Aon Australias 200506 Risk Management and TCOIR Survey

1
Aon Australias 2005/06 Risk Management and
TCOIR Survey

• Results

2
Agenda

• Purpose of the survey
• Who was surveyed?
• Key findings
• What are the top 10 risk concerns for Australian
  executives?
• How does your TCOIR compare to others?
• How are others managing insurable risk?
• Did your insurance costs increase in 2005/06?
• Questions

3
Why launch such an initiative?

• Nothing else existed (or continues to exist) for
  Australian organisations
• To identify the dominant business risk issues
  concerning corporate Australia (including clients
  and prospects)
• To obtain an understanding of how Australian
  organisations are profiling, treating and
  financing their insurable risk
• To provide organisations with the ability to
  benchmark their risk management activity and
  their risk financing performance over time and
  across similar organisations
• Benchmarking of risk financing program
  performance in Australia (TCOIR) was generally
  unavailable prior to this initiative being
  launched in 2002 (the only comparison was the
  U.S. RIMS initiative).

4
What answers were we looking for
Insurable Risk Confidence Level
Insurable Risk Tolerance Level
IDENTIFY BOUNDARY
CAN TRANSFER
MUST RETAIN
SHOULD TRANSFER
Probability of loss
Loss Value ()
Markets wont Insure or will charge
excessive premium
Earnings Equity Capital are sensitive to losses
in this range
Equity holders may be willing to chance a loss
in this range
Earnings working capital can sustain losses
in this range
Risk Retention Strategy
Risk Transfer Strategy
5
Agenda

• Purpose of the survey
• Who was surveyed?
• Key findings
• What are the top 10 risk concerns for Australian
  executives?
• How does your TCOIR compare to others?
• How are others managing insurable risk?
• Did your insurance costs increase in 2005/06?
• Questions

6
Who was surveyed ?

• In 2005/06, Aon invited organisations to
  participate in its survey via direct invitations
  and through media publications
• 235 respondents,
• responses came from both Aon clients and
  prospects, and
• respondent confidentiality was preserved via
  independent consultant (Horwath Chartered
  Accountants).

7
Respondent industry demographics
8
Agenda

• Purpose of the survey
• Who was surveyed?
• Key findings
• What are the top 10 risk concerns for Australian
  executives?
• How does your TCOIR compare to others?
• How are others managing insurable risk?
• Did your insurance costs increase in 2005/06?
• Questions

9
Key findings

• Corporate Governance is the top risk concern for
  2005/06 perhaps leading to concerns as to
  whether business is tied down with conformance
  issues instead of concentrating on performance
• The risk management sea change identified last
  year remains risk is being taken more seriously
  by CEOs, CFOs and Boards and is increasingly
  being considered as part of the overall business
  strategy
• TCOIR costs are down largely due to the effects
  of a softening market and premium reductions
• Organisations believe they are benefiting from
  risk management investment key benefits being
  better informed decision making, improved
  controls and standards of corporate governance

10
Agenda

• Purpose of the survey
• Who was surveyed?
• Key findings
• What are the top 10 risk concerns for Australian
  executives?
• How does your TCOIR compare to others?
• How are others managing insurable risk?
• Did your insurance costs increase in 2005/06?
• Questions

11
Top 10 risk concerns
12
The risk drivers
13
Changes over time in key risk concerns
Year on Year Comparison of the Top 10 Risks
Rank
2002/03
2003/04
2004/05
2005/06
1
Legal
Brand and
Brand and
Corporate
Image
Image
Governance
2
Brand and
Physical
Corporate
Systems
Image
Assets
Governance
3
External
Systems
Regulatory
Brand and
Dependency
Image
4
Market Structure
Human Resource
Legal
Human Resource
5
Human Resource
Legal
Systems
Legal
6
Systems
Corporate
Human Resource
Liquidity
Governance
7
Regulatory
Market Structure
Liquidity
Information
Management
8
Shareholder
External
Physical
Business
Needs
Dependency
Assets
Interruption
9
Corporate
Liability
Capital Structure
Capital Structure
Governance
10
Intellectual Property
Liquidity
Information
Lack of Innovation
Management
14
Agenda

• Purpose of the survey
• Who was surveyed?
• Key findings
• What are the top 10 risk concerns for Australian
  executives?
• How does your TCOIR compare to others?
• How are others managing insurable risk?
• Did your insurance costs increase in 2005/06?
• Questions

15
What is Total Cost of Insurable Risk ?

• TCOIR is defined as
• Risk transfer premiums
• Risk retention costs
• Internal risk management costs
• External risk management costs

