Rocket Science for Risk Managers

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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 New Skies
• Wednesday, June 24th
• 1130AM 1230PM

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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

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Why is Managing Variability Important?
Top 10 Risks Around the World

• Economic slowdown (7)
• Regulatory/legislative changes (4)
• Business interruption (-1)
• Increasing competition New entry
• Commodity price risk New entry
• Damage to reputation (-5)
• Cash flow/liquidity risk New entry
• Distribution or supply chain failure (-4)
• Third party liability (-6)
• Failure to attract or retain top talent (-3)
• Taken from Aons Global Risk Management Survey
  2009

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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

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Models A Refresher
Model
Reality

• 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 toolsall models are wrong, some are
  useful

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Generalized Modeling Framework
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.).
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.
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Variability Spectrum Black Swan Event

• 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 2008-09
• Collapse of AIG on 9/16/08
• The Depression
• Spanish Flu of 1918
• Other?

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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

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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

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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.)

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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

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Counterfeit/Tampering Risk Case Study
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.
Product Factors Under Consideration Factors Under Consideration Factors Under Consideration
Product Supply Chain/Channel Drug Characteristics External 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 3rd Parties Market Share Threat
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Counterfeit/Tampering Risk Case Study
To understand the impact of an event once it
occurs, we used a decision tree approach based on
the potential event severity
Y/N
Product Liability Lawsuit
Recall Cost
Y/N
Counterfeit / Tampering Event
Y/N
Lost Sales Market Share Impact
AND
Value of Product Recalled
Shareholder(DO)Lawsuit
Y/N
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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

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c/t risk is counterfeit/tampering risk and
represents TCOR
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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?

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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

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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

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Risk Diagnostic Methods

• Enterprise Risk Management (ERM)
• Risk Governance SP 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

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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

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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

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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 4th year 3.22 to 1 ROI
• Claim reductions of 36 and costs 47

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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

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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

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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

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Managing Variability

• Data analysis process
• comprised using actuarial techniques
• identify primary loss drivers and respective
• impact on TCOR

• Specific,
• Measurable, Achievable,
• Reasonable Timely risk
• improvement and financial
• Impact goals based on
• identification of primary TCOR
• influencers and produces
• dashboard metrics

TCOR Reduction
Return on Investment
Budget Validation

• Solutions designed,
• Developed and implemented

• Stewardship process
• identifies specific ROI
• and monitors results
• against expected outcome as
• compared to established dashboard
• metrics using actuarial science

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SES who we are

• The worlds 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)

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SES Global Reach, Regional Focus

• SES ASTRA is Europes 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

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SES TodayThe SES Fleet
AMC-8
AMC-7
AMC-10
AMC-11
AMC-15
AMC-18
AMC-1
AMC-4
AMC-2
AMC-3
AMC-16
AMC-9
AMC-5
AMC-6
NSS-806
NSS-10
Satcom C3
NSS-703

• 40 satellites
• 26 orbital positions

ASTRA 1D
ASTRA 3A
ASTRA 2C
ASTRA 2B
Sirius 3
ASTRA 1C
ASTRA 1E
ASTRA 2A
ASTRA 1L
NSS-7
ASTRA 1KR
ASTRA 1G
ASTRA 1F
ASTRA H
ASTRA 1M
Sirius 4
Denotes flying in inclined orbit
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Characteristics of space risks

• 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)

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Risk profile of various space phases

• 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

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Risk profile of various space phases

• 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.

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Risk profile of various space phases

• 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 industrys
  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.

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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.

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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 doesnt 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.

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The space insurance market cycle
Launch 1 year rates

• 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.

In-orbit rates
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Space InsuranceAnnual Premium and Claims
Millions
Space Insurance market has been profitable over
the long run
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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 lets look at an example of successfully
  managing variability!
• THANK YOU!

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