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Risk Strategy Safari Monday, April 28, 2014 RIF011

Risk Strategy Safari Monday, April 28, 2014 RIF011. Carol Murphy Andrew Nottestad Managing Director Director, Corporate Aon Risk Solutions, Inc. United Continental Holdings. What to Expect/Learning Objectives.

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Risk Strategy Safari Monday, April 28, 2014 RIF011

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  1. Risk Strategy SafariMonday, April 28, 2014RIF011 Carol Murphy Andrew Nottestad Managing Director Director, Corporate Aon Risk Solutions, Inc. United Continental Holdings

  2. What to Expect/Learning Objectives • Understand current risk financing challenges for 2014 including terrorism legislation coming up at year-end, updates to Property modelling, collateral, and Reputation Risk. • Proven, cutting edge financing solutions and new tools from real life case studies. • Framework for risk financing communications with senior management.

  3. Property TIV Return on Investment

  4. Investing in your property exposure data may pay big dividends as CAT Models play a bigger role in pricing your property insurance • 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

  5. CAT Modeling

  6. Risk Assessment Modeling • As sophisticated as your model ever gets it can only be a simplification of reality… • ACTUARIAL & FINANCIAL • MODELS • + • ASSUMPTIONS • Science • Art

  7. A COMMENT ON STATISTICS

  8. CAT Modeling Results Track With Reality?

  9. Collateral – Reducing Economic Cost

  10. UW Madison April 11, 2013 • IBNR • CASE RESERVE • PAID • 2001 • 2002 • 2003 • 2004 • 2005 • 2006 • 2007 • 2008 • 2009 • 2010 • 2011 • 2012 • Understanding Collateral • Workers’ Compensation Retained Risk Profile • Negotiate paid loss credits with insurer based on insured’s credit quality and payout pattern • COLLATERAL • REQUIRED

  11. UW Madison April 11, 2013 • Understanding CollateralSignificant Cost for Companies • WC EXPENSES AND TAXES WC COLLATERAL  • 3% Collateral Costs are > 10% of Many Companies TCOR • RISK TRANSFER •  WC RETAINED LOSS • 1. COST OF COLLATERAL = Assumes 8% cost of restricted cash

  12. UW Madison April 11, 2013 • Typical forms of collateral and general characteristics for less than investment grade companies

  13. UW Madison April 11, 2013 • Collateral Management ProcessOverview • Collateral Map • Analysis • Strategies • Recovery & Workout • Risk Financing Strategies • Program Design • Leveraging safety initiatives • What Collateral Exists? • What are the cost? • Financial Analysis of cost metrics • Actuarial Analysis • Buyout/Closeout • Loss Portfolio Transfers

  14. Reputation Risk

  15. Reputation Risk: • Changing internal and external environmental factors • Can create division between stakeholder expectations and company behaviors • Reputation risk evolves when stakeholder expectations are not met • Reputation risk can expand the risk, volatility and cost of other operational risks

  16. 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

  17. 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

  18. Update on Terrorism Legislation / TRIPPA and Insurer Response

  19. 2014 Casualty Marketplace: The Great Tug of War

  20. 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 Decreases • Rate Increases

  21. 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

  22. Marketuncertainty: 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

  23. TRIPPA Reauthorization: Which direction will it go? • The Right: • Pulling for higher private sector share • The Left: • Pulling for continuation of public sector support

  24. Framework for Communication with Senior Management

  25. Understanding Impact of Volatility Integrating Confidence Levels and Financial KPI’s Will Provide a Greater Understanding of Volatility in Go-Forward Program Design Establishes appetite levels for enterprise risks and tolerance levels for insurable risks which are linked to corporate performance objectives and volatility thresholds • Risk Appetite • Analysis • Dynamic • RiskModeling Generates a thorough understanding of current insurance exposures, individually and/or in portfolio • Design & • Program • Stress Testing(including funding) Provides a cost/benefit comparison of various risk management strategies including captive and alternative risk strategies Aon Risk Solutions | Global Risk Consulting | Proprietary & Confidential

  26. Risk Financing Decision PlatformIdentifying the Efficient Frontier Aon Risk Solutions | Global Risk Consulting | Proprietary & Confidential

  27. 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?

  28. Management Communications Tool – Example

  29. Thank you! Please complete the session survey on the RIMS14 mobile application.

  30. Andrew Nottestad • Insurance and RM Experience • 20 years experience as Risk Manager and Insurance Professional • Currently Director of Corporate Insurance at United Airlines • Held 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 • Strong Academic Foundation ARM

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