Aggregate Risk Principles & Assessment

Instructor: Sudha Aravindan

Sudha has a Doctor of Education Degree and is currently working as a Information Technology Specialist.

In this lesson, we will discuss the general principles for performing aggregate exposure and risk assessments for organizations. We'll also learn about evaluation and applications.

Aggregate Risk

Jill is the risk manager of her company. One of her job responsibilities is to assess, identify, and manage risks in keeping with the business objectives so that the company's finances, reputation, safety, and security are not affected. Jill met with her project team to discuss the implementation of an aggregate risk management strategy.

As part of her job, Jill had to figure out the aggregate risk, which is the totality of all possible risk across the portfolios of the organization that could result in any kind of negative outcomes. Aggregate is a combination of different elements, so aggregate risk is a comprehensive and quantitative overview of all risks the organization faces.

Jill started off by defining risk as any level of uncertainty in a business environment. She recognized that an effective risk management system manages risks across portfolios while maintaining consistency and managing uncertainties when there are a number of possible outcomes. She created a checklist for her team for identifying risks and aggregate risks in the entire organization.

  • A risk is not a risk when it exists in isolation and does not affect any of the business workings of the company.
  • Risk drivers (factors that would cause the risk to occur) have to be evaluated and assigned risk scores for measuring the individual and aggregate risk factors on strategic objectives.
  • Aggregate risk management has to evaluate possible new opportunities and potential threats.
  • Risk outcomes have to be grouped together to generate a meaningful numerical aggregate of risk factors.

As an example, Jill explained to her team that in the event of an employee suffering an injury on the job, an aggregate risk assessment would allow for an understanding of how the risk would affect different areas of the company including financial impact, loss of manpower, and reputation. If risks are evaluated in isolation instead, the effect of the totality of risks on the overall business strategies of the company would not be understood.

Risk Assessment

Jill followed up with discussions with her management team about possibilities for risk assessment. The team decided it was important to be able to identify and rate risks.

Risk Identification

  1. Risk selection: Select an area for possible risk and create individual risk scores. A quantitative risk profile analysis of the possible threats to an organization, assets, projects and individuals would need to be calculated by assigning numerical values to the potential threats and the degree of danger for each threat. Example: Sales revenue.
  2. Risk limits: Identify limits for each risk factor. Set upper limits of risks based on the current capabilities of the organization. Example: How much lower of a profit margin is acceptable?
  3. Risk drivers: Identify factors that would escalate the risk. Example: Pricing of competitors for the same product.
  4. Estimate risk scenarios: Estimate the best, worst, most likely, and least likely cases. Example: Best profit margin (+30%), worst (-45%), most likely best (+20%), and most likely worst (-15%).

Risk management discussion
Risk Management

Risk Rating

  1. Rate each risk for current circumstances of the company. For example, in the current situation, the likelihood of a profit margin is 40%.
  2. Identify assumptions and conditions that were considered for each rating. For example, determine the market share of the product and competitor pricing.
  3. Link risks that are interrelated, and identify dependencies between risks. For example, for a product that is performing below what is expected in sales, calculate the financial risks as well as operational risks.
  4. Quantify each risk by giving it a numerical value so that the aggregate risk for the entire organization can be understood in numerical terms.

Aggregate Risk and Portfolio Management

To continue with the aggregate risk management strategy across portfolios, Jill had to access how many of the projects were high risk and how many were stable. With the help of the management of her company, Jill was able to define a plan for effective risk aggregation and reporting for the company portfolio. She included the following elements in the plan.

Accurate and Reliable Data

The company should have the IT infrastructure to generate and report on accurate risk data. Ideally, there should be software tools that help aggregate risk based on the different risks identified.

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