Process and Added-Value Based Structure

The structure of the Opture^® system is modelled after risk management processes and added value chain. The efficiency and benefits ofrisk management depend on six success factors, which are also requirements for professional risk management systems:

Risk data collection,
Risk aggregation,
Risk results,
Risk reporting,
Risk monitoring,
Implementation.

In this frame, four parameters determine the quality of risk results and system functionality:

Method and concept of risk data collection,
Risk management models,
Multi-factor and correlation model,
Risk aggregation and performance of Monte Carlo simulator.

Risk Data Collection

Within the Opture^® system, risks, opportunities, and measures can be categorized with respect to several corporate structures, such as corporate units, P&L, risk categories, risk owner, etc. The representation of these corporate structures is customizable and flexible so that it easily adjusts to changes in the company. The quantification of risks, opportunities, and measures is done by risk owners and risk profilers. The quality of the risk data acquisition process can be improved by collecting several independent quantifications per risk, opportunity, or measure. The number of attributes to describe a risk, opportunity, or measure can vary from a few to more than 70, depending on client's requirements. Individual risks or risk portfolios, built by selection of individual risks or by slicing through the mentioned corporate structures, can be monitored. Limits on a variety of predefined risk quantities can be set so that when the monitored risks or risk portfolios violate these limit an alert is sent to the corresponding owner and/or the central risk manager.

The risk attributes allow an efficient specification of risks and their time dependence so that a quantification remains valid for some time. A detailed risk data acquisition has to be done only in the beginning, with later periodic updates being mainly corrections. This reduces effort and costs for the regular risk updates. The primary effect is, of course, to provide reliable risk evaluations over several years into the future (see aggregation). Especially strategic and long term risks have to be quantified carefully because they can have a strong impact on the company's key figures (e.g. EBIT). The highest impact of strategic risks is normally on scales of 5-10 years (long term) and not during the next years (short term).

To assure high data input quality the Opture^® system fulfills the following requirements:

Quantitative collection of risks, opportunities, measures, risk factors, and correlations.
Overlap-free, unambiguous, systematic, coherent, and consistent data collection.
Small collection errors and small estimation errors.
Consideration of risk parameters (distinguishing between gross and net risk values, e.g. growth rate, efficiency of measures, etc.).

Risk Aggregation

Aggregation of individual risks, opportunities, and measures results in consolidated risk statements for corporate units, P&L positions, riskcategories, etc. The statements show probabilities for deviations from projections or plans (e.g. planned P&L) and exhibit the contributionsof individual risks, opportunities, or measures to the consolidated statements. Note that many small risks can make large contributions to a risk portfolio, which has to be taken into account when developing measures to reduce risks.

Aggregation also considers the influence of driving factors, such as exchange rates, interest rates, commodity prices, etc. Thus, even without updates in the risk database, the risk exposures can change from day to day due to these external factors. The consideration of correlations among risks, opportunities, measures, and factors often results in an overall diversification of risk exposures but can also substantially increase certain risk positions (risk bundles).

Correct risk aggregation demands professional risk management models and methods and high-performance Monte Carlo simulations (and most certainly this cannot be accomplished with any type of spreadsheet computation at required precisions). The Opture^® risk management system performs the horizontal and vertical aggregation of risk portfoliosover all or selected corporate units or of individual risk portfolios selected by other criteria. The results can exhibit significant diversification effects due to uncorrelated or anti-correlated risks and can uncover potentially dangerous concentration effects due to risk bundles (correlated risks of medium or high impacts with enhanced simultaneous occurrence).

To ensure high data output quality the Opture^® system fulfills the following requirements:

Correct aggregation of all risks and opportunities with all mutual correlations,
Consideration of different risk types (e.g. market risks, event risks),
Consistent risk model that integrates all types of risk,
Evaluation of internal and external factors with correlations (multi-factor model),
Correct calculation of diversification and concentration (risk bundles) effects,
High-performance high-precision Monte Carlo simulator (capable of aggregating thousands of risks, hundreds of factors, with all correlations and interdependencies).

Risk Results

In addition to risk documentation (risk map, risk ranking by configurable criteria for individual risks and risk portfolios) the Opture^® system calculates risk-adjusted Profit and Loss statements and cash flow statements for all corporate units. This includes relevant risk figures (VaRx%, RACx%, RAROC, RORAC, Sigma, Quantils, Risk Capital, etc.), including the sensitivities, concentrations, contributions, and correlations of all individual risks, opportunities, risk drivers, and measures. Specialized and customized statements (e.g. optimal risk-return positioning, efficient risk mitigation, etc.) are created or developed on client's demand.

Risk Reporting

The Opture^® system contains a standard report and an individually configurable report. The reports deliver the evaluation results (data, charts, etc.) in all standard formats (e.g. as doc or pdf documents or as xls spreadsheets) or other forms suitable for client systems.

Risk Monitoring

Users can configure risk limits on selected risks or risk portfolios. When these limits are violated or are likely to be violated in the near future, an email alert is sent to the corresponding riskowner and/or the general risk manager. The risk owners or risk managers respond by entering measures that have been taken to reduce the risks below limits. Failure to respond within acertain period results in escalation email messages. The response periods, messages, and recipients are fully configurable.

In addition, the time evolution of selected risks or risk portfolios can be monitored. This includes also an implementation schedule of mitigationmeasures with milestones and automatic notifications if deadlines are not met.

Implementation

The Opture^® system as a standard web application is compatible with virtually all corporate IT environments. It only requires an intranet or internet infrastructure with web server and database. This means: low implementation costs, low maintenance costs, high accessibility, and high scalability.

To ensure an efficient implementation the Opture^® system and N&N fulfill the following requirements:

Experienced implementation team (competence in e.g. risk management, process engineering, corporate structures, and IT-environments),
Professional and focussed in-house communication (for acceptance and high motivation),
State-of-the-art system architecture for functionality, reliability, compatibility, and efficient implementation,
Web-based (intranet) risk management system powered by risk engine and database.