Discussion on ERM

ITS 835 Chapter 25

Uses of Efficient Frontier Analysis in Strategic Risk Management

Enterprise Risk Management

Dr. Les Stovall

Introduction

• Strategic risk management framework • Modern portfolio theory • Practical application of risk measurement for insurance • Sample case study • Intended uses

Strategic Risk Management Framework

• Enables organization to discover risks • Across organizational boundaries

• Continuous cycle • Considers interactions of multiple risks • Combines risk appetite and risk tolerance • Defines exploitable risks

Strategic Risk Management

Modern Portfolio Theory

• Mathematical model – from 1950s • Risk is standard deviation

• When portfolio is weighted combination of assets

• Rp – return of portfolio • Ri – return of asset i • Wi – weighting of asset i

Practical Application of Risk Measurement for Insurance

• Purpose is to optimize insurance placements • And risk limits

• Tail value at risk of loss – TVaRL • Expected value of loss, given that an event has occurred

Sample Case Study

• Three basic risks • Earthquake exposure to buildings

• Workers’ compensation insurance

• General liability insurance

Portfolio Options

Earthquake Options

Workers’ Compensation Options

General Liability Options

Combined Portfolio Options

Intended Uses

• Help large organizations • Risk management

• Portfolio management

• Insurance and non-insurance risks • Best fit

• Established ERM