srm
KenyanPR
ch2511.pptx
ITS 835
Chapter 25
Uses of Efficient Frontier Analysis in Strategic Risk
Management
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
