Competing Risks denotes a collection of two or more distinct Risk Event types that are mutually exclusive, namely the occurrence of one automatically precludes the occurrence of the others.
The most common and well developed example of competing risks is the interplay between Credit Risk and Prepayment Risk. When lending contracts permit early repayment of funds (a potential income risk for the lender), an earlier than expected repayment of a loan obviously eliminates the possibility that the borrower might default.
Issues and Challenges
Assessment of risk in the presence of interacting and competing risk types is more complex and difficult given
- the need to more carefully establish empirical evidence for historical performance data
- the need to simultaneously handle two classes of events that are potentially very distinct in terms of drivers / risk factors
- the prevalence of Risk Silo phenomena where firm-wide expertise is segmented by risk type and therefore becomes less effective when handling more complex phenomena