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FRM Part II · FRM Exam Part II · Risk Identification

Which of the following is the primary reason a firm would supplement its internal loss data with external loss data?

External loss data are used mainly to capture rare, high-severity events that the firm has not itself experienced but could plausibly face. They fill gaps in the tail of internal data and complement, rather than replace, scenario analysis and KRIs.

  1. ATo capture rare, high-severity events that the firm has not experienced but could plausibly sufferCorrect
  2. BTo eliminate the need for scenario analysis
  3. CTo replace KRIs with historical averages
  4. DTo reduce the number of events requiring root cause analysis

Explanation

Internal data are usually rich in high-frequency, low-severity events but thin in the tail. External data provide examples of severe losses at peers, informing tail assessment alongside scenarios. It complements rather than replaces scenarios or KRIs.

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