Risk Management, PRMIA

A single operational risk event is comprised as being part of a system of many events, each with a specific loss value of its own however, the primary reason for this division of analysis is that the numerical properties of these two distributions (frequency and magnitude) operate under completely different dynamics, right down to the application of measurement in variance and means. The severity loss model is part of a continuous distribution that may take on any value between a lower and upper limit, while the frequency model is likened to the random number of customers walking through the door and is a discrete analysis used to understand the count of events within the number of combinations of possibilities.

The simple essence of Monte Carlo is a convolution process used to combine these two forms of analysis and results in a single picture of what might occur considering the current variables that have been measured.

Interestingly though, the history of mathematical analysis is often derived from applications far from the field of science, banking or even economics.

That fundamental ideas in applied mathematics would be developed in a brewery sounds sufficiently improbable, but the story is true and intriguing. The statistical technique most often used to study events of low probability was discovered by a Polish mathematician and an employee of the Guinness brewery.

The scholars behind the stout - John Kay