Risk Aggregation

Question 1

Briefly describe the idea of Risk Aggregation

Answer 1

Idea is to get a better understanding of what the total risk position of the company is, in other words to get a better understanding of the risk exposure by aggregating the individual risks

Question 2

What is the main Problem of Risk Aggregation ?

Answer 2

-Not all individual risks can be measured
- Measurable risks might have been measured by using different approaches. Thus, the question is how to combine those figures.
-Also individual risk might be correlated

Question 3

What are possible solutions to solve the problems of Risk Aggregation?

Answer 3

1) Do nothing

2) One other possible solution is that its better to overstate losses than understate losses.

3) Benchmark for the risk exposure should be the risk coverage funds and not the risk coverage potential. The reason is to allow a risk buffer.

If the risk exposure is smaller than the risk coverage funds the risk taking capacity of the firm is given

If the risk exposure would be larger than the risk coverage funds the risk taking capacity would not be given.