2008 Annual Meeting ● Assemblée annuelle 2008 Québec
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Transcript of 2008 Annual Meeting ● Assemblée annuelle 2008 Québec
2008 Annual Meeting ● Assemblée annuelle 2008
Québec
2008 Annual Meeting ● Assemblée annuelle 2008
Québec
Canadian Institute
of Actuaries
Canadian Institute
of Actuaries
L’Institut canadien desactuaires
L’Institut canadien desactuaires
JF
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Enterprise Risk Management
“Not just for Insurance Companies”
John R.S. FraserVice President, Internal Audit & Chief Risk Officer, Hydro One Inc., June 20, 20082008 Annual Meeting Conference Canadian Institute of Actuaries, Quebec City
Summary
1. Background on Hydro One
2. What we consider ERM to be
3. The Components of ERM
4. The ERM Processes
5. Risk Tolerances and Workshops
6. Risk Profiles
7. Resource Allocation
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Background on Hydro One• Ontario’s primary electricity
transmission & distribution company
• One of the largest Tx companies in N.A.
• $12 B of assets
• $4.6 B of annual revenue
• $1 B annual capital and maintenance spend
• 5000 employees plus 1,000 outsourced
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ERM – Scope of Mathematical Intensity
Detailed math is the answer
Broad ranges are the way
to go
AU/NZS 4360
COSO
ISO 31000
SOA
CAS
PRMIAS&P
Moody’sRIMS
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ERM is no big deal….
“Enterprise risk management is just basic actuarial science, which is now being applied in all industries.”
Sim Segal, FSA, CERA, MAA,
Managing Director
Aon’s Global Risk Consulting Group
(quoted by Rough Notes Magazine - October 2007)
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ERM requires a major re-think…
“…actuaries of the fourth kind…” (a reference to actuaries working in ERM)
by Professor Paul Embrechts of the Swiss Federal Institute of
Technology as quoted by Stephen D’Arcy in his 2005 Presidential address to the Casualty Actuarial Society
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Risks Identification
“There is no point getting into a panic about the risks of life until you have compared the risks which worry you with those that don’t but perhaps should.”
Rothchild
Quoted by Felix Kloman in Risk Management Reports - Vol. 31 No. 10 - October 2004
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Why have ERM?
“...overly complex methods are likely never to be fully implemented, or, if they are, to generate a lot of resentment, non-compliance and workarounds.”
“…the minutia will be well-managed at great cost while ignoring the big picture, especially the future types of risks.”
David McNamee October 2004
Internal Auditor Magazine
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What our ERM is not about
• Sarbanes Oxley• Compliance• Audits• Regulations• Performance Measurement• Credit, market or operational risk in isolation• Detailed calculations without the big picture
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008 • Good Governance
• Good Management (“a proxy for good management”)– Agreed objectives and risk strategies– Future business outlook– Prioritization of objectives, risks and
resources– Resource allocation
(i.e improving the business/operations while knowing your risks and using your resources wisely.)
What ERM is about:
10a
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What ERM is about:
10b
Market
OperationalStrategic
OtherCredit
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Framework Initiated Formulated Implemented Robust
ERM Policy
ERM Framework
Executive Risk Committee
Common Language
Dedicated Corporate Risk Group
Champions
Integration with loss control
Integration with Strategic Planning
Integration with Business Planning
Policy and Organization(Hydro One ERM Status - April 2002)
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Tools & Techniques Initiated Formulated Implemented Robust
Approved Risk Tolerances
Workshops - Line
Workshops - Leadership
Voting Software
Measurement – broad ranges
Measurement – detailed metrics
Risk Register
Business Plan Templates
Scenario analysis
Sign-off by Line Management
ERM in VP’s Personal Contracts
Risk Tolerances and Workshops
(Hydro One ERM Status - April 2002)
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Deliverables Initiated Formulated Implemented Robust
Corporate Risk Profile
Reporting to Leadership/IRC
Reporting to Audit & Finance Committee
Reporting to Board
Reporting Processes(Hydro One ERM Status - April 2002)
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CORPORATE RISK
PROFILE
BOARDCOMMITTEE
EXECUTIVEMANAGEMENT
POLICY &FRAMEWORK
RISK PROFILES &
BUSINESS PLANSLINE
MANAGEMENT
RISK TOLERANCES
MANAGE RISKS, $$MANAGE RISKS, $$
The ERM Process at Hydro One
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Turning Strategy into Risk Tolerances
Business Strategy
How are we goingto achieve our
overall Corporateaims??
