1 / 20

The Enterprise in Enterprise Risk Management A Case Study

The Enterprise in Enterprise Risk Management A Case Study. CAS Special Interest Seminar Understanding the Enterprise Risk Management Process. Case Study - ABC Corporation.

rsquier
Download Presentation

The Enterprise in Enterprise Risk Management A Case Study

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript


  1. The Enterprise in Enterprise Risk ManagementA Case Study CAS Special Interest Seminar Understanding the Enterprise Risk Management Process

  2. Case Study - ABC Corporation • Based on composite and rescaled individual data, industry information, recent press releases and some pure “guestimates” • Quantify risks individually and aggregate • Measure “untreated” earnings impact • Quantify the impact of the “portfolio effect” on aggregate risk

  3. ABC Corporation -Assumptions • Market Cap = $42.8 Billion • Net Income = $5.45 Billion (ttm) • EPS = $4.72 (ttm); Share Price = $38.12 • Effective Tax Rate = 35% • Protect against the “1 in 100 year event” • Exposures can be transferred at pretax nominal cost (expenses offset PV factor)

  4. Hazard/Legal Risks Property Business Interruption Cargo/Marine Workers’ Compensation Automobile Liability General Liability Product Liability Employment Practices Crime Boiler & Machinery Directors & Officers Intellectual Property Product Recall Foreign Liability E&O/Professional Liability ABC Corporation Risks - I

  5. Financial Risks Credit Residual Value ERISA/Fiduciary Foreign Exchange Commodity Prices Energy Prices Interest Rates Operational Risks Warranty Product Recall Contingent Business Interruption Political Intellectual Property E-Commerce Strike/Labor Relations ABC Corporation Risks - II

  6. Strategic Risks Model Selection Geographic Expansion Brand Image Product Pricing R&D Investments Acquisitions & Divestitures ABC Corporation Risks - III

  7. Property Business Interruption Warranty Residual Value Political Geographic Expansion Product Recall Product Liability Strike/Labor Relations Employment Practices Acquisitions & Divestitures Directors & Officers Examples of Correlated Risks

  8. Measurement “CORREL” function Rank Correlation Regression Analysis Judgement Implementation Causative/Formulaic Correlation Matrix Resort/Resampling Combinations Approaches to Correlation

  9. ABC Corporation Hazard Risk 6,000 5,000 4,000 3,000 2,000 1,000 0 99% 90% 80% 100% Case Study - Hazard Risk Avg. NI NI (Agg) $Loss (Sum) $Millions NI (Sum) $Loss (Agg) Avg. Loss 1% 0% 70% 60% 50% 40% 30% 20% 10% Probability of Exceedence

  10. Case Study - Hazard Risk

  11. ABC Corporation Financial Risk 8,000 6,000 4,000 2,000 0 -2,000 99% 90% 80% 70% 60% 50% 100% Case Study - Financial Risk Avg. NI NI (Agg) $Loss (Sum) $Millions NI (Sum) $Loss (Agg) Avg. Loss 1% 0% 40% 30% 20% 10% Probability of Exceedence

  12. Case Study - Financial Risk

  13. ABC Corporation Operational Risk 20,000 15,000 10,000 5,000 0 -5,000 99% 90% 80% 70% 60% 50% 100% Case Study - Operational Risk NI (Agg) Avg. NI $Loss (Sum) $ Millions NI (Sum) $Loss (Agg) Avg. Loss 1% 0% 40% 30% 20% 10% Probability of Exceedence

  14. Case Study - Operational Risk

  15. ABC Corporation Strategic Risk 8,000 6,000 4,000 2,000 0 -2,000 99% 90% 80% 70% 60% 50% 100% Case Study - Strategic Risk Avg. NI NI (Agg) $Loss (Sum) Loss ($Millions) $Millions NI (Sum) $Loss (Agg) Avg. Loss 1% 0% 40% 30% 20% 10% Probability of Exceedence

  16. Case Study - Strategic Risk

  17. ABC Corporation Composite Risk 20,000 15,000 10,000 5,000 0 -5,000 -10,000 Case Study - Composite Risk 30,000 25,000 Avg. NI NI (Agg) $Loss (Sum) $Millions NI (Sum) $Loss (Agg) Avg. Loss 1% 0% 99% 90% 80% 70% 60% 50% 40% 30% 20% 10% 100% Probability of Exceedence

  18. Case Study - Composite Risk

  19. ABC Corporation - Implications • To protect against earnings volatility at the “1 in 100 year” level on a pretax basis: • finance $11.2 B if risks treated individually; • finance $3.6 B if risks treated as a portfolio. • Risk finance cost difference of $76 Million. • $0.04 in after-tax EPS. • Almost $400 M in market capitalization at current P/E multiple.

  20. ABC Corporation - Caveats • Not all risks to Net Income are included. • WC, cargo, etc. due to lack of data; • general economic risks - interest rates, etc. • “Portfolio Effect” potentially overstated • not all correlations reflected (warranty, recall and product liability, for example); • companies may look at some risks in portfolios (integrated insurance programs, combined aggregate excess programs, etc.).

More Related