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Rocket Science for Risk Managers Corey Gooch, Aon Global Risk Consulting Christopher Iovino, Aon Global Risk Consulting Maureen Offord, SES AMERICOM/SES.

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Presentation on theme: "Rocket Science for Risk Managers Corey Gooch, Aon Global Risk Consulting Christopher Iovino, Aon Global Risk Consulting Maureen Offord, SES AMERICOM/SES."— Presentation transcript:

1 Rocket Science for Risk Managers Corey Gooch, Aon Global Risk Consulting Christopher Iovino, Aon Global Risk Consulting Maureen Offord, SES AMERICOM/SES New Skies Wednesday, June 24 th 11:30AM – 12:30PM

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3 3 Agenda Managing the full spectrum of variability Improving the quality of quantitative analysis Aligning risk mitigation solutions and capital deployment strategies Real world example of putting the pieces together

4 Why is Managing Variability Important? 1.Economic slowdown(+7) 2.Regulatory/legislative changes (+4) 3.Business interruption(-1) 4.Increasing competitionNew entry 5.Commodity price riskNew entry 6.Damage to reputation(-5) 7.Cash flow/liquidity riskNew entry 8.Distribution or supply chain failure(-4) 9.Third party liability(-6) 10.Failure to attract or retain top talent(-3) *Taken from Aon’s Global Risk Management Survey Top 10 Risks Around the World*

5 How Can You Better Manage Variability? Expand your view beyond traditional insurance and insurable risk Improve the quality of quantitative analysis Align solutions and capital deployment decisions with the spectrum of variability Incorporate the impact of efficacy and value in your assessment and in your communications 5

6 Models: A Refresher Reality Model Attempt to estimate an unknown to make a better decision Simplification of reality to help us understand characteristics of a system Useful when it is prohibitive or impossible to observe/test directly Important characteristics: Accuracy, Clarity, Flexibility, Efficiency Models are tools…all models are wrong, some are useful 6

7 Generalized Modeling Framework Arguably the most difficult step. Deterministic and stochastic parameters need to be determined. Consider internal and external data sources. Discuss with subject mater experts. Monte Carlo simulation to determine the shape of the aggregate distributions. Run multiple times to stress test parameter assumptions. Current mitigation efforts as well as additional mitigation options identified will overlaid on the results. Framework to identify the appropriate risk management strategies from cost-benefit standpoint. Monitored and updated as the organization and the risk landscape changes. Organization defines the risks it wishes to model. Determine the desired output. Keep in mind the potential mitigation strategies. Map out the model flow. Likely requires a decision tree framework as opposed to a single frequency and single severity framework. Convert process flow into a mathematical risk model. Design such that KPIs are captured ($, market share, units, etc.). 7

8 Variability Spectrum – Black Swan Event 8 Inconceivable at the time; blind-siding, game- changing events that reshape the world Risk Management-related examples: –9/11 –Concern regarding carrier financial stability industry-wide –Scale of Hurricane Katrina loss –Paradigm shifts in litigation environment (asbestos, tobacco, long-term care, silicone implants, construction defect, etc.) –Other? Examples not traditionally related to risk management: –Collapse of Enron and Arthur Andersen –Collapse of Lehman on 9/16/08 and the Credit Crunch/Recession of –Collapse of AIG on 9/16/08 –The Depression –Spanish Flu of 1918 –Other?

9 Keys to Managing Black Swan Events Preparation is key, but not prep for a specific event Be out there – get involved and be linked into operations Access to partners with depth/breadth of resources Importance of communication 9

10 Variability Spectrum – Known Unknowns Conceivable risks/costs, with a scale of increasing difficulty of prediction primarily relating to: –Frequency –Changes in frequency or severity –Influence of correlation Risk Management-related examples: –Business interruption and supply chain disruptions –Retained loss in deductible/retention levels New losses on current or future programs Deterioration of existing case reserves IBNR on historical programs –Catastrophic loss (EQ, Named Wind, Flood, class action litigation, etc.) –Terrorism, Pandemic and other low frequency/high impact catastrophe events –Uninsured loss –Political upheaval in international countries Examples not traditionally related to risk management: –Changes in political/legislative/regulatory –Credit quality of suppliers, customers –Cost of capital, borrowing costs –Raw materials/commodity costs –Changes in health care costs 10

