LR-301g · Module 2

Enterprise Risk Aggregation

3 min read

Individual risk quantification tells you the exposure from each risk. Portfolio aggregation tells you the total exposure from all risks combined. The aggregation is not a simple sum — risks interact. Correlated risks materialize together, producing losses that exceed the sum of their individual expectations. Diversified risks rarely materialize simultaneously, producing losses that are less than the sum. The aggregation methodology must account for these interactions.

Do This

  • Model risk correlations explicitly — which risks share triggering conditions, which are independent?
  • Run Monte Carlo on the entire portfolio, not just individual risks — portfolio simulation captures correlated tail events
  • Report total exposure at multiple confidence levels — expected, 90th percentile, 95th percentile, 99th percentile

Avoid This

  • Sum individual risk estimates to produce total exposure — simple sums overstate independent risks and understate correlated ones
  • Ignore correlations because they are hard to estimate — imperfect correlation modeling is better than assuming independence
  • Report a single total exposure number — without confidence levels, the number communicates false precision