Aon Risk Solutions | Global Risk Consulting

Balance Sheet Protection for Emerging Operational RisksDriving Value through Corporate Risk Management

Markus Mende, Group Managing Director AGRC EMEA

November 14, 2016Zurich

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Agenda

Emerging Operational Risk

Risk Management Tool Box

Driving Value through Risk Management- Corporate Finance Theory- Risk Maturity - Insurance as Capital- Metrics for Insurance Purchase

Structured Risk Solutions

Conclusion

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Emerging Operational Risk

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1Damage to reputation /

Brand

2Economic

Slowdown /Slow

Recovery

3Regulatory /Legislative Changes

4Increasing

Competition

5Failure to attract

or retain top talent

6Failure to Innovate/

meet customerneeds

7Business

Interruption

8Third Party

Liability

9Computer Crime /Hacking / Viruses / Malicious Codes

10Property Damage

1

2 3 4

5 6

7 8 9

10

+3

+2

Increasing Competition

=Economic Slowdown /Slow Recovery

=Regulatory /LegislativeChanges

_ _ _

_ _ _Failure toinnovate / meetcustomer needs

- 4_ _ _ Damage to

reputation/Brand - 1

_ _ _ Failure to attract or retain toptalent

+2_ _ _

Computer Crime /Hacking /Viruses /Malicious Codes

+2_ _ _Commodity Price Risk

+6_ _ _Political Risk /Uncertainties

+2_ _ _Growing burden & Consequencesof corporate governance /Compliance

2015 Projected 2018

Corporate Risk LandscapeTop Risks Now and in Three Year

Source: Aon’s Global Risk Management Survey ,2015 /16 is compiled from over 1,400 risk management professionals in 60 countries (http://www.aon.com/2015GlobalRisk/).

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1. Insurable & generally insured

2. Insurable & not enough insured

3. Insurance design challenges

General business risk

Social or global risk

Financial risk

8. Third party liability

7.Business interruption

1. Damage to reputation or brand

2. Economic slowdown, slow recovery

29. Environmental risk

11.Commodity price risk

10. Property damage

9.Computer crime, hacking, viruses

21. Failure of disaster recovery plan

3. Regulatory or legislative changes

34. Accelerated change in market and geopolitics

12. Cash flow liquidity risk

18. Weather, natural disaster

13. Technology failure, system failure

22.Corporate social responsibility and sustainability

4.Increasing competition

35. Aging workforce and related health issues

17. Exchange rate fluctuation

20. Directors & officers personal liability

14. Distribution or supply chain failure

25. Loss of intellectual property data

5. Failure to attract or retain top talent

36. Globalisation, emerging markets

19. Capital availability credit risk

23. Injury to workers

15. Political risk and uncertainties

46. Social media

6. Failure to innovate, meet customer needs

40. Natural resource scarcity

27. Counter party credit risk

24. Crime, theft, fraud, employee dishonesty

33. Product recall

16. Corporate governance and compliance burden

44. Pandemic risk, health crisis

37. Interest rate fluctuation

Corporate Risk LandscapeEmerging Operational Risks

Source: Aon’s Global Risk Management Survey 2015 /16.

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Corporate Risk LandscapeEmerging Operation Risks / Sector Perspective

Source: Aon’s Global Risk Management Survey 2015 /16.

Product Recall ranks equally with Loss of Intellectual Property for Pharma only

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Risk Management Toolbox

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Risk Map

5

8

2

3

4

9

711 12

1

6 10

Likelihood

Impa

ct

Minor

Moderate

Major

Critical

Catastrophic

Remote Unlikely Possible Probable

Risk Management Tool BoxRisk Map

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Risk Management Tool BoxQuantitative Impact Analysis

Risk Map

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8

2

3

4

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1

6 10

Likelihood

Impa

ct

Minor

Moderate

Major

Critical

Catastrophic

Remote Unlikely Possible Probable

-100

-50

0

50

100

150

200

250

300

350

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

?

Impact of high severity risks

on EBIT

Investor EBIT expectation

EBIT

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Risk Management Tool BoxRisk Tolerance

Are traditional risk management decisions for insurable risks supported by analysis that incorporates risk tolerances?

Source: Aon’s Global Risk Management Survey, 2015/16

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Risk Map

5

8

2

3

4

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1

6 10

Likelihood

Impa

ct

Minor

Moderate

Major

Critical

Catastrophic

Remote Unlikely Possible Probable

Risk Management ToolboxMitigation Analysis

9IEngineering

Insurance

9E

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Risk Management Tool BoxMeasuring Effectiveness of Risk Management

Source: Aon’s Global Risk Management Survey 2015 /16

Methods of evaluating effectiveness of risk management by revenue (in USD)

Category <1B 1B-4.9B 5B-9.9B 10B-14.9B 15B-24.9B 25B+

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Risk Management Tool BoxKey Questions

How much insurance / financial risk can a company retain given non-transferable exposures, e.g. political, trading?

