What defines a risk model?

This post is a repost of a short article I wrote in 2009, on my then riskguy blog. I’ve rewritten it to more appropriately reflect my ideas on this, as of course over the past years this has evolved. I’ve revisited this article because it has become actual again in the ongoing discussion on whether or not to use a risk model.

In a lot of the articles on this blog about internal audit or risk management, I refer to the Risk Model or the Risk Identification Model, or Risk Model, but what defines a risk model to me?

The following are to me the two defining elements of the Risk (Identification) Model, with some explanation:

It’s a Model

It is a structured representation of a reality. It is important to realize that the map, or the model in this case, is but an abstraction of, and therefore not the territory. It is a representation, a ‘simplification’ for easier use or access. And as any simplification, it does not contain all dimensions or aspects of the real thing. We use a model to make it easier to deal with or to handle a complex reality.

So whatever way you look at it, you cannot ever blame the model for its inadequacies or its incompleteness. As a risk manager, you have the responsibility to make sure the risk model you use is adequate across all the dimensions you are using it for. In effect, having a subject matter expert looking at the model for each of the dimensions you will be using it for (operational, financial, strategic, human resources …) is highly relevant and can only add to the relevance and the pertinence of the model.

It serves a purpose and only that purpose: identifying risks

The model is to be developed for and aims at supporting the user in identifying risks which are relevant to him or her. The structured representation of a model reduces the reality to a set of risks (the concepts) out of a risk universe (a set of all possible risk events which could occur) with respect to the objectives of the area in scope such as an organization, a division, a set of processes, a process, a sub process or a set of activities.

So, if you want to use the model for another purpose, it cannot serve as such. Much like you cannot use a map of London which is useful for a car as a means of finding public transportation. Other purposes, other tools.

A definition for a risk model

Thus, in short, a Risk Identification Model or Risk Model is a simplified representation of the risks to the objectives of the in scope area, for the purpose of identifying those risks.