11 Solutions to Manage ‘Known Unknowns’ Modeling: Tools and Strategies –Enable you to estimate future financial performance based on past patterns –Enable you to improve the predictive capability of models when cost mitigation tools and strategies alter past patterns –Enable you to estimate future financial impact of scenarios for which very little historical data exists and/or for which many types of external influences impact results (i.e. Pandemic, counterparty credit, etc.) 11

12 Counterfeit/Tampering Risk Case Study Process: –Integrated qualitative risk assessment with quantitative risk modeling –Worked with the supply chain team, counterfeit team, finance and others to analyze their commercial products for vulnerability to counterfeiting or tampering and completed a detailed risk ranking of the most significant risk (s) –Developed models to quantify the economic consequence of potential counterfeiting events based on frequency and severity under current operating conditions –Investigation mitigation strategies and costs –Considered the cost vs. benefit of various mitigation alternatives –Recommended mitigation strategies to senior management 12

13 13 Counterfeit/Tampering Risk Case Study Product Factors Under Consideration Supply Chain/Channel Drug CharacteristicsExternal Factors Product A Product B Product C Product D Product E Product F Product G Product H Product I Product J Raw Materials Warehousing Bulk Manufacturing Bulk Logistics Fill Manufacturing Fill Logistics Packaging Manufacturing Packaging Logistics Distribution Site of Administration Formulation Counterfeiting History Packaging Controls Compounding Black Market Demand Channel Distribution Returns Through 3 rd Parties Market Share Threat To understand the likelihood of an event, risk drivers across the supply chain were considered on a drug-by-drug basis. Key personnel were included on the team in order to understand the risks at every step of the manufacturing and distribution process. 13

14 14 Counterfeit/Tampering Risk Case Study Recall Cost Counterfeit / Tampering Event Value of Product Recalled Shareholder (D&O) Lawsuit Product Liability Lawsuit Lost Sales & Market Share Impact AND Y/N To understand the impact of an event once it occurs, we used a decision tree approach based on the potential event severity 14

15 15 Counterfeit/Tampering Risk Case Study Mitigation considered –Overt packaging features, enabling users to verify the authenticity of packaging –Covert packaging features, enabling the brand owner to identify counterfeit product –Serialization –Authentication/E-Pedigree c/t risk is counterfeit/tampering risk and represents TCOR 15

16 Variability Spectrum – The Knowns Conceivable and relatively predictable; have some degree of variability at renewal/annual periods Risk Management-related examples: –Risk Management Department expense –RMIS costs –Brokerage costs –TPA/Service Provider costs –Captive Management costs –Other? Examples not traditionally related to risk management: –Supplier costs under contract –Service provider costs (tax, accounting, audit, legal, housekeeping, etc.) –Taxes –Lease/mortgage/loan payments –Maintenance/CAPEX costs –Other? 16

17 Managing Variability Can the Captive be a true “risk centre” & “investment” vehicle to diagnose and manage variability?YES! Ownership of risk data Prioritize costs and risk management focus Have greater input and direction over the risk mitigation and risk control strategies Efficient deployment of underwriting profits into risk improvement process for delivery of ROI Access a broad array of consultative solutions which, individually or collectively, can manage the known and unknown risks

18 Risk Diagnostic Methods Financial Analysis to fully optimize captive potential –Health Checks –Feasibility Studies Benchmark capabilities and utilization TPA/Vendor analysis Risk Management gap analysis of existing practices to recommend strategies to implement world class risk management

19 Risk Diagnostic Methods Enterprise Risk Management (ERM) Risk Governance – S&P requirements & implementation of best practices Risk Analytics – Optimize risk finance programs Risk Quantification – develops risk models for key risks to understand the impact against business objectives & plan appropriate mitigation solutions Actuarial & Analytics Establish ultimate losses, frequency, severity, loss rates Identify client trends/development vs. industry Demonstrates risk/reward trade-offs by comparing projected losses/pricing at various retentions Evaluates collateral requirements to determine impact on cash flows Prioritizes risk control and claims management strategies

20 Risk Mitigation Solutions Manage risk exposure by reducing event frequency and severity All costs to implement reviewed from a required hurdle rate perspective recognizing the competing needs within the business to allocate capital and expense to the most important areas of the business. No decision to employ capital or cost associated with risk should be taken without a clear target on the returns available. Result: Contribute to financial targets, maximize brand value, meet strategic goals and create environment that attracts talent, customers, suppliers, partners and investors

