Risk management - a tool to achieve success

1. Risk management - a tool to achieve success Nina KukuskinaAon Latvia, CEO

2. Aon Aon is a Fortune 500 company, based in ChicagoListed in NY and London; 53,000 employees in 120 countriesWorld leaders in insurance broking and risk management • In 1983 Aon set up a commercial property specialisation • Aon European real estate group set up in 1999, now has 80+ specialist staff, based in UK, Belgium, Chech Republic, Poland, Hungary, France, Germany, Italy, Netherlands & Spain, Baltic countries • Corporate member of FIABCI since 1999

3. Insurance Brokers • Practitioners in Risk • Intermediaries between risk takers and risk carriers - insurers • Needed to access some of the market • Advisers on risk management strategy • Should be regarded as part of your professional team

4. Hold onto your hats - there’s a lot of ground to cover

5. What is RISK? Exposure to chance of injury or loss

6. RISK !

7. Why manage risk... • We always have! • Formality will help to cope with complexity • In a competitive world - ever smaller margins need to be more robust • Insurance may be impossible without it • It is good management practice

8. RISK !

9. RISK MANAGEMENT A four part process: Risk analysis and quantification Transfer or retention planning REVIEW Elimination or reduction of risk

10. Don’t worry - We’re Insured! Insurance is no substitute for effective risk management It will not cover all the loss Insurance may not exist

11. If you think that you are protected by insurance arranged by someone else Check it - quick!

12. Types of Risk - insured or not? Material Damage - fire/corrosion Consequential - flood/latent defect Social - sudden pollution/public opinion Legal Liability - injury/deliberate act Political - terrorism/government policy Finance - credit/marketing errors Risk Analysis

14. Key elements - Corporate Operations

15. Key elements Analysis - Project Management Undertaken by a small project group

16. Everyone has their own agenda The Gap!!! The Developer The Contractor The Tenant The Banker

17. Categories of risk • Performance risks • Liability risks • Design risks • Performance risks • Financial risks • Liability risks Strategic Market • Procedural risks • Information risks • Availability risks Economic Organization • Political risks Political Processes & assets • Performance risks • Property risks • Construction risks • Design risks Society • Crime risks • Liability risks • Social risks Human resources Nature • Labour risks • Liability risks • Information risks • Natural risks • Property risks • Construction risks • Liability risks INTERNAL THREATS EXTERNAL THREATS

18. Likelihood Analysis

19. Impact analysis

20. Risk Map LOSS AMOUNT High Expectedloss Acceptable < $100.000,-- 10.000.000 Expected loss Continuous from$ 100.000,-- improvement to$ 1.000.000,-- Expected loss Not acceptable > $ 1.000.000,-- 1.000.000 Medium IMPACT 100.000 Low 10.000 1.000 1/10 1 10 100 1.000 LOSS FREQUENCY per year LIKELIHOOD Low Medium High

21. Good Risk Management • Keep it Simple • Be Honest about Risk Awareness • Implement Fundamental Controls • Maintain Awareness of Business Objectives • Set up Early Warning Mechanisms and Quick Response Strategies • Regular Consultation with Project Team

22. Case Study Inner-City regeneration project • Ministry of Transport are building underground motorway and tramway alongside existing below-ground railway system • Railway company is constructing new station complex (train, tram, bus, taxi, metro) • The site will be covered by a concrete raft • The resulting new free-standing surface is being offered for the following uses: offices, retail, housing, public areas, leisure & entertainment (a new city within a city) • Site use: 50 % of area remains in public ownership, balance passes to private ownership, on 999 year lease • Potential office development of 20,000 sq. m • Full design team with standard construction by a main contractor • Planning permission is anticipated

23. The Workshop Teams B = Bankers C = Contractors D = Developers Assignment: • What are the goals? • Establish risk profile • Prioritize risks using the risk map • Set up recommendations for top risks

24. A Summary of the results from the Chartered Surveyors Livery Company, City Seminar - January 2005

25. The Bankers • Goals • Lend to successful developer • Achieve good return to reflect risk • Have reliable exit strategy • Repeat business • Threats & Key risk controls 1 - Planning application fails 2 - Interest rate rise and inflation risk Hedge 3 - Market conditions deteriorate 4 – Failure of Developer/Contractor Examine track record & financials/Proof of Pre-let /Parent Guarantee 5 - Major loss is uninsured Involve insurance broker fromthe start to protect own interests

26. Risk Map LOSS AMOUNT High Acceptable Expectedloss < $100.000,-- 10.000.000 2 Expected loss Continuous from$ 100.000,-- improvement to$ 1.000.000,-- 4 3 5 Expected loss Not acceptable > $ 1.000.000,-- 1.000.000 Medium IMPACT 1 100.000 Low 10.000 1.000 1/10 1 10 100 1.000 LOSS FREQUENCY per year LIKELIHOOD Low Medium High

27. The Contractors • Goals • Make a profit • Deliver on time (enhance reputation) • Ensure correct quality with no defects • Maintain a safe site • Gain repeat business (develop long-term relationship) • Threats & Key risk controls 1 - Disruption from other works 2 - Damage to other works - esp. railway Regular monitoring process/ Professional Liability Insurance 3 - Supply of labour /materials Framework Agreements 4 - Sub-contractor failure Know your client 5 - Client insolvency

28. Risk Map LOSS AMOUNT High Acceptable Expectedloss < $100.000,-- 10.000.000 Expected loss Continuous from$ 100.000,-- improvement to$ 1.000.000,-- Expected loss Not acceptable > $ 1.000.000,-- 1.000.000 5 Medium 2 IMPACT 1 100.000 4 3 Low 10.000 1.000 10/1 1 10 100 1.000 LOSS FREQUENCY per year LIKELIHOOD Low Medium High

29. The Developers • Goals • Obtain satisfactory planning permission • Secure a pre-let • Obtain funding • Control costs • Maximise profit • Completion on time • Threats and Key risk controls 1 –Delayed completion Adequate and effective project management 2 - Deterioration in office letting market ( Failure to attract/keep tenant) 3 - Contractor insolvency 4 – Exceeded budget: interest increase/ cost Manage interest rates risks/ tight cost control 5 - Stability of professional team 6 - Catastrophic uninsured lossesUse insurance broker to get the best available insurance cover

30. Risk Map LOSS AMOUNT High Expectedloss Acceptable < $100.000,-- 6 10.000.000 Expected loss Continuous from$ 100.000,-- improvement to$ 1.000.000,-- Expected loss Not acceptable > $ 1.000.000,-- 1.000.000 1 2 Medium IMPACT 4 100.000 Low 3 10.000 5 1.000 1/10 1 10 100 1.000 LOSS FREQUENCY per year LIKELIHOOD Low Medium High

31. BANKERS CONTRACTORS 2 4 3 5 5 2 1 1 4 3 6 DEVELOPERS Interesting how their perceptions differ 1 2 4 3 5

32. Analysis without ownership is - WORTHLESS AWarning!

33. Risk in your businessisyour business It might also be the end of it! Take it seriously

34. Further information Contact us at Aon Latvia telephone +371 789 2551 fax +371 789 2552 e-mail aonlatvia@aon.lv Regular Property Risk Management updates: www.aonproperty.com