Method and apparatus for operational risk assessment and mitigation
View Patent ↗Risk in business management is analyzed based on a probabilistic network approach which quantifies the impact of operational risk on financial metrics such as Value-at-Risk (VAR) and/or Potential Losses (PL). This approach provides further capability to determine the optimal placement of one or more countermeasures within a system to minimize the impact of operational risks.
1. A method for modeling and quantifying operational risk in a business enterprise comprising the steps of:
identifying one or more operational risks in the business enterprise,
obtaining historical information on events that contribute to identified operational risks,
identifying one or more business processes in the business enterprise,
associating identified business processes with underlying logical and physical infrastructure and operational risks,
constructing by a computer a probabilistic network model based on the business processes, underlying infrastructure and operational risks, said network comprising a taxonomy of the operational risks, each operational risk having associated functions for frequency of occurrence over a time period and duration, a topology linking each operational risk to one or more corresponding resources disrupted and consequent one or more activities disrupted, and functions for each activity identifying revenue from the activity and cost from disruption of the activity, and
computing by the computer an overall potential exposure to losses in the business enterprise from the identified operational risks over said time period,
wherein the computation of the potential loss exposure due to an operational risk is itself inherently inclusive of a combinatorial risk explosion; and wherein the computational method obviates the combinatorial risk explosion by constructing a filtering operation determined by setting the parameters of the input operational risks to specified material risk levels according to the tolerances of a particular institution or a class of institutions.
2. A method according to claim 1 , wherein the model is used to quantify any combination of technology, process and/or people risk, or the risk of any of them separately.
3. A method according to claim 1 , wherein probability distribution of financial losses is calculated using an algorithm whose computational effort is a non-exponential function of number of operational risks and parameters describing the probabilistic network.
4. A method according to claim 1 , further comprising the step of taking one or more actions or countermeasures to control one or more aspects of operational risk.
5. A method according to claim 1 , further comprising the step of taking one or more actions or countermeasures to control the financial risk presented by a system.
6. A method according to claim 1 , further comprising the step of estimating a Return on Investment (ROI) for identified risk countermeasures.
7. A method according to claim 1 , further comprising the step of modeling the state of an environment according to the risk tolerance of a manager or owner of the business enterprise.
8. A method according to claim 1 , wherein users can dynamically alter the state representation of an environment to create “what-if” scenarios.
9. A method according to claim 1 , wherein the at least one operational risk event further comprises the step of prioritizing events reflecting state changes based on changes in systemic quantified risk and 4 optimize the allocation of resources to manage system change.
10. A method according to claim 1 , wherein the assessed risk is the determination of the probability of failure of any system component, as well as its duration and frequency.
11. A computer implemented method for modeling and quantifying operational risk of a business enterprise comprising the steps of:
identifying one or more operational risks in the business enterprise,
obtaining historical information on events that contribute to the identified operational risks,
identifying one or more business processes in the business enterprise,
associating the identified business processes with underlying logical and physical infrastructure and operational risks,
constructing by a computer a probabilistic network model based on the business processes, underlying infrastructure and operational risks, said network comprising a taxonomy of the operational risks, each operational risk having associated functions for frequency of occurrence over a time period and duration, a topology linking each operational risk to one or more corresponding resources disrupted and consequent one or more activities disrupted, and functions for each activity identifying revenue from the activity and cost from disruption of the activity, and
computing by the computer an overall potential exposure to losses in the business enterprise from the identified operational risks over said time period,
wherein the computation of the potential loss exposure due to an operational risk is itself inherently inclusive of a combinatorial risk explosion; and wherein the computational method obviates the combinatorial risk explosion by constructing a filtering operation determined by setting the parameters of the input operational risks to specified material risk levels according to the tolerances of a particular institution or a class of institutions.
12. A non-transitory, signal-bearing medium tangibly embodying a program of machine readable instructions executable by a digital processing apparatus to perform a method for modeling and quantifying operational risk of a business enterprise comprising the steps of:
identifying one or more operational risks in the business enterprise,
obtaining historical information on events that contribute to identified operational risks,
identifying one or more business processes in the business enterprise,
associating identified business processes with underlying logical and physical infrastructure and operational risks,
constructing a probabilistic network model based on the business processes, underlying infrastructure and operational risks, said network comprising a taxonomy of the operational risks, each operational risk having associated functions for frequency of occurrence over a time period and duration, a topology linking each operational risk to one or more corresponding resources disrupted and consequent one or more activities disrupted, and functions for each activity identifying revenue from the activity and cost from disruption of the activity, and
computing an overall potential exposure to losses in the business enterprise from the identified operational risks over said time period,
wherein the computation of the potential loss exposure due to an operational risk is itself inherently inclusive of a combinatorial risk explosion; and wherein the computational method obviates the combinatorial risk explosion by constructing a filtering operation determined by setting the parameters of the input operational risks to specified material risk levels according to the tolerances of a particular institution or a class of institutions.