Glossary
Model Risk
The risk that an AI model produces incorrect, unfair, or unsafe outputs.
Definition
Model risk is the risk that a model fails — by being wrong, biased, drift-prone, or unsafe — in ways that produce financial, regulatory, or reputational harm to the organization that deployed it. In regulated industries (banking, insurance, healthcare), model risk management is a formal discipline with documented frameworks.
Context
In banking and insurance, model risk management is overseen by a dedicated function and constrained by regulators (SR 11-7 in the US). Healthcare and other regulated industries are converging on similar discipline. AI systems intensify model risk because their behavior is harder to fully characterize, making evaluation, monitoring, and human oversight critical controls.