Risk management includes the identification, assessment, and application of measures, in order to minimise, monitor, and control the probability and/or impact of loss events. Eurorisk Systems'risk management solution estimates and manages the main financial risk types: Market Risk, Credit Risk and Operational Risk, which have the following risk distribution and the corresponding risk capital allocation:
After the economic crisis in 2008, additional risk types include Liquidity Risks of Assets as well as Spread Risks of Assets and Derivates.
Eurorisk Systems' solution for risk management uses technological, human and organizational resources and follow international principles and standards (ISO 31000). Further, it can estimate risks in non-financial areas, since these risks can be expressed in terms of financial risks. For example, the risk of price changes (e.g. in materials, services, etc.) is actually market risk, similarly to the risk of changes in share prices. The solution consists of the following main modules for Value at Risk (VaR) calculation:
A set of supporting modules is used to produce calculation data from primary market data:
Data flow ensures the calculation and simulation of various risks, as well as the preparation of primary data, that comes from evaluation environments outside the system:
|№||Module List||Models and Functionality|
|4||Rating and Scoring||
The current Solvency II Module includes Market, Default, and Life Underwriting Risk as well as the calculation of BSCR (Basic Solvency Capital Requirements) as well as BCR (Basic Solvency Capital Requirements). Тhe calculated BSCR is adjusted for loss absorbency, using the equivalent scenario or the modular approach for each risk category. Solvency Capital for Operational Risk is considered in the calculation of Overall Solvency Capital Requirement (SCR) and Minimum Solvency Capital Requirement (MCR).
In the credit risk calculation, rating estimations act as measurements for the ability to serve loans and other debt transactions. Risk Framework' solution for estimation of private and corporate ratings is based on balance sheet data and on soft factors (see above). Country specific factors and criteria can be defined to consider particular economical environment conditions. Scoring results can be mapped to rating levels, using unified master rating scales. Certain rating levels are determined by early warning signals and corresponding K.O.-criteria. Official external information about counterparties can be included. Scoring models evaluate the quality of the applied collateral, as the relation between planed debt redemption and debtor incomes. The quality of the produced rating and scoring is enhanced by adjusting rating and scoring models according to historical losses of a debtor pool, or produced ratings and PDs of the rating and scoring modules.
It is calculated via the Monte Carlo Simulation, using the Copula approach on non-normal distributions. Simulation distributions for severity and frequency event type are adjusted for every loss, based on the economic capital. This capital is calculated either according to those loss event types or according to a historical loss database that accumulates internal or external loss data for the previous 5 years.
The Risk Management Module inherits the features of Risk Framework Interfaces and Connectors and Risk Engine Interfaces and Connectors.