Anticipated and Unanticipated Benefits of Loss-Forecasting

In anticipated direct events, identification and use of risk mitigants mean better preparation to reduce losses in analyzed situations:

  1. Precautions or ex ante actions that reduce the possibility of the considered situation occurring
  2. Insurance, hedging, or other ex ante actions that reduce the magnitude of loss should the adverse event occur
  3. Contingency plan to implement ex post or actions to reduce the magnitude of loss when such a situation arises

The same mitigants can reduce losses in unconsidered situations, e.g., contingency plans for one disaster may work for an unforeseen one.

These benefits are unknown beforehand and may be attributed to serendipity or luck but are realized because precautions, insurance or contingency plans were already in place for other scenarios. For example:

  • As a precaution, you wear sunglasses on the beach to protect against harm from the sun, and they protect against wind-blown sand, debris, and potentially thrown objects.
  • As a contingent action, you take aspirin to reduce muscle aches and pains that had caused loss of enjoyment, and it prevents or reduces the chance of heart attack.

Our Loss Forecasting Benefits: Spero Risk Associates have worked as former risk managers, developers, validators, and regulators. Our variety of experiences give us a unique edge on our competition in all aspects of stress testing and scenario analysis & design, especially in CECL, CCAR and DFAST. In fact, we have built a variety of hypothetical and historical scenarios for both credit and market risk, as well as joint credit-and-market loss scenarios years before the crisis and CCAR.

We start with the following questions:

1. What can happen?                     

2. How can it hurt you?

What We Determine:

1. Adverse shocks (or differences) between current conditions and possible, unfavorable conditions tailored to you.
2.Sensitivities & of the item of interest–whether it’s an instrument, portfolio, firm or industry–to environmental changes.

These determinations, in conjunction with learning, lead to a better understanding of the relationships between the firm and its environment and risk factors. As the industry, social and political conditions, technology, and other factors change, so do the firm and possible loss scenarios.