21 Positioning Risk Control and Claims Critical phase in the risk management journey Still an underperforming activity for many firms The linkage between “risk” and “operations” Continuous improvement process Driven by risk, not insurance or programme structure Can provide both compliance and cost reduction paths Investment, not cost, with priorities set by TCOR impact Driver of sustainable economic benefit to operating units A key asset in the underwriting process - Property, casualty / liability, products, motor

22 Risk Mitigation Solutions Examples of Pre Loss Tools: WC, liability, motor-related risk control solutions that generate sustainable economic impact –Product Risk - Reputation Risk (#6 risk) –Third Party Liability (#9 risk) –Ergonomics –Fleet Safety –Analytics Driven Safety Improvements Case Study – Fortune 500 company with 40% WC costs due to ergonomic related claims. Willingness to use Captive as funding vehicle Entering 4 th year – 3.22 to 1 ROI Claim reductions of 36% and costs 47%

23 Risk Mitigation Solutions Examples of Pre Loss Tools: Property related risk control solutions that support program marketing efforts and operational sustainability –Business Interruption analysis – risk accounting, BI, property values (#3 risk) –Business Continuity/Supply Chain (#8 risk) –Property Risk Control and Engineering Services Case Study – Global Health/Pharm company with concerns of accuracy of BI values Detailed BI review by division Policy improvement recommendations $2.5 MM premium savings

24 Risk Mitigation Solutions Examples of Post Loss Tools: Casualty-related claims solutions to ensure advocacy, cost containment and recoveries –Vendor management and selection to ensure appropriate pricing –Loss Portfolio Management to Reduce Collateral, LOCs, Accruals, Improve Program Marketability –Dedicated “captive claims resource” to eliminate potential captive owner conflict of interest Case Study – National retailer had significant legacy WC and Liability claims of $6MM open reserves Limited internal staff to manage Aggressive management 76% open claims closed, $1.7 MM reserves reduced

25 Risk Mitigation Solutions Examples of Post Loss Tools: Property related post-loss mitigation to ensure maximum recovery and minimize business disruption –Rapid Response to Loss – minimize loss and optimize settlements –Complex Catastrophic Property Losses, Complex Business Interruption or Contingent Business Interruption losses –Property Subrogation and Recoveries Case Study – Major retailer impacted by California wildfires Need to protest assets, evaluate property damage and BI losses On site evaluations within 48 hours of event Expedited insurance payments, inventory impact $250,000 savings

26 Managing Variability SMART Goals Risk Solutions Results Analytics & Analysis TCOR Reduction 1.Data analysis process comprised using actuarial techniques identify primary loss drivers and respective impact on TCOR 2.Specific, Measurable, Achievable, Reasonable & Timely risk improvement and financial Impact goals based on identification of primary TCOR influencers and produces dashboard metrics 3.Solutions designed, Developed and implemented 4.Stewardship process identifies specific ROI and monitors results against expected outcome as compared to established dashboard metrics using actuarial science

27 SES – who we are The world’s pre-eminent satellite group 40 satellites: global fleet with optimal look angles and comprehensive landmass coverage, operated through our –fully-owned operating companies SES ASTRA, SES AMERICOM/SES NEW SKIES and our –majority-owned SES SIRIUS, CIEL, QuetzSat Premier provider of transmission capacity –media distribution –connectivity Advanced satellite-based platforms and services for –media and government organizations Created in 1985 and based in Luxembourg, Europe 1,550 staff around the world Traded on Euronext Paris and Luxembourg stock exchanges (SESG)

28 28 SES Global Reach, Regional Focus SES ASTRA is Europe’s No.1 DTH satellite service provider reaching 122 million households (including cable) SES NEW SKIES is a premier provider of satellite communications services, with more than 300 customers in 85 countries across five continents SES AMERICOM is a major player in video broadcasting – serving DTH and cable services, and has a substantial government services business as well as serving enterprise and consumer networks

29 SES Today The SES Fleet 40 satellites 26 orbital positions ASTRA H ASTRA 1C* Sirius 4 ASTRA 1M ASTRA 1KR ASTRA 1L ASTRA 1G ASTRA 1F NSS-9 NSS-10 NSS-6 NSS-703 ASTRA 2C ASTRA 2A ASTRA 2B NSS-806 NSS-7 AMC-7 AMC-10 AMC-11 AMC-1 AMC-4 AMC-15 AMC-3 AMC-9 AMC-5 AMC-6 Satcom C3* AMC-2 AMC-16 ASTRA 3A ASTRA 1E AMC-18 Sirius 3 AMC-21 ASTRA 2D NSS-11 AMC-8 ASTRA 1D* Ciel-2 NSS-5 * Denotes flying in inclined orbit

