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Risk managers urged to weigh qualitative, quantitative risk assessments

Risk managers urged to weigh qualitative, quantitative risk assessments

When preparing reports for their board of directors, risk managers need to carefully weigh the use of qualitative and quantitative risk assessments, according to an analysis the Risk & Insurance Management Society Inc. released Tuesday.

Based on a survey of 119 RIMS members as well as existing research, the report, “Risk Reports and Perceptions,” finds that the greater quantification of risks is not always desirable if it comes at the expense of qualitative assessments.

“Many risk management methods suggest the need to quantify risk information to create comparable information across risks and allow for comparisons to risk appetites,” according to the report. “However, if quantification causes managers to question the underlying information and creates potential uncertainty for board members, then quantification may not necessarily aid the risk management process.”

Ultimately, the decision of whether to stress qualitative and quantitative metrics regarding a risk will depend on the type of risk and the availability of data, the report finds.

“For risks that are well-understood and impact risk areas such as operations where data and models for calculating likelihood and impact are well-defined, specific point estimates may be appropriate,” according to the report. “When considering strategic risks that do not have a specific calculation model and underlying data is more subjective, the use of qualitative report formats may assist in communicating the potential issues to the board.”

Three professors at the Farmer School of Business at Miami University authored the report, which requires registration. They are Dale Stoel, associate professor of accountancy; Brian Ballou, Ernst & Young professor of accountancy and co-director of the Center for Business Excellence; and Dan Heitger, Deloitte professor of accountancy and co-director at the Center for Business Excellence.