# Risk Model

From Open Risk Manual

## Definition

**Risk Model** denotes any quantitative (mathematical), qualitative or hybrid approach that aims to produce systematic risk assessments / estimates for the purpose of Risk Management.

## Risk Model Components

A risk model is fully defined through a number of components:

- The Abstract Risk Model, the conceptual definition of the model
- The Model Specification, the concrete realization of a model
- The Model Implementation (the computer programs and other resources required to operate the model)
- The live Model Instance that can be deployed in operation

## Types of Risk Models

- Substantially quantitative risk models, namely risk models relying in large part on quantitative inputs (data). Expert input is still essential in quantitative risk models, at all stages of the Risk Model Lifecycle
- Qualitative or Expert Risk Models do not use quantitative input directly but only by informing subject matter experts
- Hybrid Models that encompass significant direct qualitative inputs

## Issues and Challenges

- Over-reliance on quantitative approaches for decision making
- Model Risk is a significant risk factor, in particular with more complex quantitative risk models
- Expert Biases are a significant risk factor of expert based models
- Consistency between quantitative and expert estimates is a significant risk factor for hybrid models, e.g the degree to which the expert opinion and quantitative estimate can be integrated into a meaningful and reproducible risk measurement