Risk Strategy Safari Monday, April 28, 2014 RIF011

Recording of this session via any media type is strictly prohibited.

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Risk Strategy SafariMonday, April 28, 2014

RIF011Carol Murphy Andrew NottestadManaging Director Director, CorporateAon Risk Solutions, Inc. United Continental Holdings


What to Expect/Learning Objectives1. Understand current risk financing challenges for

2014 including terrorism legislation coming up at year-end, updates to Property modelling, collateral, and Reputation Risk.

2. Proven, cutting edge financing solutions and new tools from real life case studies.

3. Framework for risk financing communications with senior management.


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Property TIV Return on Investment


Investing in your property exposure data may pay big dividends as CAT Models play a bigger role in pricing your property insurance

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Insurance underwriters use several methods to come up with premium

One method for CAT exposed accounts is to multiply the RMS Annual Average Loss by a multiplier

Improving the RMS data quality typically improves the average annual loss RMS typically defaults to a worse assumption if data is unavailable A typical range that insurers may multiply the AAL by is 1.5 to 1.7 using 1.6

EQ AAL down $1.5M is $2.4M less cat premium loading Windstorm AAL down $300,000 is $0.5M less cat premium loading


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CAT Modeling


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+Science Art

ASSUMPTIONS

ACTUARIAL & FINANCIAL MODELS

Risk Assessment ModelingAs sophisticated as your model ever gets it can only be a simplification of reality…


A COMMENT ON STATISTICS

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CAT Modeling Results Track With Reality?


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Collateral – Reducing Economic Cost


10UW Madison April 11, 2013

201220112010200920082007200620052001 2003 20042002

PAID

IBNR

CASE RESERVE

Understanding Collateral

COLLATERAL REQUIRED

Negotiate paid loss credits with insurer based on insured’s credit quality and payout pattern

Workers’ Compensation Retained Risk Profile


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11%

34%

52%

WC COLLATERAL

3%

WC EXPENSES AND TAXES

WC RETAINED LOSS

RISK TRANSFERCollateral Costs are > 10% of

Many Companies TCOR

1. COST OF COLLATERAL = Assumes 8% cost of restricted cash

UW Madison April 11, 2013

Understanding CollateralSignificant Cost for Companies


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Type States Accept

Insurers Accept

Cost Effective

Call Risk

Letter of Credit

Enhanced Letter of Credit

Surety

Cash Trusts

CA Alternative

Security Plan

Real Assets / Hybrid

Typical forms of collateral and general characteristics for less than investment grade companies

UW Madison April 11, 2013


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Collateral Options Analysis

Recovery& Workout

Strategies

Collateral Map

Collateral Options Analysis

Recovery& Workout

Strategies

Collateral Map

Collateral Management ProcessOverview

UW Madison April 11, 2013 13

What Collateral Exists?

What are the cost?

Financial Analysis of cost metrics

Actuarial Analysis

Risk Financing Strategies

Program Design

Leveraging safety initiatives

Analysis Recovery & Workout

Collateral Map Strategies

Buyout/Closeout

Loss Portfolio Transfers


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Reputation Risk


Reputation Risk:1. Changing internal and

external environmental factors

2. Can create division between stakeholder expectations and company behaviors

3. Reputation risk evolves when stakeholder expectations are not met

4. Reputation risk can expand the risk, volatility and cost of other operational risks


Reputation Risk

• A strong reputation already does not necessarily protect the firm in tough times.

• Instead, organizations with strong reputations already may suffer more consequences of stakeholder disappointment.

• Case Study: BP

Source: Corporate Executive Board


Caught Off Guard

• Even the most respected companies can be caught off guard when there is a shift in public sentiment.

• Case study: Cadbury Schwepps “Get Active” promotion.

Source: Corporate Executive Board


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Update on Terrorism Legislation / TRIPPA and Insurer Response


2014 Casualty Marketplace: The Great Tug of War


Market balance

Depressed interest rates

Slowing reserve releases

Rising tort costs

Depressed industry ROE

TRIPPA uncertainty

Record policyholder surplus

Market competition

Improving economy

Exposure growth

Rate Increases

Rate Decreases


Market uncertainty: Terrorism backstop (TRIPRA) Current version of federal terrorism backstop (TRIPRA)

expires 12/31/2014

Casualty lines impacted: General and excess liability Workers compensation

Market focus on workers compensation due to aggregation risk

Conventional wisdom suggests TRIPRA will be renewed with greater risk borne by private sector


Market uncertainty: Terrorism backstop (TRIPRA)

Uncertainty created by its expiration beginning to have implications for renewals

Ability to re-price terrorism exposures Ability to exclude terrorism (GL/excess only) Short term workers compensation policies Market dislocation

Navigating the uncertainty: Start early Obtain best exposure data possible For risks with pricing uncertainty, negotiate terms if

TRIPRA is renewed


TRIPPA Reauthorization: Which direction will it go?

