Portfolio risk management

Portfolio risk management for non financial institutions

The fallout from corporate scandals and increased market volatility has given greater emphasis to performance measurement and risk management in many enterprises. Shareholders, banks, insurance companies, credit rating agencies and other stakeholders are seeking greater transparency regarding the risk reward ratios that adopted by management. There is an expectation that the scope of risk management extends beyond traditional financial and market risk to encompass enterprise-wide risks.

The challenge is often one of accumulating risk at group (or holding company) level. This involves establishing where there are significant synergies at an operational, compliance and reporting level. It becomes more demanding where the strategy has been to adopt an expansive business model seeking benefits from diversification in business activity, geographic positioning, and industry sector. Risk managers in an enterprise are being asked to implement more effective tools to model and recognise risk and align these with the specific characteristics of the business. This is increasingly managed through an integrated approach that looks at the risk contribution of each risk type present in the business portfolio. Consequently, there is a need for more rigorous methods to tie risk events to capital requirement, cash-flow requirement and earnings expectations.

Risk-based capital management (or economic capital management), when coupled with an enterprise-wide risk-aware culture, gives enterprises a powerful new source of competitive leverage. It can help enterprises to identify threats, weaknesses or opportunities that may be missed by competitors, and target investment where it can earn its best return. It can also help to align risk appetite with capital allocation, and communicate the tangible strengths and potential of the business to analysts, investors and rating agencies. Just as important, it ensures that decisions made outside of normal risk frameworks have been sufficiently rigorous.

Reply supports its clients  with all aspects of (economic) capital calculation and allocation by:

  • Determining the capital resources required to support material risks faced by your organisation (or for a given transaction), and guard against unexpected potential significant losses to a pre-defined solvency level;
  • Estimating the various correlations between risk estimates, risk types and business lines;
  • Defining a range of scenarios that stress macro-economic variables, and analyse the likelihood of scenario occurrence and the associated impact on key risk factors and capital requirements;
  • Building and validating the models required, and outlining the appropriate course of action to mitigate stressed and worst-case scenarios;
  • Allocating the necessary risk capital at transaction, business line, business unit or group level.

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