wi 2012 - risk management & financing for warranty & esc programs
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TRANSCRIPT
Risk Management & Financing for Warranty & ESC Programs
Michael Paczolt, FCAS, MAAAConsulting ActuaryMilliman
August 2, 2012
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WHYARE
WARRANTIESAND
SERVICECONTRACTSIMPORTANT?
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What is your strategic position?
Product innovation
Customer intimacy
Operational excellence
Graphic from Business Analytics for Managers, Laursen and Thorlund
Market Standard
Below Above
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Where are warranties?
SCM
Inventory Mgmt
HRD
Pricing
Prod Develop
Finance Lean
CPM
Web
Campaign Mgmt
CRM
Operational Excellence
Product Innovation Customer Intimacy
Graphic from Business Analytics for Managers, Laursen and Thorlund4
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“Whale” Graph
AcquisitionCosts
Earnings
Increased Sales
Time
Customer Retention
Graphic from Business Analytics for Managers, Laursen and Thorlund5
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WHATDOESRISK
MANAGEMENTHAVE TO DO
WITH WARRANTIESAND SERVICECONTRACTS?
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Risk
Uncertainty
Possibility of loss
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Financial
Investment
Supply Chain
Warranty claims
Non-Financial
Reputation
Brand
Relationships
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0%
5%
10%
15%
20%
25%
30%
35%
$0 $10 $20 $30 $40 $50 $60 $70 $80 $90 $100Millions
Mean 95th
Percentile
Expected Loss
Unexpected Loss
Probability Distributions
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Mean 95th
Percentile
Budget Savings
($5M)
Risk Management
Savings($25M)
Expected Loss
Unexpected Loss
Quantitative Risk Management
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0%
5%
10%
15%
20%
25%
30%
35%
$0 $10 $20 $30 $40 $50 $60 $70 $80 $90 $100Millions
Pre RiskMitigationPost RiskMitigation
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Diversification/PoolingC
laim
s
# of Polices
Mean
5th Pct
95th Pct
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Diversification/Pooling (Cont’d)
-250%
-200%
-150%
-100%
-50%
0%
50%
100%
150%
200%
250%
Cla
ims
as %
of M
ean
# of Policies
5th Pct95th Pct
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Risk Management Objectives
Pre-Loss Objectives
• Efficiency• Tolerable uncertainty• Legal requirements• Ethical conduct
Post-Loss Objectives
• Survival• Continuity of operations• Profitability• Growth• Ethical conduct
12From Foundations of Risk Management, Wiening
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Risk Control
Prevention Reduction Separation Duplication Diversification
13From Foundations of Risk Management, Wiening
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Risk Management Team
Risk Manager Finance/Accounting Advisors
– Legal– Actuarial– Broker– Auditor
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Analytics
Competing on analytics is the future
Key to making educated decisions going forward
Confidence and support of IT is critical
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HOWCAN WEMANAGE
THE RISKSOF A WARRANTY
OR SERVICECONTRACTPROGRAM?
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Risk Financing
Insurance
Self-Insurance
Mixture
Hybrid self-insurance
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Self-Insurance
Sales Year
Cost per Unit
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Insurance
Sales Year
Cost per Unit
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Insurance vs. Self-Insurance
• Peace of mind• Reduce volatility• Financial reasons• Help with administrative/legal/regulatory issues• Tax deductible premiums
Insurance
• Loss incentive• Control of claims handling• Cost savings (insurer profit & inv. income)• Goodwill• Synergy
Self-Insurance
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Types of Insurance
Pro Rata
Excess of Loss
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Insurer Share
Insurer Share
Insured Share
$10m
$20m
$0m
$10m
$20m
$0m
Insured Share
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Selecting Insurance
Price Trust Retention/Limits Financial Condition TPA
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Alternatives
Risk Sharing Pools Captives Retro plans RRGs Capital markets
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Captives
Self-Insurance advantages
Access to reinsurers
Potential tax savings
Advantages
Capital/Startup costs
Premium taxes
Solvency risk
Disadvantages
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Captives & Warranties/Service Contracts
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Warranties, Extended Warranties, and Service Contracts most likely qualify as 3rd party risk which help the Captive qualify as an insurance company, resulting in a potential tax benefit
*Please consult a tax professional before doing so!*
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Leftovers
Read insurance contract provisions carefully Include provision for access to claim and premium data Avoid silos Communication is key Control of call center is crucial Align incentives of all parties
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