ICSC European Retail Property School Insurance & Risk Management July 2014
Part 1 RISK MANAGEMENT Tiago Mora MDS Group tiago.mora@mdsinsure.com
Risk RISK UNCERTAINTY lack of predictability concerns value (usually monetary) inherent danger to investments
Risk (Definition) Reputation Loss Counterparty Risk Natural Disasters Fire Economic Cycle Changes Shareholder value loss Inefficiencies Legal Penalties Everything enables organizations to achive their stategic objectives
Risk (Consequences) Rating decreased from AA to BBB Defective Product recall costs 50 millions lawsuit 30 millions in fines 100 millions annual loss Fire causes business interruption of 6 months President threatened
Risk STRATEGIC Inefficiencies COMPLIANCE Legal Penalties New Markets Counterparty Risk Economic Cycle Changes Processes Failures Fire FINANCIAL OPERACIONAL
Insurance & Risk Management Risk UNCERTAINITY OPORTUNITY Taking Risks is part of any business model All companies take risks to achieve their business objectives The greater the opportunities, the higher the risks
Risk Management Risk Management will allow the treatment of those Uncertainties (risks) without creating a spirit of aversion to them Risk Management will allow risks are no longer seen a threarts but as opportunities Risk Management will be a competitive advantage
Risk Management RM Cycle Risk Assessement Risk Financing Identification Analysis Evaluation Control Retain Transfer Risk Treatment Avoid Eliminate Mitigate
Risk Management Risk Assessement identification Anaysis Evaluation Identify the reasons why the objectivres of the organization can be not achive (What can go wrong) identifying the causes and origin of the risks, events or circumstances that may have an impact on the organization s objectives Risk List
Risk Management Risk List Risk Class Causes 1 Fire O Uncontrolled fire in the emergency generator room 2 Fire O Fire out of control in the parking area may destroy a number of vehicles and inflict some structural damages to the building 3 Fire O Improving housekeeping in electrical panel room 4 5 6
Insurance & Risk Management Risk Management Risk Assessement Identification Analysis Evaluation Understand the Risks. Determine the consequences and probability that may occur (Risk Quantification) Risk Mapping
Risk Management Quantifying the Risk 1 Frequency RISK = Likelihood * Impact 0 Severity
Risk Management Risk Mapping Risk Class Causes Likelihood Impact 1 Fire O Uncontrolled fire in the emergency generator room 2 Fire O Fire out of control in the parking area may destroy a number of vehicles and inflict some structural damages to the building 3 Fire O Improving housekeeping in electrical panel room Likely $1.500.000 Likely $5.000.000 Possible $350.000 4 5 6
Risk Management Risk Matrix high 2 Impact ($) low 3 1 low Likelihood high
Risk Management Risk Matrix
Risk Management Risk Assessement Identification Analysis Evaluation Determine the importance of the level and the type of risk compared to the standart criterias (risk tolerance). Suport for decisions: the need of treating risks establish treatment priorities Strategic Plan
Risk Management Risk Apetite Of course we ve been trough storms, but never in all my experience I found myself at risk worthly of mention Edward J Smith Captain of TITANIC (1907) Fear? No, I m not afraid. Risks must be calculated, otherwise I would stop driving Michael Schumacher F1 World Championship
Risk Management Risk Strategy Risk Class Causes Likelihood Impact Srategie 1 Fire O Uncontrolled fire in the emergency generator room 2 Fire O Fire out of control in the parking area may destroy a number of vehicles and inflict some structural damages to the building 3 Fire O Improving housekeeping in electrical panel room likely $ 1.500.000 Treat likely $ 5.000.000 Treat likely $350.000 Treat 4 5 6
Risk Management Risk Treatment Avoid Eliminate Mitigate Choose, Accept and implemente the various options to modify the likelihood of a risk or its effects or both. Risk Plan
Risk Management Risk Plan Risk cl Cau Likelihood Impact Action owner Start date End date Cost of implem. New Likelihood New Impact 1 F O Likely $ 1.500.000 a) John 07-13 10-13 $ 40.000 Likely $ 1.000.000 2 F O Likely $ 5.000.000 a) Mike 09-13 12-13 $ 600.000 Likely $ 500.000 3 F O Likely $ 350.000 a) Mike 09-13 12-13 0 Possible $ 250.000 4 5 6 a) Extend the automatic sprinkler to protection to protect the the emergency generator room b) Fire out of control in the parking area may destroy a number of vehicles and inflict some structural damages to the building
