departments by utilizing qualitative and quantitative methods to their full potential? Get in touch for a demo of our “American Bankers Association” endorsed compliance solution Predict360 and see how it leverages data to generate intelligence and actionable sequences.