risk strategy safari monday, april 28, 2014 rif011
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Risk Strategy Safari Monday, April 28, 2014 RIF011. Carol MurphyAndrew Nottestad Managing DirectorDirector, Corporate Aon Risk Solutions, Inc.United Continental Holdings. What to Expect/Learning Objectives. - PowerPoint PPT PresentationTRANSCRIPT
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Risk Strategy SafariMonday, April 28, 2014
RIF011Carol Murphy Andrew NottestadManaging Director Director, CorporateAon Risk Solutions, Inc. United Continental Holdings
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What to Expect/Learning Objectives1. Understand current risk financing challenges for
2014 including terrorism legislation coming up at year-end, updates to Property modelling, collateral, and Reputation Risk.
2. Proven, cutting edge financing solutions and new tools from real life case studies.
3. Framework for risk financing communications with senior management.
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Property TIV Return on Investment
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Investing in your property exposure data may pay big dividends as CAT Models play a bigger role in pricing your property insurance
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Insurance underwriters use several methods to come up with premium
One method for CAT exposed accounts is to multiply the RMS Annual Average Loss by a multiplier
Improving the RMS data quality typically improves the average annual loss RMS typically defaults to a worse assumption if data is unavailable A typical range that insurers may multiply the AAL by is 1.5 to 1.7 using 1.6
EQ AAL down $1.5M is $2.4M less cat premium loading Windstorm AAL down $300,000 is $0.5M less cat premium loading
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CAT Modeling
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+Science Art
ASSUMPTIONS
ACTUARIAL & FINANCIAL MODELS
Risk Assessment ModelingAs sophisticated as your model ever gets it can only be a simplification of reality…
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A COMMENT ON STATISTICS
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CAT Modeling Results Track With Reality?
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Collateral – Reducing Economic Cost
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10UW Madison April 11, 2013
201220112010200920082007200620052001 2003 20042002
PAID
IBNR
CASE RESERVE
Understanding Collateral
COLLATERAL REQUIRED
Negotiate paid loss credits with insurer based on insured’s credit quality and payout pattern
Workers’ Compensation Retained Risk Profile
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11%
34%
52%
WC COLLATERAL
3%
WC EXPENSES AND TAXES
WC RETAINED LOSS
RISK TRANSFERCollateral Costs are > 10% of
Many Companies TCOR
1. COST OF COLLATERAL = Assumes 8% cost of restricted cash
UW Madison April 11, 2013
Understanding CollateralSignificant Cost for Companies
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Type States Accept
Insurers Accept
Cost Effective
Call Risk
Letter of Credit
Enhanced Letter of Credit
Surety
Cash Trusts
CA Alternative
Security Plan
Real Assets / Hybrid
Typical forms of collateral and general characteristics for less than investment grade companies
UW Madison April 11, 2013
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Collateral Options Analysis
Recovery& Workout
Strategies
Collateral Map
Collateral Options Analysis
Recovery& Workout
Strategies
Collateral Map
Collateral Management ProcessOverview
UW Madison April 11, 2013 13
What Collateral Exists?
What are the cost?
Financial Analysis of cost metrics
Actuarial Analysis
Risk Financing Strategies
Program Design
Leveraging safety initiatives
Analysis Recovery & Workout
Collateral Map Strategies
Buyout/Closeout
Loss Portfolio Transfers
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Reputation Risk
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Reputation Risk:1. Changing internal and
external environmental factors
2. Can create division between stakeholder expectations and company behaviors
3. Reputation risk evolves when stakeholder expectations are not met
4. Reputation risk can expand the risk, volatility and cost of other operational risks
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Reputation Risk
• A strong reputation already does not necessarily protect the firm in tough times.
• Instead, organizations with strong reputations already may suffer more consequences of stakeholder disappointment.
• Case Study: BP
Source: Corporate Executive Board
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Caught Off Guard
• Even the most respected companies can be caught off guard when there is a shift in public sentiment.
• Case study: Cadbury Schwepps “Get Active” promotion.