Risk Management 1 Frequency Protetion Measures: to reduce severity Prevention Measures: to reduce likelihood 0 Severity
Risk Management 3 6 2 1 5 32 14 4 Severiity ($) 31 20 12 27 22 33 29 9 26 10 11 33 31 32 24 16 18 23 21 25 30 34 15 7 30 13 17 8 28 Likrlihood (%)
Risk Management Risk Matrix high 2 Impact ($) low 3 3 2 1 1 low Likelihood high
Risk Management Safety Costs Costs Total Cost A Loss Costs Safety Level
Risk Management Risk Financing Retain Transfer The impact tolerated by the organization The amount of loss can be assumed
Risk Management Risk Financing Retain Transfer Above the risk tolerance The amount of loss can t be assumed INSURACE
Risk Management 3 6 2 1 5 Impact ($) 31 20 12 28 27 22 33 29 26 10 11 31 32 16 18 23 24 21 32 9 33 25 34 30 15 7 30 13 14 17 4 8 Moderate Impact High Impact TRANSFER RETAIN/TRANSFER Likelihood (%) Low Impact
Risk Management High Impact Moderate Impact Low Impact
1 Risk Management Expected Losses Severe Unexpected Losses catastrophic Unexpected Losses Frequency RETAIN RETAIN / TRANSFER MANAGE / TRANSFER 0 Operation s Management Decision Board Decision To Transfer Severity
Risk Management RM Cycle Avoid Eliminate Mitigate Risk Risk Risk Transfer Retain Risk Apetite Risk Assessement Risk Treatment Risk Financing
Risk Management Goals Align risk apetite with strategy To provide an integrate response to the risks across the organization To Minimize Operational Losses To Optimize the cost of risk
Risk Management Main Drivers The increasing pressure from regulators and financial markets The logic of the entrepreneurial concerns The pressure of the public opinion by the social consequences of business activity Risk Management
Risk Management 2013 2002 2004 2006 2009 1992 ISO 31000 8 th EU Directive ERM COSO 2 Sox FERMA COSO 1
Part 2 INSURANCE Tiago Mora MDS Group tiago.mora@mdsinsure.com
Risk Financing Risk Financing Transfer Retain Unfunded Funded Unfunded Funded Insurance ART (Finite) Cash Flow Equity Captives (ART) Insurance is the most efficient mechanisms for risk transfer
Risk Transfer Risk Transfer Transfer of Uncertainty The insured pays the premium the insurer assumes the losses on his place Basis of Insurance Mutuality: Collective bearing of losses all contribute to pay the losses suffered by unfortunate one law of the great numbers: Actuarial estimates based upon principles of Probability But there are limits, not all the risks can be transfered to Insurance
Risk Transfer STRATEGIC COMPLIANCE FINANCIAL OPERACIONAL
Risk Classification Pure Risk loss or no loss situation Insurable Risks Speculative Risks There are a third dimension (opportunity of a financial profit) Uninsurable Risks
Risk Transfer STRATEGIC COMPLIANCE Non Insurable Non Insurable Insurable Insurable FINANCIAL OPERACIONAL
Insurable Risk Sudden and unforeseen events independent of the will of the insured Risks must be Pure Risk Risks must be Quantified Risks must have a Low frequency of Losses Risks must allow a joint treatment
Main Categories of Insurance Material: Property Technical (CAR/EAR, Machinery Breakdown, Electronic Equipment) Marine Personal: Life Health Accidents Workmen s Compensation Liability Insurance (TPL, Products Liability, Professional Liability, E&O, D&O) Financial Insurance (Credit, Surety, Bonds)
Property Insurance Property Insured Buildings Contents (Equipments/Machinery) Stocks Property in course of construction or erection Property in transit Personal Property (Employees) Business Interruption
Property Insurance Property Excluded Land Standing timber Animals Jewellery, precious stones, precious metals Property underground / offshore Vehicles Vessels or Craft
Property Insurance Covered Risks Fire, Lightning, Explosion Windstorms, Hail Flood, Landslide Earthquake /volcanic eruption Vehicle impact / Aircraft impact Theft, burglary Riots, Malicious Damage Removal of Debris, Clean up Expenses, Temporary removal, Fire Fighting Expenses, Public Authorities
Property Insurance Excluded Risks War, invasion, act of foreign enemy Popular uprising / military uprising Confiscation, requisition, nationalisation, seizer or destruction by order of a public authority Nuclear radioactivity Terrorism
Property Insurance Methods of Insuring Property Type of Cover Named Perils (Fire, Extended Coverage) "All Risk Basis of Indemnity Replacement Cost Actual Cash Value Stipulated Amount (Agreed Amount)
