Role of Predictive Modeling in Risk Management

Risk management identifies risk or uncertainty. With the help of risk management the impact of unfortunate events can be minimized and also realization of opportunities is maximized . Risk can occur in the following situations:

• project failures in design


• Natural causes and disasters


• Legal liabilities


• Deliberate attack from an adversary


• Credit risk


• Uncertainty in financial markets


• Uncertain or unpredictable root-cause

Reasons for managing risks are as follows:

• Public image protection


• Reduction and protection of legal liability


• Environment protection


• Save resources like income, people, assets, property


• Protects people from harm

How Does Insurance Work?

Many people find insurance mysterious. Insurance company helps and promises to pay for any loss. If any one of the groups suffers from a loss the insurance company makes its way to pool the money from all the groups. For this reason business owners takes the help of insurance so that in times of failures the company will not face any financial ruin.

What is Risk Management?

We are all familiar with the word risk, all of us take risks knowingly or unknowingly. A risk assessment takes place when one makes a decision. The risk assessment is challenging in case of business.

The Risk Management Process

1. Potential Exposures Identification

2. Decide Which Alternatives to Use

3. Monitor Results

4. Alternatives examination

5. Measure Frequency and Severity

6. Implement The Chosen Techniques

Role of Predictive Modeling in Managing Risk:

Predictive Analytics helps the companies to respond to changes, risks and also helps the company to manage risks that are based on capital markets, competition etc. In addition to that risk data can be made more actionable and relevant with predictive modeling. Predictive Analytics plays a very vital role for making risk prediction in credit loans, risk management ,and also in making insurance policy decisions that depends on customer's financial information, history etc. Thus predictive analytics manages risk effectively and rapidly, which is rewarding in such changing markets.

Learn from Mistakes:

The impact of crisis in the current economy is not predicted by any forecasting model. Instead of limiting increased risk the so called risk management model increased it. So we need to remove the weak points of it. Thus risk management should reduce the impact of the crisis created in the economy and sophisticated techniques should be developed to predict the economic environment.

To reduce risk we must avoid the following six mistakes:

• Manage risk by predicting extreme events.


• Studying the past to manage risk.


• Not listening to advice about what we shouldn't do.


• Measuring risk with the help of standard deviation.


• Reduncy is not tolerated by efficiency and maximizing shareholder value.


• Not appreciating that what is mathematically equivalent is not physiological.