© 2011 Towers Watson. All rights reserved. Enterprise Risk Management for Small Businesses A presentation to IABA Annual Meeting by Jay Vadiveloo Lu Ma Jackie Bogensberger August 2011

© 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. towerswatson.com Presentation1 2 Outline Motivation for ERM for Small Businesses (ERMSB) initiative Why ERMSB does not exist? Similarities and differences between ERM for large corporations and small businesses ERMSB initiative at the Goldenson Center Case study – Between Rounds Bagels Student perspective on doing an ERMSB project Where do we go from here? Conclusion

© 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. towerswatson.com Presentation1 3 Motivation for ERMSB Initiative Small business are the largest, fastest growing, and most important segment of the American economy Small businesses experience one of the highest failure rates compared to large corporations in other industries Lack of any institutional or fomalized risk management for small businesses

© 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. towerswatson.com Presentation1 4 Why ERMSB does not exist? Small businesses are unwilling to pay for this service May be financially unable to do so May not recognize the potential benefit of ERM Fear of change As a consequence, ERM principles and literature are tailored primarily to large corporations

© 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. towerswatson.com Presentation1 5 Similarities with ERM for large corporations Fundamental steps are similar Identify and prioritize risks Model and quantify the risks Create risk-mitigation strategies

© 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. towerswatson.com Presentation1 6 Differences with ERM for large corporations Needs to incorporate business growth strategies as well Need to focus on reasonably likely risks with serious consequences versus low likelihood events with serious consequences Business owners are very knowledgeable about risks and business growth strategies Easier to assess and manage risks of a small business, but consequences of a risk shock are far greater Qualitative risks may be just as important as quantitative risks ERM analysis covers a shorter time horizon (3 to 5 years) and should be revisited afterwards

© 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. towerswatson.com Presentation1 7 Differences with ERM for large corporations: continued A well defined ERM analysis which incorporates business growth strategies can materially improve the sustainability and profitability of a small business

© 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. towerswatson.com Presentation1 8 ERM Initiative at the Goldenson Center In place for the past two years Students funded by the Center to undertake ERMSB projects in the region Service offered free-of-charge to small businesses Students work in teams and provide a formal written ERM report and any software tools at the end of the project

© 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. towerswatson.com Presentation1 9 Risk Management Report for Between Rounds Bagels University of Connecticut Graduate Program in Actuarial Science: Lu Ma Jackie Bogensberger Eric Anderson Maura Bey

© 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. towerswatson.com Presentation1 10 Outline The Bagel Industry Background Recognition of Risks for Between Rounds Data Analysis Micro Level Macro Level Suggestions/Conclusions

© 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. towerswatson.com Presentation1 11 The Bagel Industry There are about 3,072 bagel shops at the 2007 census Operate at 11.4% profit margin

© 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. towerswatson.com Presentation1 12 Recognition of Risks Competition Bagel Stop Production Co, Bruegger’s Bagel Bakery and Lox Stock & Bagels, Inc, Dunkin’ Donuts Seasonal trends Trends due to the economy Cost efficient items Waste management Advertisement

© 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. towerswatson.com Presentation1 13 Data Analysis We used the information complied from Between Rounds’ register reports to create a user friendly pivot table (in Excel) In order to calculate the percent profit for each item, we assumed a 33% cost From there we looked at best selling items (contribute to 50% of profit) over a monthly and year basis

© 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. towerswatson.com Presentation1 14 Pivot Table

© 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. towerswatson.com Presentation1 15 Monthly and Year Best Sellers

© 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. towerswatson.com Presentation1 16 Gross Profit (per store) South Windsor/Vernon Most profitable year: 2006 Least profitable year:2009 Overall down slope since 2006 Economy has slowed — Less people eating out

© 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. towerswatson.com Presentation1 17 Gross Profit (per store) Manchester 2010 was most profitable and the store saw an overall increase in profit from 2006 to 2010 Notable: All three branches show lower numbers in January and February New Years resolutions Cold Weather Saving money after the holiday spending sprees

© 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. towerswatson.com Presentation1 18 Total Gross Profit for All Locations Manchester is the only growing branch Manchester is the smallest branch -Overall profit has decreased, but as has the economy We see a positive outlook in 2010 in all stores Check 2011 data to see if up turn continues

© 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. towerswatson.com Presentation1 19 Our Suggestions Bagel Promotions: advertise on the side of a vehicle, coffee promotion, healthy promotion during New Years Resolution Time Online Advertisement: Groupon, Facebook Drive Thru Menu: consider the potential for traffic, new menu items (based on best sellers)

© 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. towerswatson.com Presentation1 20 Our Suggestions (cont.) Data Collection: adjust your “family groups” to be more condensed or keep the names more consistent. Keep count on waste Strategizing to Appeal to other clientele: consider re-branding to appeal to younger customers/college students

© 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. towerswatson.com Presentation1 21 THANK YOU From all of us, thank you for allowing us to analyze your business. You have been more than cooperative and we appreciate it!!

© 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. towerswatson.com Presentation1 22 Student perspective on ERMSB initiative Not your typical actuarial project Forces students to think out-of-the-box since each ERMSB project is unique Students work in a team and are involved from start to finish — Students work directly with the business owners — Final report, models and presentation done by students — Invaluable experience and immediate gratification of having recommendations implemented by owners

© 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. towerswatson.com Presentation1 23 Where do we go from here? Need to expand the Center’s ERMSB initiative on a larger scale Any large scale implementation should be supported by large corporations, private foundations and government agencies and not small business Most cost effective way to do these projects is to engage students at universities all over the country Goldenson Center could help facilitate and coordinate any large scale ERMSB initiative.

© 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. towerswatson.com Presentation1 24 Conclusion The Goldenson Center has just scratched the surface in showing how an effective ERM culture can be created with small businesses ERMSB is a form of micro risk management and can be replicated globally as well with funding from large corporations and other entities and university students doing the projects Huge payoff since any reduction in the failure rate for small businesses would be a boost to the overall economy.

© 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. towerswatson.com Presentation1 25 Contact Information Jay Vadiveloo, Ph.D, FSA, MAAA, CFA Professor-in-Residence & Director Janet & Mark L. Goldenson Center for Actuarial Research, University of Connecticut & Senior Consultant Towers Watson