Risk Score

From Open Risk Manual

Definition

A Risk Score is Score number that aims to assess and quantify a level of Risk associated with a system, process or entity. Within a Risk Taxonomy any risk / Risk Factor that admits techniques from Quantitative Risk Management may benefit from the construction of risk scores.

Conceptually a Risk Score is a Risk Model. Implicit in the construction / compilation of the score is a casual cause/effect model that links the contributions to the score to a level of risk (some uncertain future realization)

Usage

Risk scores are used widely in many sectors, e.g., medical sector, biostatistics, banking, insurance are prominent examples.

Advantages

Risk Scores are popular tools as they have a number of advantages:

  • Are (generally) simple to calculate using e.g., [[Scorecards]
  • Are easily to communicate and interpret:
    • The result is a single number that is (typically) placed in a pre-determined scale
    • Allow the aggregation of risk contributions
  • Are easilty integrated with decision making: E.g Credit Decisioning based on threshold values

Structure

A risk scoring method is composed of the following components

  • A set of consistent rules (or weights) that assign a numerical value ("points") to each risk factor that reflect our estimation of underlying risk
  • A formula (typically a simple sum of all accumulated points) that calculates the score

Estimation

  • Empirical assignement of weights
  • Statistical Estimation on the basis of data for both factors (covariates) and outcomes (risk realizations)

Issues and Challenges

See Also