The situation
- Our client wanted to set up a reserve to cover the risk of
losses from the failure of their IT systems. They wanted the
reserve to be sufficient to cover a "one in ten year event".
What we did
- The starting point was to calculate the "Value at Risk" or
"VaR". This is a way of measuring risk that is widely used in the
banking and insurance sectors. It told us the maximum loss that was
expected 9 times out of 10; however it gave no information about
how big losses could be on the 10th occasion.
- We used a more robust method called "Tail Value at Risk"
or "TVaR". This method estimated the average size of losses that
would happen in the worst year in 10.
Client benefit
- By going beyond the traditional way of measuring risk, we were
able to inform our client fully about the risks they were facing.
Our client was able to set up a reserve that accurately reflected
the amount of risk it was willing to take.
