ITS 835 ENTERPRISE RISK MANAGEMENT CHAPTER 25 ERM - USES OF EFFICIENT FRONTIER ANALYSIS IN STRATEGIC RISK MANAGEMENT UNIVERSITY OF CUMBERLANDS 1 INTRODUCTION  Strategic risk management framework  Modern portfolio theory  Practical application of risk measurement for insurance  Sample case study  Intended uses UNIVERSITY OF CUMBERLANDS 2 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 UNIVERSITY OF CUMBERLANDS 3 STRATEGIC RISK MANAGEMENT UNIVERSITY OF CUMBERLANDS 4 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 UNIVERSITY OF CUMBERLANDS 5 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 UNIVERSITY OF CUMBERLANDS 6 SAMPLE CASE STUDY  Three basic risks  Earthquake exposure to buildings  Workers’ compensation insurance  General liability insurance UNIVERSITY OF CUMBERLANDS 7 PORTFOLIO OPTIONS UNIVERSITY OF CUMBERLANDS 8 EARTHQUAKE OPTIONS UNIVERSITY OF CUMBERLANDS 9 WORKERS’ COMPENSATION OPTIONS UNIVERSITY OF CUMBERLANDS 10 GENERAL LIABILITY OPTIONS UNIVERSITY OF CUMBERLANDS 11 COMBINED PORTFOLIO OPTIONS UNIVERSITY OF CUMBERLANDS 12 INTENDED USES  Help large organizations  Risk management  Portfolio management  Insurance and non-insurance risks  Best fit  Established ERM UNIVERSITY OF CUMBERLANDS 13 ITS 835 ENTERPRISE RISK MANAGEMENT CHAPTER 22 ERM - JAA INC. –A CASE STUDY IN CREATING VALUE FROM UNCERTAINTY UNIVERSITY OF CUMBERLANDS 1 INTRODUCTION  Business background  Initial steps  Evolution of Risk Management  Introduction of ISO 31000 and HB 436 to JAA  Bringing everything together UNIVERSITY OF CUMBERLANDS 2 BUSINESS BACKGROUND  JSS is a clothing wholesaler and retailer  Founded in 1972  Went public in 1998  Three operating segments  U.S. wholesale  U.S. retail  International (wholesale and retail)  57 retail stores in 10 countries UNIVERSITY OF CUMBERLANDS 3 INITIAL STEPS  Strategic objectives  Maintain market leadership  Sustain technology leadership  Strengthen global presence  Deliver quality service  A leader in compliance with all laws and regulation UNIVERSITY OF CUMBERLANDS  Establish a governance system  Multiple committees, each with specific responsibilities 4 GOVERNANCE FRAMEWORK UNIVERSITY OF CUMBERLANDS 5 EVOLUTION OF RISK MANAGEMENT  Lack of strategic risk management led to many problems  Communication  Missed/lost opportunities  Lack of commitment to objectives  Declining quality  Identified gaps in risk management  Engaged in aggressive internal training  Soft skills  Team building  Management planning UNIVERSITY OF CUMBERLANDS 6 INTRODUCTIONS OF ISO 31000 AND HB 436  JAA adopted ISO 31000  HB 436 provided extensive implementation guidance  ISO 31000 was basically an upgrade of the framework JAA was already using  ISO 31000 framework formalized JAA’s ERM  Defined organization and process UNIVERSITY OF CUMBERLANDS 7 USING CONTEXT FOR RISK CRITERIA UNIVERSITY OF CUMBERLANDS 8 BRINGING EVERYONE TOGETHER UNIVERSITY OF CUMBERLANDS 9 RISK MAP UNIVERSITY OF CUMBERLANDS 10 RISK ATTITUDE UNIVERSITY OF CUMBERLANDS 11
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