16
Total cost of insurable risk by revenue
TCOIR per 1,000 Revenue
0
5
10
15
20
25
Revenue Band
14.80
0 to 100m
6.83
100m to 1b
4.25
gt 1b
8.69
Total
75th
25th
Median
Percentile
Percentile
17
Total cost of insurable risk by industry
TCOIR per 1,000 Revenue
0
5
10
15
20
25
30
35
Industry type
Agriculture, Forestry
Fisheries
7.66
Construction and
Engineering
12.39
Finance and
Insurance
5.74
6.98
Manufacturing
12.84
Mining
18.42
Government and
Education
Retail / Wholesale
Trade
2.53
5.31
Service Industries
Transport, Storage
20.05
Communications
Health and Social
11.55
Services
Property and Real
17.29
Estate
Automotive and Industrial
6.71
Machinery Manufacturing
Food and Beverage
7.31
Manufacturing
Tourism and
12.33
Leisure
10.72
Utilities
8.69
Total
18
Risk dollar spend historical comparison
of TCOIR
0
10
20
30
40
50
60
70
80
90
100
2005/06
63
17
17
4
2004/05
71
11
13
4
2003/04
69
16
12
3
2002/03
72
14
8
6
Risk Transfer Costs
Risk Retention Costs
Internal Risk Management Costs
External Risk Management Costs
19
The risk dollar spend by industry
0
20
40
60
80
100
4
3
87
5
Agriculture, Forestry and Fisheries
9
5
78
7
Construction and Engineering
19
1
37
43
Finance and Insurance
5
5
79
11
Manufacturing
8
4
86
2
Mining
16
3
81
0
Government Education
15
6
70
10
Retail / Wholesale Trade
2
4
91
3
Service Industries
38
3
41
18
Transportation, Storage Communications
6
5
75
13
Health Social Services
Risk Transfer
5
95
Property and Real Estate
Costs
19
3
66
13
Automotive Industrial Machinery Manfg.
Risk Retention
Costs
1
8
85
6
Food and Beverage Manufacturing
Internal Risk
5
5
86
4
Tourism Leisure
Management
Costs
4
5
69
22
Utilities
External Risk
Management
1
6
93
0
Unallocated
Costs
17
4
63
17
Total
20
TCOIR - Australia vs. USA
Source of USA data is RIMS Benchmarking Survey
21
Agenda

• Purpose of the survey
• Who was surveyed?
• Key findings
• What are the top 10 risk concerns for Australian
  executives?
• How does your TCOIR compare to others?
• How are others managing insurable risk?
• Did your insurance costs increase in 2005/06?
• Questions

22
How are organisations identifying risks?
23
Strategy development responsibilities
Number of Respondents
0
10
20
30
40
50
60
70
80
90
100
Main Board
Board Sub-Committee
Chief Executive Officer
Chief Financial Officer
Chief Risk Officer
Company Secretary / Legal
Risk Manager
Health, Safety, Environment Manager
Human Resource Manager
Internal Audit
Operational/divisional heads
Local managers
Formulates Strategy
Develops / Implements
Monitors Implementation
24
Perceived benefits of risk management investment
of Respondents
0
10
20
30
40
50
60
70
80
Lower total cost of insurable risk
(premiums, retention costs and risk
management costs)
More informed decisions on risk taking/
risk retention
Reduced compliance costs
Improved internal controls
Improved returns on investment
Improved shareholder value
Improved business strategy
Improved standards of governance
25
Agenda

• Purpose of the survey
• Who was surveyed?
• Key findings
• What are the top 10 risk concerns for Australian
  executives?
• How does your TCOIR compare to others?
• How are others managing insurable risk?
• Did your insurance costs increase in 2005/06?
• Questions

26
Insureds views on premium movements
50
196
49
40
37
35
29
30
27
27
Increase / (Decrease)
20
12
9
10
8
7
3
3
3
1
1
1
1
0
0
0
0
0
0
-2
-3
-5
-8
-10
-10
Property (inc. BI)
Public Products
Directors and Officers Liability
Fidelity
Medical Malpractice
Professional Indemnity
Motor Vehicle
Guarantee/Bankers
Liability
Bond
2003
2004
2005
2006 (Expected)
27
Agenda

• Purpose of the survey
• Who was surveyed?
• Key findings
• What are the top 10 risk concerns for Australian
  executives?
• How does your TCOIR compare to others?
• How are others managing insurable risk?
• Did your insurance costs increase in 2005/06?
• Questions

28
Contacts

• Jason Disborough National Manager, Business
  Development
• jason.disborough_at_aon.com.au
• Ross Castle National Manager, Client Research
  Development
• ross.castle_at_aon.com.au
• Hadyn Hewitt National Manager, Analytical
  Services
• hadyn.hewitt_at_aon.com.au
• Ross Ivey Senior Analyst, Analytical Services
• ross.ivey_at_aon.com.au