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
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