Has the corporate risk register been aligned to risk transfer (& insurance) decision making?

What is the expected impact of an insured loss on EBIT, cash-flow and the balance sheet?

Assuming investor indifference to the source of non-core volatility, is hedging cheaper than insurance?

Are financial and insurance exposures correlated?

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Driving Value Through Risk Management

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All Organisations(1400+ Organisations Globally)

• Developing capabilities to identify, assess and prioritiserisks across the organisation

• Developing capabilities to analyse risk consistently, but approach may be primarily qualitative

• Developing capabilities for monitoring existing risk exposure across the organisation

• Informal and inconsistent consideration of risk and risk management information in decision making

• Developing understanding of Enterprise Risk Management (ERM) and its application

Driving Value through Risk ManagementRisk Maturity (Aon / Wharton Index)

Assessment Focus: Corporate governance, management decision processes and risk management practices; 125 questions organised into 40 components that align with 10 characteristics of risk maturity (2 relate to Culture).

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Driving Value through Risk ManagementRisk Maturity (Aon / Wharton Index) – Evidence (1/2)

Source: Aon / Wharton Risk Maturity Index, 2015

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Organisations with the highest Risk Maturity Rating of 5.0 (Advanced) as a group exhibited a stock price performance of -6%. This represents a +40% enhanced stock price performance compared to organisations with the lowest Risk Maturity Rating of 1.0 (Initial) that as a group exhibited a negative stock price performance of -10%.

Organisations with the highest Risk Maturity Rating of 5.0 (Advanced) as a group exhibited a stock price performance of -1%. This represents a +90% enhanced stock price performance compared to organisations with the lowest Risk Maturity Rating of 1.0 (Initial) that as a group exhibited a negative stock price performance of -12%

Driving Value through Risk ManagementRisk Maturity (Aon / Wharton Index) – Evidence (2/2)

Source: Aon / Wharton Risk Maturity Index, 2015

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Driving Value through Risk ManagementInsurance as a Form of Capital

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Methods for risk assessment Expert opinion Scenario analysis Stochastic risk

modelling

Result Expected loss Maximum loss

TCOR (Total Cost of Risk) for the non-insured case EUR 77m

Loss probability

Loss amount

Claims payment

Expected lossEURm 40

PML (200-year event) EURm 400

=

+ Admin costs EURm 1

+ Cost of capital(EURm 400 - EURm 40)*10% = EURm 36

+ (expected) Claims paid = EURm 40

Driving Value through Risk ManagementMetrics for Insurance Purchase

Step.1: Risk Assessment

Step.1: Estimate TCOR (Total Cost of Risk) for the non-insured case

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Driving Value through Risk ManagementMetrics for Insurance Purchase

The curve identifies the ‘efficiency frontier” relating a chosen risk appetite / Value at Risk (V@R) to a risk transfer premium.

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Structured Risk solutions

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Structured Risk SolutionsInsurance Options

Captive structures

(own or rented risk facility)

Structured Solutions

- Alternative Risk Capital

Integrated risk(multi-year / multi-

line structures)

Catastrophe bonds

(capital market solution for hard to

insure risks, e.g. Cal quake)

Loss portfolio transfers

(removal / limitation of contingent liabilities, e.g. disease, historic insurance liabilities)

Finite risk(blend of risk transfer and retention using

an escrow, e.genvironmental)

Contingent capital (pre-arranged credit facility from insurer, e.g. product recall)

Dual triggers(Insurance linked to an external index,

e.g. oil price)

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Conclusion

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Conclusions

Take a COR approach Consider insurance as a

third source of capital Analytics to drive decision

making – linked to risk tolerance

Structured solutions for emerging risks Embed risk thinking into the

organisational DNA Review key risks for alternative

treatment, e.g. contingent liabilities, cyber, environmental, product recall, weather

Get the risk basics in place Risk registers, risk maps, risk

process Develop joint risk solutions /

action plans

Risk management and economic value Demonstrable increase in

‘value’ for better risk managed companies

Impacts key financial metrics and resilience

Assess and target increased risk maturity Align disconnected processes,

e.g. insurance, financing and risk process

Have a ‘maturity risk standard’ across the business

Balance sheet protection for

emerging risks