30 Space Risks are explained by several factors: –The power density involved in the operation of rocket engines, which renders related technologies very unforgiving. –The high level of complexity of space systems and difficulties to realistically model the space environment on the ground. –The requirement for space systems to operate flawlessly during many years in orbit, in a harsh environment (e.g. radiation, large thermal excursions) and without any possibilities of maintenance or repair. –The requirement to introduce new technologies to keep space systems competitive, which sometimes negates the potential benefits of in-orbit heritage. Risks can be characterized by a few major phases: –Pre-launch (risk borne by the spacecraft manufacturer) –Satellite launch into space (minutes to hours) –Pre-operational phase: from separation from the rocket to commercial service (some weeks) –Operational phase (typically 15 years) Characteristics of space risks

31 Launch  Although the launch phase represents only, typically, between the first 20 minutes and the first few hours of a space program, it is by far the most critical event in terms of failure risk.  A launch failure usually means the immediate and complete loss of the satellite Risk profile of various space phases

32 Pre-operational phase  The pre-operational phase involves critical operations including propulsion subsystem pressurization, transfer orbit maneuvers, antenna and solar array deployments. Failures occurring during such operations often have serious consequences on the future operational capability of the satellite.  The pre-operational phase also includes in-orbit testing. Risk profile of various space phases

33 Operational phase  The first year in orbit can still be characterized by some infant mortality of units and subsystems  After the first year of operation, the statistical risk of an anomaly stabilizes. An anomaly can have a wide range of impacts ranging from a negligible impact due to available on-board redundancy, a moderate reduction in the satellite lifetime or payload capacity, a large reduction in satellite capacity, often related with the loss of one of the two solar array wings up to a total failure.  Industry-wide, a total failure has affected satellites with more than one year of in- orbit life at a frequency of approximately 1% per year.  Actual failure probabilities of SES satellites are estimated to be lower than the industry’s average due to: Reliance on heritage components and designs, Application of rigorous design, test and product assurance plans to our satellites, Best-in-class satellite operations. Risk profile of various space phases

34 Types of space insurance Pre-launch Insurance –Covers risks to the satellite or launch vehicle during manufacturing and transportation. –Customers: satellite manufacturers and launch service providers. Launch and In-orbit Insurance –Covers risks from launch to, typically, the end of the first year in orbit. Longer periods are occasionally covered. –Customers: satellite operators and satellite manufacturers (for incentives). In-orbit Insurance –Covers risks during a typical 1-year period in orbit. –Customers: satellite operators. Third Party Liability Insurance –Covers risk of liability to third parties during launch or in orbit. –Customers: satellite operators and launch service providers.

35 General characteristics of space insurance Space insurance is somewhat different from other types of insurance because it is based on agreed value policies – as opposed to policies written on an indemnification basis. The following general insurance principles remain applicable: –The insured always needs to have an insurable interest under the policy, –Over-indemnification is forbidden: sums insured on asset protection policies cannot include a hidden portion of loss of revenue insurance. Space insurance market is particular in that it fails to comply with one of the basic requirements of standard insurance businesses: –No large number of homogeneous exposure units! –Law of large numbers doesn’t apply. –Any single loss can be significant. –Strongly impacts volatility of this market. Broad scope of coverage: –Space insurance does not only cover events of an accidental nature, but also malfunctions associated with faulty design or workmanship or wear and tear of equipment.

36 The space insurance market cycle Rates have been extremely volatile, with a highly cyclical market. As a consequence of large claims many underwriters left the market around 2001, causing capacity to reduce and rates to increase. Situation in 2001 was exacerbated by the overall situation of insurance markets. Today increasing capacity is again available in the space insurance markets. General market In-orbit rates have varied between `1.75% to 3%. Launch + 1 year rates In-orbit rates

37 Space Insurance Annual Premium and Claims $ Millions Space Insurance market has been profitable over the long run

38 Conclusion Managing variability creates a link to every area of your company –Helps you become more linked into the organization –Helps you more effectively manage downside risk –Helps you demonstrate to C-suite why you should have a seat at the table Now let’s look at an example of successfully managing variability! THANK YOU! 38

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