Risks Influencing the balance sheet

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Influence of Risk on your Balance sheet

The Approach – the consulting perspective

In Practice – the client perspective

Impact on insurance costs – the insurer perspective

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Aon

Risk Management Influencing the Balance Sheet

A consulting perspective

Alex van den Doel

Managing Director

Aon Global Risk Consulting

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Deepwater Horizon accident

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Financial Impact on BP

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Balance sheet:

Liabilities + 32%

15% of Assets to be sold

Equity -6%

Share Price

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

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The Upside of Risk Management!

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Integrated Risk Management

Why?

Resilience – Protecting the downside:

Shareholder value

Financial objectives and covenants

Reputation

•€

•Ris

k

•Re

turn

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High performance – Creating upside:

Higher P/E ratio, higher predictability

Higher risk maturity creates value

Better decision making

Cost Effective and Pragmatic

The IRM Approach – modular and pragmatic

Stress test

Identify and quantify scenenario's threatening financial objectives

Risk Maturity

Identify the gaps between existing and desired risk maturity levels

Risk Rating

Identify main risk areas from a financial perspective

(QUICK SCAN)

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

Risk Assessment

Identify and assess most significant risks: strategic, operational, financial,

compliance

Outsourcing Risk management activities bij external resources

Registering and Reporting Record and monitor risk developments realtime andonline

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

Annual

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Integrated Risk Management - Results

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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

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Stress Test – Risk Bearing Capacity

Information from financial statements

Balance sheet total: 880M

Equity: 330M

Solvency ratio = 38%

Claim of 50M will lower ratio to 32%

An impact of 28M will lower the ratio to 34% → RBC = 28M

Covenant in financing arrangement specifies a threshold of 34%

39 % 38 % 37 % 36 % 35 % 34 % 33 % 32 % 31 % Breach of Covenant!

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0 5 10 15 20 30 35 40 45

Sc

en

ari

os

Risk Bearing Capacity:

EUR 28M

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Business Interruption

Environmental liability

Product liability

Decreasing demand

Product recall

Impact EUR (M)

Risk Appetite:

EUR 15M

Stress Test – Example result

Take decisions

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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

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Profile

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• Waste service provider and supplier of raw materials and energy

• Annual revenues €1 billion

• Nine countries

• Market leader in the Benelux

• 5,800 employees

•VG Collection • 7 Mt Waste

Household and Commercial waste

•Chemicals

•Minerals Our contribution to the circular economy

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Identify Analyse

Property Damage Assessment

Impact on balance sheet

Reputation assessment

Liability Risk Quantification

Business Impact Analysis

Our risk management process

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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

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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

response

More rules and

enforcement

More rules and

enforcement

More rules and

enforcement

More

enforcement

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What will be the impact on our 4 Central Chemical Depots in case of a worst case scenario?

Central question

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What if scenario: BLEVE

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•Stress test results: (7 m. vs. 30 m.) •Property Damage Assessment

•Stress test results: (30 m vs. 25 m) •Liability assessments

•Stress test results: (13 m. vs. 0) •Reputation assessment

Financial impact vs. protection

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Financial impact vs. protection

•Stress test results: •15 m. vs. 30 m. •Business Interruption Analysis

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Scenarios

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07 million. Property damage

13 million. Reputational damage

25 million. General liability

30 million. D&O liability

06 million. Employers liability

12 million. Environmental liability

15 million. Business Interruption

Risk Bearing Capacity = 12 million (5% impact on EBITDAE)

13 million uninsured

05 million uninsured

18 million uninsured

108 million. Total impact on combined worst case scenario

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

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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

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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

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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 !!

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Business continuity is the real risk differentiator

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

474

962

100

300

500

700

900

2005 2006 2007 2008 2009 2010 2011

Lo

ss In

dex (

2005=

100)

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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.

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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)

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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

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