Source: Corporate Executive Board
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Update on Terrorism Legislation / TRIPPA and Insurer Response
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2014 Casualty Marketplace: The Great Tug of War
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Market balance
Depressed interest rates
Slowing reserve releases
Rising tort costs
Depressed industry ROE
TRIPPA uncertainty
Record policyholder surplus
Market competition
Improving economy
Exposure growth
Rate Increases
Rate Decreases
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Market uncertainty: Terrorism backstop (TRIPRA) Current version of federal terrorism backstop (TRIPRA)
expires 12/31/2014
Casualty lines impacted: General and excess liability Workers compensation
Market focus on workers compensation due to aggregation risk
Conventional wisdom suggests TRIPRA will be renewed with greater risk borne by private sector
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Market uncertainty: Terrorism backstop (TRIPRA)
Uncertainty created by its expiration beginning to have implications for renewals
Ability to re-price terrorism exposures Ability to exclude terrorism (GL/excess only) Short term workers compensation policies Market dislocation
Navigating the uncertainty: Start early Obtain best exposure data possible For risks with pricing uncertainty, negotiate terms if
TRIPRA is renewed
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TRIPPA Reauthorization: Which direction will it go?
The Left:Pulling for continuation of public sector support
The Right:Pulling for higher
private sector share
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Framework for Communication with Senior Management
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Integrating Confidence Levels and Financial KPI’s Will Provide a Greater Understanding of Volatility in Go-Forward Program Design
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Establishes appetite levels for enterprise risks and tolerance levels for insurable risks which are linked to corporate performance objectives and volatility thresholds
Generates a thorough understanding of current insurance exposures, individually and/or in portfolio
2. Dynamic RiskModeling
3. Design & ProgramStress Testing(including funding)
Provides a cost/benefit comparison of various risk management strategies including captive and alternative risk strategies
1. Risk Appetite Analysis
Understand Expected Losses
Understand Tradeoffs between Mitigation Tools
Enterprise View of Risk and its Financial Contribution
Risk
Appetite
Dynamic Risk Modeling
Design & Program
StressTesting
Capital Deployment Efficiency
Aon Risk Solutions | Global Risk Consulting | Proprietary & Confidential
Understanding Impact of Volatility
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Risk Financing Decision PlatformIdentifying the Efficient Frontier
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$20
$25
$30
$35
$40
$45
$50
60% 65% 70% 75% 80% 85% 90% 95% 100%
X-Axis: Conf idence Level
Unlimited Current Alternative Risk Tolerance
Y-Axis: Total Cost of Risk ($ in millions)
Events Frequency (Events/Years)
1/10 1/20 1/1001/5
Program Expected TCOR Risk Appetite TVaR at
(Premium + Loss) Breach Point 95%
Unlimited $22.8 million 86% $39.1 million
Current $26.1 million 78% $32.2 million
Alternative $23.4 million 87% $33.9 million
Aon Risk Solutions | Global Risk Consulting | Proprietary & Confidential
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Communicating Impact to Management• CFOs don’t like surprises
• Stability• Prediction accuracy
• Not all risks important to CEO or CFO appear on financial statements• ‘So what’ response to data generation• Prioritization• Conflicting incentives• Metrics – compliance vs. impact
• Example: OSHA statistics vs. workers’ compensation costs• Common language• Other considerations?
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Management Communications Tool – Example
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Component Information Communicated
(1) How to quantify the cost of the problem(s) and risk, and the potential impact of mitigation strategies.(2) Helps to calculate and communicate the cost of fixing vs cost of not fixing.(3) Measuring the value generated by the solution(s).
(1) Each risk and organization is different.(2) With unique characteristics, no one size fits all.(3) A business case must be presented to senior management to support the allocation of scarce resources and obtain buy-in.(4) Data must be clean and reliable.
(1) project prioritization must occur because not all can be done at once.(2) High value, high impact, low investment to start and build credibility.(3) This is a multi-year process.(4) KPIs are critical to measuring performance and progress, as well as adjusting strategies over time.
(1) This is a useful methodology (answers the 'what' and 'what to do').(2) Other functions will see progress and use the process to achieve their own goals (multiple impacts from single project).(3) It takes a couple of years to get meaningful results.
(1) Allowing for activities to be included in budgeting and strategic planning processes.(2) Obtain and maintain senior management support.(3) Obtain and ensure required resources are aligned.
(1) Targeted and focused activity reflecting an organization's unique risk profile and appetite.(2) Improved and documented risk management results and value.(3) Significant impact on coverage negotiations and collateral.(4) Improved business intelligence upon which operations management can make decisions.
Benefits are:
Situation involves:
Complications are:
Implications are:
Position is:
Necessary actions are:
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Thank you!
Please complete the session survey on the RIMS14 mobile application.
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Andrew Nottestad
20 years experience as Risk Manager and Insurance ProfessionalCurrently Director of Corporate Insurance at United AirlinesHeld both divisional risk management and corporate roles at AXP and PepsiCo Integrated and spun off numerous multi-billion dollar companies risk and insurance programs Started career at Wausau Insurance Companies as a Commercial Underwriter
Insurance and RM Experience
Strong Academic Foundation