The Left:Pulling for continuation of public sector support

The Right:Pulling for higher

private sector share


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Framework for Communication with Senior Management


Integrating Confidence Levels and Financial KPI’s Will Provide a Greater Understanding of Volatility in Go-Forward Program Design

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Establishes appetite levels for enterprise risks and tolerance levels for insurable risks which are linked to corporate performance objectives and volatility thresholds

Generates a thorough understanding of current insurance exposures, individually and/or in portfolio

2. Dynamic RiskModeling

3. Design & ProgramStress Testing(including funding)

Provides a cost/benefit comparison of various risk management strategies including captive and alternative risk strategies

1. Risk Appetite Analysis

Understand Expected Losses

Understand Tradeoffs between Mitigation Tools

Enterprise View of Risk and its Financial Contribution

Risk

Appetite

Dynamic Risk Modeling

Design & Program

StressTesting

Capital Deployment Efficiency

Aon Risk Solutions | Global Risk Consulting | Proprietary & Confidential

Understanding Impact of Volatility


Risk Financing Decision PlatformIdentifying the Efficient Frontier

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$20

$25

$30

$35

$40

$45

$50

60% 65% 70% 75% 80% 85% 90% 95% 100%

X-Axis: Conf idence Level

Unlimited Current Alternative Risk Tolerance

Y-Axis: Total Cost of Risk ($ in millions)

Events Frequency (Events/Years)

1/10 1/20 1/1001/5

Program Expected TCOR Risk Appetite TVaR at

(Premium + Loss) Breach Point 95%

Unlimited $22.8 million 86% $39.1 million

Current $26.1 million 78% $32.2 million

Alternative $23.4 million 87% $33.9 million

Aon Risk Solutions | Global Risk Consulting | Proprietary & Confidential


Communicating Impact to Management• CFOs don’t like surprises

• Stability• Prediction accuracy

• Not all risks important to CEO or CFO appear on financial statements• ‘So what’ response to data generation• Prioritization• Conflicting incentives• Metrics – compliance vs. impact

• Example: OSHA statistics vs. workers’ compensation costs• Common language• Other considerations?

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Management Communications Tool – Example

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Component Information Communicated

(1) How to quantify the cost of the problem(s) and risk, and the potential impact of mitigation strategies.(2) Helps to calculate and communicate the cost of fixing vs cost of not fixing.(3) Measuring the value generated by the solution(s).

(1) Each risk and organization is different.(2) With unique characteristics, no one size fits all.(3) A business case must be presented to senior management to support the allocation of scarce resources and obtain buy-in.(4) Data must be clean and reliable.

(1) project prioritization must occur because not all can be done at once.(2) High value, high impact, low investment to start and build credibility.(3) This is a multi-year process.(4) KPIs are critical to measuring performance and progress, as well as adjusting strategies over time.

(1) This is a useful methodology (answers the 'what' and 'what to do').(2) Other functions will see progress and use the process to achieve their own goals (multiple impacts from single project).(3) It takes a couple of years to get meaningful results.

(1) Allowing for activities to be included in budgeting and strategic planning processes.(2) Obtain and maintain senior management support.(3) Obtain and ensure required resources are aligned.

(1) Targeted and focused activity reflecting an organization's unique risk profile and appetite.(2) Improved and documented risk management results and value.(3) Significant impact on coverage negotiations and collateral.(4) Improved business intelligence upon which operations management can make decisions.

Benefits are:

Situation involves:

Complications are:

Implications are:

Position is:

Necessary actions are:


Thank you!

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Recording of this session via any media type is strictly prohibited.31

Andrew Nottestad

20 years experience as Risk Manager and Insurance ProfessionalCurrently Director of Corporate Insurance at United AirlinesHeld both divisional risk management and corporate roles at AXP and PepsiCo Integrated and spun off numerous multi-billion dollar companies risk and insurance programs Started career at Wausau Insurance Companies as a Commercial Underwriter

Insurance and RM Experience

Strong Academic Foundation

Risk Strategy Safari Monday, April 28, 2014 RIF011

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