Concentration Risk and Risk Appetite
Manage concentrations of risk to identify opportunities for growth
Concentration risk analyses the customer base of business and public sector organisations to identify concentrations across multiple dimensions. These include geographical area, socio-demographic group and life stage.
It then goes on to understand whether each concentration represents a current or future risk to the organisation, forming a core input into the future view of risk appetite and exposure management.
Experian is uniquely placed to understand a customer base by leveraging its wide data assets and comparing the distribution against market context or the UK population.
Using our historical data and economic forecasts, we gain a detailed understanding of current and future risk concentrations by multiple dimensions.
Dimensions of risk concentrations we focus on include:
- Socio-demographic segment
- Household incomes across wages and salaries, self-employment, benefits, pensions and investment incomes
- Consumer spending – both basic household expenditure and discretionary purchases
- Debt burden in comparison to household income
- Public sector employment density
- Labour market trends
If you’re a member of CAIS (credit account information sharing), we’re able to provide further insight into credit risk concentrations through aggregated reporting derived from bureau data. Typically this credit risk analysis focusses on customer profiles by UK Delphi risk score, customer affordability and indebtedness.
We can also explore areas of future risk specific to a particular credit product, for example:
Mortgages – combining a contemporary house price estimate with forecast changes in house prices and the payment behaviour of the customer for a prediction of negative mortgage equity at the end of term
Credit cards – we provide insight into those who would be unable to afford increased monthly payments when they come off initial discount rate periods. This is done by using the customer’s current affordability position and incorporating forecast changes in incomes, credit interest rates and household expenditure.
What can you use Concentration Risk and Risk Appetite forecasting for?
The view of current and future risk concentrations allows you to satisfy both the needs of the regulator and to manage your new lending strategy and customer base more effectively and decisively.
If you work in FCA-regulated banking or financial services, this analysis provides quantitative data to support your annual risk appetite statement.
A view of under-penetration in future low-risk segments also helps to identify parts of your business in which growth is possible within that declared appetite for risk. It also identifies those parts where, by contrast, risk exposure needs to be managed to remain compliant with the stated risk appetite or to ensure pricing is appropriate.
Our Concentration Risk and Risk Appetite analysis provides valuable insight for financial institutions looking to better understand geographic and socio-demographic future risk groups within their customer base – for example, 16 to 24-year-olds where there are both current and forecast high levels of unemployment.
Understanding current and future risks allows organisations to plan for potential changes in their customer base. This helps them meet regulatory requirements and make sure sufficient capital is available to meet those risks, thus ensuring a more stable economy and market place.
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