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in BUS 4027W - Actuarial Risk Management by

Why is it that managing risk at the business unit level is "means that the group is not making the best use of its capital"?

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by (680 points)

Hi there

Generally speaking, it would require less capital to manage risk at an enterprise level as opposed to doing so at the business unit level. By managing risk at the enterprise level you can leverage the benefits of:

1. Diversification and risk pooling - risks can offset each other. You thus don't need to provision for as many individual risks (in the hopes that negative outcomes will be offset by positive outcomes elsewhere in the enterprise). Since you don't need to provision for as many individual risks, you can free up some capital.

2. Economies of scale - risk management strategies can be applied on a larger scale and would likely mean a lower cost per business unit. This directly frees up capital.

Hope that helps.

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