– It’s a time of great change in the sometimes arcane but always mission-critical world of risk management. Regulators globally are pushing financial institutions for more robust methodologies and models to manage the risks embedded in their balance sheets and operations. Meanwhile, automation and digitization will change the tools and techniques at their disposal in ways that most banks, insurers, and asset managers are only just starting to embrace.
Such is the background to our acquisition of Risk Dynamics, a leading risk analytics firm based in Brussels that specializes in risk model validation and advisory. “It would be an understatement to say that getting risk right is a priority for our financial sector clients,” says Cindy Levy, who leads McKinsey’s Risk Practice across Europe, the Middle East, and Africa.
While our Risk Practice comprises about 400 consultants—including a growing advanced analytics capability—the 35-strong Risk Dynamics team brings some unique capabilities to clients, including deep expertise in model validation, which is the critical business of stress-testing risk management models to ensure they are mathematically robust.
The deal is a further sign of McKinsey’s willingness to make targeted acquisitions in order to accelerate bringing new services and expertise to clients. In December, the firm announced the acquisition of QuantumBlack, a London-based consultancy that is pioneering the use of big data to improve organizational performance. Other recent acquisitions have been in fields ranging from product design to pricing optimization.
Risk Dynamics was founded in 2003 by Dominique and Olivier Bourrat, a wife and husband team with backgrounds respectively in quantitative finance and business consulting. Dominique earned a PhD in nuclear physics before moving into financial engineering at an investment bank and then risk management. Olivier, meanwhile, worked for international consulting firms in Belgium, Paris, and London.
Risk Dynamics’ (metaphorical) marriage of quantitative skills, business insight, and innovative methodologies is one of the things that piqued McKinsey’s interest. “Their team includes some real quants but we’ve found them to be very insightful about the challenges facing the industry,” Cindy says. “They share the same ‘from the engine room to the board room’ approach we bring to clients.”
Another shared interest is pushing the boundaries of knowledge to help clients manage new issues and regulations as they arise. As an example, Olivier points to “model landscape risk”—the headache-inducing challenge of understanding the interplay and governance of the dozens (or even hundreds) of different risk models being used within a single financial institution. Looking further ahead, Dominique notes that the emergence of machine learning and other computer-based forms of predictive analytics as something that financial institutions and their regulators will need to address: “It’s fine to build a risk model based on machine learning, but how do you validate it? That’s a question we are keen to help clients and regulators answer.”
After the acquisition, Risk Dynamics will continue to operate from its Brussels offices, with its entire management team playing an active role in expanding the business globally under its existing brand. Early priorities include opening a US hub and embarking on an energetic recruiting effort. Cindy says: “Fundamentally, this is about building the world’s preeminent risk analytics and model advisory firm.”