Chapter 25 – Uses of Efficient Frontier Analysis in Strategic Risk Management
- How does efficient frontier analysis (EFA) differ from other forms of complex risk assessment techniques?
- What limitations might an analyst encounter through the use of EFA?
- How can efficient frontier analysis results be communicated and utilized with nonmathematical decision makers?
Chapter 22 PPT – JAA Inc.–A Case Study in Creating Value from Uncertainty
- How high do you assess the knowledge level of the business strategy throughout the company by the average employee? Is it your assessment that there is a robust understanding of JAA’s business strategy? Support your position with examples.
- As you are aware, effective implementation of ISO 31000 involves effective design and implementation of a risk management framework and effective implementation of the risk management processes. This will be verified by incorporation of 11 key principles. Find an example in the case for each of the 11 principles in action.
If you compare the internal audit department at JAA to several that you know of currently in the marketplace, what are some of the major differences that you see at JAA that obviously have contributed to superior performance? What is unique and refreshing about the approach to the external audit as compared to what you have seen in industry?
ITS 835
Chapter 22
JAA Inc. – A Case Study in CreatingValue from Uncertainty
Enterprise Risk Management
Professor Miguel Buleje
Introduction
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Business background
Initial steps
Evolution of Risk Management
Introduction of ISO 31000 and HB 436 to JAA
Bringing everything together
Business Background
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JSS is a clothing wholesaler and retailer
Founded in 1972
Went public in 1998
Three operating segments
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U.S. wholesale
U.S. retail
International (wholesale and retail)
57 retail stores in 10 countries
Initial Steps
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Strategic objectives
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Maintain market leadership
Sustain technology leadership
Strengthen global presence
Deliver quality service
A leader in compliance with all laws and regulations
Establish a governance system
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Multiple committees, each with specific responsibilities
Governance Framework
Evolution of Risk Management
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Lack of strategic risk management led to many problems
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Communication
Missed/lost opportunities
Lack of commitment to objectives
Declining quality
Identified gaps in risk management
Engaged in aggressive internal training
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Soft skills
Team building
Management planning
Introductions of ISO 31000 and HB 436
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JAA adopted ISO 31000
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HB 436 provided extensive implementation guidance
ISO 31000 was basically an upgrade of the framework
JAA was already using
ISO 31000 framework formalized JAA’s ERM
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Defined organization and process
Using Context for Risk Criteria
Bringing Everything Together
Risk Map
Risk Atitude
ITS 835
Chapter 25
Uses of Efficient Frontier Analysis in Strategic Risk
Management
Enterprise Risk Management
Professor Miguel Buleje
Introduction
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Strategic risk management framework
Modern portfolio theory
Practical application of risk measurement for insurance
Sample case study
Intended uses
Strategic Risk Management Framework
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Enables organization to discover risks
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Across organizational boundaries
Continuous cycle
Considers interactions of multiple risks
Combines risk appetite and risk tolerance
Defines exploitable risks
Strategic Risk Management
Modern Portfolio Theory
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Mathematical model – from 1950s
Risk is standard deviation
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When portfolio is weighted combination of assets
Rp – return of portfolio
Ri – return of asset i
Wi – weighting of asset i
Practical Application of Risk
Measurement for Insurance
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Purpose is to optimize insurance placements
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And risk limits
Tail value at risk of loss –TVaRL
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Expected value of loss, given that an event has occurred
Sample Case Study
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Three basic risks
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Earthquake exposure to buildings
Workers’ compensation insurance
General liability insurance
Portfolio Options
Earthquake Options
Workers’ Compensation Options
General Liability Options
Combined Portfolio Options
Intended Uses
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Help large organizations
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Risk management
Portfolio management
Insurance and non-insurance risks
Best fit
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Established ERM