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Article | Managing Risk

How to unlock the power of portfolio approaches to risk management

By John Merkovsky , Erin Boulware and Arun Kurian | March 19, 2024

By understanding and quantifying individual risks in a portfolio view, you can identify more effective risk management strategies that deliver greater value.
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Traditional risk management approaches evaluate risks in isolation, which could leave your organization falling short on maximizing the opportunities from risk connections and correlations. By moving to modern portfolio approaches to risk management, you can optimize risk-reward outcomes and make informed decisions that better align with your financial priorities.

In a recent WTW Outsmarting Uncertainty webinar titled “How to deliver value through a portfolio approach to risk management” we shed light on the mechanics and specific benefits of portfolio risk management. This session was the third installment in a series of webinars that connect the fundamentals of risk finance – from defining risk tolerance, to quantifying individual risks using analytics, moving on to developing a portfolio approach and how risk managers can bring modernized risk management to your organizations. 

This insight summarizes the key takeaways on why and how you might move to a portfolio approach and elevate the role of risk management, and your own contribution to organizational resilience and success.

Why shift from traditional to a portfolio risk management approach?

To illustrate the limitations of a traditional risk management approach, we refer to a football analogy. In football, understanding the behavior of individual players is crucial, but it’s equally important to anticipate how they might work together as a team.

Similarly, managing risks in silos fails to capture the potential for diversification and correlation among risks. By evaluating risks individually, you could risk overestimating or underestimating your financial impact, leading to suboptimal risk management strategies.

A portfolio approach provides a holistic view of your organization's total risk picture, enabling leaders to make more informed decisions. By quantifying risks and modeling various risk mitigation options, you can identify the most efficient combinations of investments that minimize costs while maximizing risk protection. This approach can create optimized risk-reward outcomes and aligning risk management strategies more closely with the financial goals of the business.

How can you implement a portfolio approach to risk management?

The first step on the journey toward a portfolio approach starts with establishing a risk tolerance framework. This framework sets the boundaries within which your organization can evaluate all risks and risk-mitigating actions, defining the parameters around the risk you can take, and the risk the business is willing to take.

Next, you need to identify a portfolio of risks to examine. While it’s ideal you analyze a diverse set of risks, you can begin with a few key risks and expand the portfolio you consider over time.

Quantifying risks is a crucial step in the portfolio approach. Doing this right is likely to mean calling on diverse sources of data and insight, including historical data, industry benchmarks and expert judgment to estimate the potential financial impact of each risk. By having a nuanced approach to quantification, you can better evaluate the impact of one risk on another and consider correlations among risks. By calling on sophisticated quantification approaches, you can develop a comprehensive understanding of your total risk landscape.

Customize your modeling approach to maximize portfolio risk management

When it comes to risk modeling, customization is key. For risks with abundant historical data, you can rely on traditional actuarial analyses. By examining past occurrences, you can project future outcomes with confidence.

However, in cases where there isn’t enough historical experience, you should look for ways to incorporate industry data to fill the gaps. If there isn’t enough relevant industry data, you can look to alternative methods to quantify and model risk, such as constructing a tailored set of scenarios, attaching likelihood and financial impact ranges to each scenario.

Scenario-led approaches combine expert judgment from external sources and internal stakeholders within your organization to serve as the foundation for generating a wide range of simulated scenarios.

Regardless of the quantification methodology, for each risk, your aim is to provide a scientific estimation of potential losses, including the variability surrounding the estimate. To put this simply, you need to determine the expected loss outcome, the potential for outcomes worse than expected and the likelihood of adverse outcomes.

You’ll also want to evaluate the interplay between risks, specifically the correlations among them. Understanding how one risk can impact another is crucial.

Implementing portfolio risk management: Case study

WTW worked with a large natural resources organization to identify and assess a range of realistic loss scenarios and how best to respond to them. While there was ample historical claims and exposure data available for insurable risks like property damage and liability, other risks such as supply chain interruptions and cyber threats required a scenario-led approach.

To examine the potential consequences of a major flood at a primary location or a prolonged disruption at the port the business relied on for shipping, actuaries constructed models that simulated losses under various probabilities. These models also accounted for the possibility of one risk affecting another, such as supply chain interruptions resulting from a cyber attack. In other words, the portfolio analysis incorporated correlations between risks.

The next step was to determine and test the investment options for risk mitigation. For each option, the analysis quantified the implementation cost and the associated risk protection benefits. In the case of the insurable risks, the business used a portfolio optimization tool to explore different limit, sublimit and deductible structures for each line of coverage. This tool can also consider alternative risk transfer options, such as integrated, structured, or parametric programs.

Beyond insurance policy options, portfolio approaches can also help businesses evaluate investments in fire protection systems, supply chain diversification, or labor reskilling.

Applying the portfolio approach and related analytics ultimately empowered the natural resources business to make more informed decisions, minimize cost impact and provide the risk protection it needed.

Next steps on realizing the benefits of a portfolio approach to risk management

If your organization is ready to embrace a portfolio approach to risk management, it’s worth anticipating the need for collaboration and consistency across different functions within the organization to get this right.

We’ve seen how transparency around the process and the methodology and a common language are essential to ensure your modernized portfolio risk management strategy is aligned with your organization's overall objectives.

By looking at your organization’s risks collectively, risk management can be the business function that breaks down silos and fosters collaboration and, with this, drive a risk management approach that’s aligned with, and is crucial to delivering better financial performance.

Find out more detail on portfolio approaches to risk management, watch the full webinar on-demand by filling out the form.

For a smarter way to move to modern portfolio risk management, get in touch with our risk management specialists.


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