Risk and Opportunity Forecasting with Monte Carlo Simulation

With single risk simulation, you can assess the potential impact of individual risks, considering the probability of occurrence. Aggregating these analyzed individual risks provides the value of your overall risk position. The Monte Carlo simulation serves as the computational foundation for aggregation, generating meaningful and reliable results through approximately 10,000 iterations per single risk. This offers you a dependable overview of your risk landscape, helping you better understand your risk situation and take the necessary actions.

Risk correlation describes the interplay between different risks and their potential mutual impact. Using the Spearman correlation coefficient, this relationship is quantified in the simulation, with result values ranging from -1 to 1. Negative values indicate a reduction in aggregated risk, while positive values signify an increase in overall risk. This enables a better understanding of how risks reinforce or weaken each other, facilitating more effective responses to complex risk situations.

A primary goal of risk and opportunity simulation is to empower risk managers to take actions with the highest likelihood of success. This involves minimizing one's own risk exposure while keeping costs low to stay within budget. Additionally, quantified simulation results play a critical role in determining risk capacity and appetite, key indicators in this process. By optimizing your measures, you save costs, enhance the efficiency of risk management, and steer your company towards sustainable success.

Within BIC GRC, our multiperiod simulation allows you to project and analyze your combined risk portfolio over several years. This feature considers the evolving nature of your risk landscape, both in the short term (1-2 years) and the medium term (2-5 years). By doing so, it enables you to pinpoint risks and opportunities that may not be immediately relevant but could have significant future impacts. A proactive approach like this empowers you to make strategic decisions and prepare comprehensively for any eventualities.

By using the risk linkage feature in BIC GRC's Monte Carlo simulation, you can analyze and visually represent the intricate interplay between different risks within your organization. These interdependencies are clearly illustrated in a network graph with percentage indicators, enhancing internal risk awareness and providing a robust means of communicating insights to management, investors, and other stakeholders.

By using Monte Carlo simulation to stress test, you can prepare your company for extreme scenarios by assessing its ability to handle unexpected events. You can stress both the probability of occurrence (“inevitable”) and the magnitude of risk damage. By comparing stressed and unstressed values, you get a clear picture of the potential repercussions of extreme circumstances. These insights help identify weaknesses, set risk tolerance limits, and ensure your risk strategy matches your financial capabilities, protecting your business in the long run.