How To Build Better Risk Models In 3 Steps

How to build better risk models in 3 steps

Fraud is at a record high – nearly half of all businesses had experienced fraud in the past two years. This excerpt of the Explorium’s guide on enhancing risk models explains how to build them better in three steps.

Every few years, whether global, local, or industry-specific, a major event comes along and threatens to throw your risk models into disarray. Businesses are taken by surprise. Customers and investors get spooked. CROs and fraud officers scramble to reassess and reevaluate their risk models and projections in line with market volatility, fast-changing political contexts, and hard-to-predict outcomes.

Internationally, fraud is at a record high. PwC’s Global Crime and Fraud Survey 2020 found that nearly half of all businesses had experienced fraud in the past two years, with an accumulated cost of $42 billion.

There are other complex risks to think carefully about, too. Supplier risk, logistical challenges, unexpected warehousing, and inventory costs can deeply impact your operations. Abrupt changes to rules and regulations can restrict movement or the ability for your business to operate at all. Crashing demand for some products and services and surges in demand for others can hit your bottom line hard. It’s a lot to get your head around — and is likely pushing your existing risk models to breaking point.

Now more than ever, risk officers are realizing that models that don’t produce real business impact are decorative at best and misleading at worst. Having a risk model is great in theory, but to drive a real impact, it must genuinely help your organization to make better business decisions.

There are three key steps to take as you build on your intuition and domain knowledge, stripping out the signals that don’t actually help you, and introducing new data sources, and testing them to find out which really do give you the best features and reliable results in order to hone your model.