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Article | Managing Risk

Seeking more efficient ways to manage risk? Why a portfolio approach provides the answers

January 23, 2024

Understanding how a portfolio approach can offer greater risk and insurance value to your organization.
Captive and insurance management solutions|Casualty|Corporate Risk Tools and Technology|Facultative|Risk and Analytics

Taking a portfolio approach to risk management may seem complex at first glance but bringing together single-coverage lines within a portfolio view can boost value and reveal hidden opportunities. While there’s growing awareness of the potential advantages of portfolio approaches, some risk managers may not yet feel sufficiently comfortable with the concept to pursue them.

Many risk managers are seeing their insurance spend recommendations face increased scrutiny. So, if you’re coming under pressure to find savings, now could be the time to explore a modern, analytical approach to seeking an optimized risk outcome.

If you’re new to portfolio risk management, this brief article explains some of the key principles, ahead of a February 2024 Outsmarting Uncertainty webinar featuring practical insight on taking a portfolio risk management approach.

What is a portfolio approach to risk management?

Historically, risk management has analyzed risk and made risk decisions in silos – risk by risk, policy by policy. The portfolio view pulls disparate risks together into one framework and language, allowing for a holistic strategy across your total program, rather than a collection of individual risk decisions.

With a portfolio perspective, you can make risk financing choices in the same way that investment managers make investment decisions: considering correlations and diversification across risks and choosing combinations of transactions (buying policies or investing in other risk mitigations) that deliver the best value for spend.

With insight on your total portfolio of risk and your mitigation options, you can deploy your risk capital more effectively and efficiently.

The advantages of portfolio approaches to risk management

There are a wide range of advantages to moving to portfolio risk management approaches. These benefits can manifest on an annual basis, at renewal and over longer time horizons and include:

  • Allowing for arbitrage by driving competition across lines of business – this, for example, allows your property carrier to compete with your cyber carrier for your risk transfer dollars
  • Promoting transparency and insuring consistency by using a repeatable, actuarial-based framework for understanding, evaluating, and managing total risk
  • Enabling greater efficiency by identifying risk financing strategies that maximize value for spend in alignment with your organization’s long-term financial objectives
  • Aligning the risk management function more closely with finance and treasury.

Portfolio approaches to risk management need not feel complex

Using a portfolio approach to risk decision making can feel daunting. Each risk will have multiple mitigation options, so considering all the potential combinations of these options across all the risks means reviewing thousands or millions of combinations. But by harnessing technology and data analytics, you can see complex and sophisticated analysis in a single view. This view allows you to visualize risk financing choices across your portfolio of risks in terms of simple trade-offs between cost and risk.

You can then identify the most efficient strategies for your organization, obtaining the highest expected return on risk spend for a given level of risk. It’s this risk optimization that helps you manage change in your industry, operating conditions and insurance markets more effectively, maximizing efficiency and reducing cost.

Next steps on taking a portfolio approach to risk management

Risk and analytics go hand in hand. If you’re not leveraging a portfolio approach to managing risk, you could be leaving money on the table.

Some of the world's most successful organizations have recognized they must transform their approach to risk financing to enhance resilience in a changing world. They’re also seeing how evolving risks create opportunities to re-envision their risk finance approach and reveal unexplored value. The same is true for your organization. Your journey toward a modernized portfolio approach can start today.

Discover a smarter way to optimize your risk and insurance value at our next Outsmarting Uncertainty webinar on taking a portfolio approach to managing risk. Register now


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Director, Risk & Analytics
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