Discussion

ITS 835 Chapter 25 Uses of Efficient Frontier Analysis in Strategic Risk

Management

Dr. William Souza

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