Quantifying the Risk Profile

Using the framework described here, it is possible to quantify a risk profile for an organization. For a given risk profile, it is then possible to project expected costs under a set of assumptions. It is also possible to alter a firm’s risk profile. For example, additional risk can be transferred by obtaining additional insurance, or insurance with lower deductibles; however, the costs associated with making that shift may outweigh the reduction in costs associated with the new risk profile itself. This leads to the idea of an efficient risk frontier (Friedel 2001), which defines the optimal combination of risk retained, risk transferred, and risk mitigated or avoided that is most cost effective for a projected set of circumstances. The frontier shifts as expectations of future conditions change. Organizations, for which risk management is critical, often use complex scenario analysis methodologies to test various risk frontiers under differing sets of assumptions and conditions.