Business Objectives
KeyPerformance
Indicators
RiskTolerances
What is ourattitude toward
failure for each KPI??
How will wemeasure successfor each Business
Objective??
What 6-10 objectivesdo we want to
factor in todecision-making?
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Key Components of ERM Process
ERM Policy & Framework
Asset Planning
Corporate Risk ProfileScan of Events Business Plans
Audit & Finance Committee
Board
Risk Workshops
Corporate Risk Tolerances
Strategic Planning
Business Objectives
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Example of HOI risk tolerances
Risk Tolerances Business
Objectives Event Impact Description 5
Worst Case 4
Severe 3
Major 2
Moderate 1
Minor
Financial
Net Income shortfall (after tax, in one year)
$>150M shortfall $75-150M shortfall $25-75M shortfall
$5-25M shortfall <$5M shortfall
Reputation
Negative Media Attention; Opinion leader and Public Criticism
National media attention; opinion leaders/customers nearly unanimous in public criticism
Provincial media attention; most opinion leaders/customers publicly critical
Significant local attention; Several opinion leaders/ customers publicly critical
Credible letter(s) to Ministry of Energy, to Premier, to Chair of OEB, or to Minister of Environment, that require action
Letter(s) to Senior Management
Customer /Reliability
Outages on the Hydro One system
One of: >100,000 Customers Distribution or >1000MW Tx for more than 7 days
One of: 40k-100k Customers Dx or 400-1000MW Tx for 4-7 days
One of: 10k-40k Customers Dx or 100-400MW Tx for 2-4 days
One of: 1k-10k Customers Dx or 10-100MW Tx for 4-24 Hrs
One of: <1000 Customers Dx or <10MW Tx for <4 Hrs
Worst Case:- threatens the
survival of the organization
in its current form
Minor:- noticeable
deterioration in results
Major:- significant
deteriorationin results
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Environmental Hazards
0 20 100%806040
Worst Case
Severe
Major
Moderate
Minor
8
2
1
7
5
4
3
2
1
Number of participants
who voted for each category
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0 20 100%806040
Environmental Hazards
Worst Case
Severe
Major
Moderate
Minor
5
4
3
2
1
3
10
5
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2
3
4
2 3 4
Probability
Mag
nit
ud
e
NOTE: Size of bubbles depicts confidence in
controls
Briefing Sessions: voted results & meaning
“Meanings:”• themes, patterns in discussion• common causes
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008 Risk Source March 2001 Dec. 2001 Risk Trend
Cost Reduction Very High Very High
Regulatory Uncertainty
High Very High
Initial Public Offering High High
Customer Relationships
High Medium
Human Resources Medium Medium
Safety High Medium
Corporate Risk Profile
Note: Each risk category is explained with a half page analysis outlining the sources of the risk and the mitigants in place or planned.
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Spending Prioritization: Making choices based on value
Vehicles??
House??
Medical??
Travel??
Highest “Risk Mitigation” Value for money
+
Intolerable Risks
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“True” tolerances: “Red Zone”5W
orst Case
4Severe
3Major
2Moderate
1Minor
5 Very Likely
4 Likely
3 Middle Odds
2 Unlikely
1 Remote
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Program Level Cost Cuml. Cost
Risk if not done
Bank for Buck (1)
Vehicles Highest Risk $2 $2
4.6 House Highest Risk $6 $8 4.5 Medical Highest Risk $1 $9 3.9 Vehicles Minimum
Level $1 $10 2.8 2.80
House Level 1 $3 $13 3.0 1.00 Vehicles Level 1 $2 $15 1.9 0.95
House Minimum Level
$5 $20 3.2 0.64 Medical Minimum
Level $12 $32 2.3 0.19
Ranking across work programs
(1) i.e. value for $’s
IntolerableRisk
“BANGfor
BUCK”
Resources = $14
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Standard & Poor’s Questions on ERM:
– Is there a statement of risk appetite or risk tolerance?
– How does the company identify and control each major risk?
– What information about each major risk is shared with senior management and/or the board of directors?
– What environmental scanning techniques does the company use to anticipate the emergence of extreme disasters?
– What contingency plans has the company developed?(Excerpts from Standard & Poor’s January 14, 2008
Bulletin)
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Questions?