Panel Discussion: Designing An Optimal Risk Retention and Risk Transfer Strategy

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Panel DiscussionDesigning An OptimalRisk
Retention and RiskTransfer Strategy
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Company XYZ The Facts and Issues
(JD)

• Annual Revenue - 5 Billion
• Total Assets - 10 Billion
• Annual Insurance Premium Spend - 29 Million
• Risk profile
• Perceived as high risk to insurers
• Insufficient risk information
• Limited competition/capacity
• Transferred to Aon mid-term
• Required advice to ensure
• Insurance program matches insurable risk profile
• Insurance program is aligned with risk
  tolerance/risk appetite
• Total Cost of Insurable Risk is minimised

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Aons Risk Financing Framework
(JD)
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
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Retail Broking Model Old Versus New
(DA)
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Aons Service Methodology
(DA)
Planning Transition

• Review performance and plan the future service
  program

Analyse

• Analyse and understand the business and risks to
  ensure that insurance matches insurable Risk
  Profile

Design

• We design risk financing options to ensure that
  they meet business needs

Execute

• We execute the solutions that best meet business
  needs

Manage

• Manage ongoing relationship to ensure the right
  resources are delivered to the business

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Risk Profiling - How we gather information
(AB)
Risk Assessment Workshops
Site Inspection / Survey
Existing Knowledge

• Facilitated structured workshops
• Broader application looking at
• Insurable Risk
• Non Insurable Risks
• Business Interruption
• Strategic Business Risk

• Structure site inspections
• Concentrate on
• Property Risks
• Business Interruption
• Liability Risk
• OHS Risks

• Desk top review
• Quick and simple risk evaluation
• Concentrate on Insurable Risks
• Use survey and other information

• Who does it?
• Risk Profiling Team
• Client Relationship Manager
• Strategic Account Manager
• Industry experts may assist

• Who does it?
• Aon Risk Profiling team
• External Specialists

• Who does it?
• Client Relationship Manager
• Risk Profiling team assist

Insurance Gap Analysis
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(AB)
Risk Profiling Top 10 Risk Summary
Risk Rank
Covered by Insurance
Limit of Liability

• Competition/Reputation High No Nil
• Hazardous Operations to Employees High
  Yes Statute
• Product Liability High Yes 500m
• Property Fire High Yes 1.5b
• Public Liability High Yes 500m
• Product/Service Dependency Significant
  No Nil
• Hazardous Operations to Contractors
  Significant Yes Statute/100m
• IT Security Significant No Nil
• Legislative Compliance Significant
  No Nil
• Disaster Recovery Significant No Nil

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Premium Summary
(DA)
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Total Cost of Insurable Risk Analysis
(HH)
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Benchmarking By Industry
(HH)
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Understanding Insurable Risk Tolerance
(DA)

• Insurable Risk is only one component of an
  organisations total risk portfolio
• 30 to 40 of a risk portfolio is typically
  insurable
• The entire risk portfolio must be taken into
  consideration when making decisions on insurable
  risk tolerance
• Risk Tolerance and Risk Appetite are not the
  same thing

Insurable Risk
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Risk Tolerance Analysis
(HH)
XYZ Limited
Sensitivity Analysis - Return on Equity
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Minimum
9.77
Acceptable Level?
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9.52
9.10
8.80
8.06
8
6.53
Return On Equity
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4.95
4
3.32
2
0
2004
2005
30
50
100
200
300
400
Self-Insured Loss Scenario (Millions)
Actual
13
(HH)
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Design Phase Key Components
(DA)
Annual Feedback Loop
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Marketing Strategy - ISR
(LL)

• Improve perception of the risk profile via
  implementation of risk recommendations
• Selling the risk to the market (surveys /
  presentations)
• Focus on market selection and levels of
  contestability
• Identify likely options in the marketplace and
  realistic client need
• Fall back positions/best alternatives
• Review policy structure
• Determine appropriate insurable values
• - Asset Valuations
• - Business Interruption Structure
• - Business Interruption Indemnity Period
• Commence market engagement

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(LL)
What is the Best Option?
XYZ Limited - Property
Assessment of Risk Retention Options
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Millions
16
14
12
10
Total Cost of Risk (Premiums Ave. Retained
Losses Volatility)
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6
4
2
0
Current (expiring)
Renewal of Current - 500K
Option 1 - 1M
Option 2 - 5M
Premium
Average Retained Losses
Volatility
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(DA)
Total Cost of Insurable Risk Analysis
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How Should Retained Risk be Financed?
(DA)

• Traditional Expense Management Deductibles
• Corporate Internal Fund or On Balance Sheet
  Provisioning
• Discretionary Mutual Fund
• Captive Insurance Company
• Cell in a Protected Cell Company (PCC)

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What is the Best Risk Financing Option?
(AK)

• Issues that impact on decision making process
• Internal Processes and organisational matters
• Legislative and regulatory issues
• Internal Rate of Return Considerations
• Tax Planning

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(AK)
Financial Aspects of Decision Making
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Operational Aspects of Decision Making
(AK)
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Retail Broking Model Old Versus New
(DA)
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Conclusion
(JD)

• Optimal program design can only occur if
• Insurance program matches insurable risk profile
• Retention strategy is aligned to risk tolerance
  appetite
• The cost of insurance capital is taken into
  account annually
• Renewal process must include analysis, design and
  execution
• Process must be conducted on an annual basis
• Successful outcomes require a true team effort
  and the utilisation of various subject matter
  experts