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Why you need a portfolio view of risk built on analytics

Risk & Analytics|Corporate Risk Tools and Technology

By George Haitsch | June 30, 2020

A portfolio view enables risk managers to navigate a complex risk landscape and align risk management with broader business objectives.

Cyber risk management has become top of mind for risk managers at most technology, media and telecom (TMT) companies, and for good reason. The very nature of the business exposes most TMT companies to multiple cyber threats, including data breaches, malware, denial-of-service attacks, and so on.

This is not to say that other risks are overlooked. All companies continue to plan around potential property & casualty (P&C) risks, professional liability, errors and omissions and other risks that could dig into profits or even jeopardize the enterprise. These “conventional” risks are routinely retained or transferred but often without the rigorous analysis that increasingly surrounds cyber risks.

The emphasis on cyber risks is understandable. Cyber is often the biggest vulnerability to a TMT company and the broader digital economy. As cyber risks morph and new ones emerge, it’s difficult for risk professionals to keep up. An army of hackers is working constantly to break your defenses with implications for customers, employees and shareholders.

The consequences of a siloed view of risks

While the emphasis on cyber risks is understandable, risk managers need to keep a steady eye on their full risk portfolio. A failure to keep a holistic risk view has consequences:

  • Risks are effectively siloed, depriving a company of a corporate-wide view of risks over time and in multiple geographies.
  • Companies fail to reap the benefits of portfolio diversification, such as the reduction of volatility and the offsetting benefits to be found within a larger risk portfolio.
  • Risk managers will find it difficult to gain a clear understanding of risks and their hedges in terms of the total cost of risk and its financial consequences.

A better approach, in my experience, is to apply a rigorous portfolio view of risks that covers every aspect of risk finance. It enables risk managers to navigate a complex risk landscape and plot strategic risk management based on empirical evidence, and it aligns with broader business objectives.

The foundation and pillars of risk management

To use a graphic image, think of your risk management program as a Greek temple. The temple’s foundation is a robust analytical platform combined with professional expertise to yield a shared understanding of your risk tolerance. This answers the question of how much risk your organization can sustain if hit by uninsured or unfinanced risk before there is a material impact on your key financial metrics, such as cash flow, earnings per share or lending covenants.

On this foundation, your various categories of risks form the temple columns. For a TMT company, they would include cyber risks, of course, as well as financing or risk transfer for boards of directors, P&C exposures, liability and other risks. Each category of risks forms a column in our hypothetical Greek temple.

Once the columns are in place, a risk manager should make informed decisions about each risk area that reflects a common understanding that the enterprise can only afford a certain scale of losses before there is a materially negative impact on earnings. Let’s say your risk tolerance benchmark is $500 million aggregate loss before breaching your financial benchmarks. What confidence do you have that your aggregate risks – the temple columns – have been accurately identified and measured? 

‘Connected Risk Intelligence’

Fortunately, our Greek temple has a roof over all those columns. In what we call Connected Risk Intelligence, the roof is rigorous risk optimization that draws on big data, emerging technology and professional insight. This holistic approach looks at all of the risks, plots each risk on an XY axis and calculates the threshold, or efficient frontier, where what you’re spending to mitigate risk effectively covers your full portfolio of exposures without incurring additional costs.

With new modeling and advanced analytical techniques, the portfolio approach can effectively cover complex and evolving risks (cyber, for example) and the more conventional risks such as directors’ and officers’, or property insurance. Advanced risk modeling and simulation, including dependency and correlation modeling, help identify the waste of excessive or unnecessary risk hedging or the threat of coverage gaps that might not have surfaced in a risk management program that relied more heavily on benchmarking.

Dealing with what-if scenarios

With the benefit of advanced simulation technology, big data and portfolio optimization expertise, a company can establish a risk strategy that is right for the business, with their risk exposure at the optimal level and paying what they should to protect themselves. When circumstances change, data-based technology can remodel in seconds, adjusting priorities quickly, simply and effectively. This portfolio-based strategy also enables a company to build a strong, accurate forecasting model that can deal with what-if scenarios as risks and corporate business priorities change.

While risk managers have used benchmarking for generations, data analytics within your company and a broader industry peer group enable a risk manager to optimize the position. A clever broker can get a better deal, and it puts you in a position where data and technology support your strategy. Who better than technology companies can make efficient use of technology?

This saves money but, more importantly, by having a holistic view of risk, it enables a risk professional to have thoughtful and well-informed conversations with a CFO or treasurer and other senior leadership and board members. This approach also contributes to a top-down risk awareness and a corporate culture that works hand in hand with data analytics and professional risk management to efficiently identify and avoid risks while achieving a cost-effective program.


Global Client Advocate
Corporate Risk and Broking

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