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In todays rapidly evolving and increasingly uncertain business environment. risk analytics are fundamental to empowering corporate decision-making throughout the risk lifecycle. At each stage-understanding, measuring and ultimately reducing the cost of risk- analytics enable risk managers to obtain a data-driven, forward-looking view of risk issues. This better equips management to make strategic decisions that are objectively aligned with the organization's performance goals. The ability to tap into vast quantities of data to form business insights is spurring companies to generate new efficiencies, create new products, enter new markets and disrupt traditional approaches.
Key to this view of risk is a new metric: the economic cost of risk (ECOR). This is a more comprehensive measurement than traditional risk assessment metrics and is better suited to help organizations manage risk decisions today. Since the amount of losses at any one company fluctuates from year to year, ECOR incorporates an understanding of the potential volatility of risks and the uncertainty an organization may face, which is crucial in making strategic capital decisions to manage risk and ensure growth.
Like total cost of risk (TCOR) calculations, ECOR incorporates the sum of expected retained losses, insurance premiums, and other expenses such as administrative costs, fees and taxes. ECOR adds a new metric, however: the implied risk charge. By assessing the severity and likelihood of detrimental outcomes and their associated cost, the implied risk charge places a value on volatility for each company. Even the bestprepared can face unforeseen events, so every organization bears an implied charge for the unexpected.
Through the ECOR metric, management can better understand how key factors such as volatility and cost of capital influence...