Published on February 18, 2014
Risks Influencing the balance sheet •1
Influence of Risk on your Balance sheet The Approach – the consulting perspective In Practice – the client perspective Impact on insurance costs – the insurer perspective 2
Aon Risk Management Influencing the Balance Sheet A consulting perspective Alex van den Doel Managing Director Aon Global Risk Consulting •3
Deepwater Horizon accident 4
Financial Impact on BP Share Price Balance sheet: Liabilities + 32% 15% of Assets to be sold Equity -6% 5
Risk Management and financial impact Chemie-Pack (Moerdijk) 45 employees EUR 7 m revenue EUR 10 m Equity Fire on January 5, 2011 Damage: EUR 71 million Bankruptcy on August 25, 2011 6
The Upside of Risk Management! 7
Integrated Risk Management Why? •Return •Risk Resilience – Protecting the downside: Shareholder value Financial objectives and covenants Reputation •€ High performance – Creating upside: Higher P/E ratio, higher predictability Higher risk maturity creates value Better decision making Cost Effective and Pragmatic 8
The IRM Approach – modular and pragmatic Annual Risk Rating Stress test Risk Maturity Identify main risk areas from a financial perspective (QUICK SCAN) Identify and quantify scenenario's Identify the gaps between existing and desired risk maturity levels Risk Assessment Identify and assess most significant risks: strategic, operational, financial, compliance threatening financial objectives Scenario analysis Detailed analysis on the most severe scenarios. Focus on supply chain (Business Impact Analysis) and liability risks Risk Management Implementation Close the gaps with respect to the risk maturity targets Registering and Reporting Record and monitor risk developments realtime andonline Outsourcing Risk management activities bij external resources Assuring Independently review risk management and financial measures Risk Financing Optimise the risk financing structure and programmes Business Continuity Management Optimise the risk financing structure and programmes 9
Integrated Risk Management - Results 10
Stress Test – approach What (extreme) scenarios can jeopardize your financial objectives? Approach Define risk bearing capacity Develop scenarios Industry specific Organization specific Out-of-the-box Quantify impact of scenarios Evaluate against risk bearing capacity 11
Stress Test – Risk Bearing Capacity Information from financial statements Balance sheet total: 880M Equity: 330M Solvency ratio = 38% 39 % 38 % 37 % 36 % 35 % Covenant in financing arrangement specifies a threshold of 34% 34 % 33 % Claim of 50M will lower ratio to 32% Breach of Covenant! 32 % 31 % An impact of 28M will lower the ratio to 34% → RBC = 28M 12
Stress Test – Example result Risk Appetite: EUR 15M Risk Bearing Capacity: EUR 28M Take decisions Scenarios Business Interruption Environmental liability Product liability Decreasing demand Product recall 0 5 10 15 20 25 30 35 40 45 Impact EUR (M) 13
Van Gansewinkel Groep Case Study: Risk Management Influencing the Balance Sheet A client perspective Doede de Waij Director SHEQ (Safety, Health, Environment and Quality) Van Gansewinkel Groep •14
Profile • Waste service provider and supplier of raw materials and energy • Annual revenues €1 billion • Nine countries • Market leader in the Benelux • 5,800 employees 15
•Minerals Our contribution to the circular economy • 7 Mt Waste •VG Collection Household and Commercial waste •Chemical s 16
Our risk management process Identify Analyse Impact on balance sheet Property Damage Assessment Reputation assessment Liability Risk Quantification Business Impact Analysis 17
What if scenario Looking at our Chemical Depots Versus What happened at Chemie Pack Moerdijk (2011): Insurance claims: 70 million Coverage PD/BI: 5 million Environmental pollution Bankruptcy Management sentenced to 240 hours of community service 18
Lessons learned ? Casus Sandoz 1986 CMI 1996 ATF 2000 Chemie Pack Cause Human error Large fire Human error Large fire Human error Large fire Human error Large fire Licence to operate Present Present Present Present Government oversight Insufficient Insufficient Insufficient Insufficient Professional fire fighting Insufficient Insufficient Insufficient Insufficient Safety policy Insufficient Insufficient Sufficient Insufficient Governmental More rules and More rules and More rules and More response enforcement enforcement enforcement enforcement 19
Central question What will be the impact on our 4 Central Chemical Depots in case of a worst case scenario? 20
What if scenario: BLEVE 21
Financial impact vs. protection •Stress test results: (7 m. vs. 30 m.) •Property Damage Assessment •Stress test results: (13 m. vs. 0) •Reputation assessment •Stress test results: (30 m vs. 25 m) •Liability assessments 22
Financial impact vs. protection •Stress test results: •15 m. vs. 30 m. •Business Interruption Analysis 23
Scenarios 07 million. Property damage 15 million. Business Interruption 13 million. Reputational damage 13 million uninsured 06 million. Employers liability 25 million. General liability 12 million. Environmental liability 30 million. D&O liability 05 million uninsured 108 million. Total impact on combined worst case scenario Risk Bearing Capacity = 12 million (5% impact on EBITDAE) 18 million uninsured 24
Benefits Manage our Licence to Operate Minimise impact on cash flow due to an incident Avoid breaching financial objectives due to an incident Raise awareness on business continuity objectives 25
Zurich Global Corporate UK Risk Management Influencing the Balance Sheet An Insurers Perspective Nick Major CUO Zurich Global Corporate UK •7/10/2013 •26
Importance of identifying risks that affect the financial objective How customers can use this from an insurance perspective… Drives risk transfer strategy – minimise purchasing and maximise value Structures a self Insured retention strategy – may utilise Captive Supports Business decisions via risk and return perspective Drives board level influence 27
Insights from Van Gansewinkel Holistic view of risk and insurance PD Limits / D&O limits / Reputational Do Insurers key risk assessments match the Customers – are we selling what you need? Engaged and business continuity focused Risk managers need to talk the language of the CFO Enhanced value of risk manager role in business planning and operations 28
What’s the impact, where’s the pay back? Maximising value from insurance spend and packaging risk transfer – multi line options ? Focusing management attention on critical risks Sets agenda for insurer engagement The value of risk maturity on pricing Business continuity vs failure !! 29
Business continuity is the real risk differentiator 962 Loss Index (2005=100) 900 700 500 474 300 100 2005 2006 2007 2008 2009 2010 Claims stats from Zurich indicate BI is growing significantly as a proportion of claims payments for large Property losses. Use risk data / knowledge to intervene pre-impact and draw conclusions beyond the obvious 2011 30
Understanding the Killer Risks! Property explosion Casualty explosion / pollution Impacts of Social Media Brand Reputation of Van Gansewinkel Mitigation vs risk transfer Crisis Definition; When written in Chinese the word “crisis is composed of two characters. One represents danger and the other represents opportunity. 31
Supply chain management impact on business resilience and reputation Trade credit protects when you sell products, what happens if you have no products to sell? Supply chain modelling - map exposure to anticipate and then manage risk ( recognising may be no choice on supplier) 32
Predicting future risk Emerging risks radar How organisations should use this management tool to drive ERM Risk Room – decision tool to assess relative risk between countries Risk insights Risk Grading App Flood resilience studies CAT Analysis 33
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