Liability Insurance Coverage Scope of Cover The indemnity the insured becomes liable to pay in respect of any liability (i) imposed by law or (ii) by contract for personal injury or property damage, caused by and in connection with the insured operations
Liability Insurance Main Exclusions Dishonest, Malicious, Criminal or Deliberate Illegal acts Fines, Penalties, Punitive and Exemplar damages Automobile Liability Worker s compensation Gradual Pollution Radioactive Contamination War and Terrorism Asbestos
Technical Insurance Construction /Erection All Risks Type of Cover "All Risk Insured All parties involved in the works as each of them is the insured
Technical Insurance Construction /Erection All Risks Scope of Cover Based on a modular structure, through which it is possible to Insure against: Physical loss or damage to the works and plant and equipment; Third-party liability arising from the work; Financial Monetary losses (Loss of profit) resulting from delays in the completion of the work as a result of an accident.
Technical Insurance Construction /Erection All Risks Beginning coverage Start of works End of works PAC End of coverage Arrival of materials on site Construction Works Cold Tests Hot Tests Testing & Commissioning Maintenace Period
Design the Insurance Program Risk Exposure Risk Management Strategy (Risk Appetite) Adequate the insurance cover to the exposure Coverage Exclusions Limits Deductibles Temporal scope Geographical scope
Design the Insurance Program International Companies Global Program
Design the Insurance Program Global Programs Global programs combine a global Master Policy with locally admitted policies placed in the individual risk locations. Master Policy (Country of headquarters) Local Policy Local Policy DIC/DIL Local Policy Local Policy DIC/DIL Local Policy Local Policy Local Policy The Master Policy provide Difference in Conditions or Difference in Limits ( DIC/DIL ) coverage over and above the local policies,
Design the Insurance Program Global Programs This approach ensures harmonized cover across a worldwide risk portfolio; A single negotiation for the entire program following standard criteria, compliance with the laws and practices of each country coordinating a client s global risk exposure on a central basis; one global program, one global insurer, one global broker best combination of local delivery with centralized global oversight and management, which ensures responsiveness and a big picture perspective in the event of a claim Economy of scale; better terms & conditions
Risk Financing ART Captives By opting to retain a portion of the risk, organizations can lower their total cost of risk by: Providing a mechanism to benefit from underwriting profits Money saved inure directly to the insured Eliminating or minimizing insurer profit Related overheads, and assessment loadings Capturing investment income on cash flow the organizations receives the investment income on the cash held in reserve to pay claims.
Risk Financing Captive Solution A Captive is an insurance company set up by an organization to primarily insure or reinsure the business risks of its parent company or more specific, a captive is a limited purpose vehicle for financing its parent company s risks
Risk Financing Captive Solution Major Advantages Profits resulting out of underwriting and investment policy Accumulation of underwriting profits where the premium volume exceeds the claim amounts; Accumulation of investment revenues received on retained premiums; Reduction of insurance costs The level of retention allows the captive to strongly influence the insurance negotiations;
Risk Financing Captive Solution Major Advantages Stable long term insurances Offers an alternative in a volatile insurance market Covering Non-insurable risks (protecting P&L) the market does not exist the cover offered by the market is too expensive
Risk Financing Captive Solution Major Advantages Tool to develop corporate Risk Management Consolidated claims profile Reward subsidiaries for good/improved claims record Use captive s surplus funds to reinvest in risk management initiatives
Case Study: Shopping Center
The Insurance Program Construction Phase Project Completion Operational Phase
The Insurance Program Construction Phase Project Completion Operational Phase The involved parties Promoter/Owner Lenders Contractor Subcontractors Architects & Engineers Control & Inspections bodies The involved parties Owner Tenant Supplier of Services Customers Any other third party Start of Works
The Insurance Program Construction Phase Project Completion Operational Phase Project Design CAR / EAR TPL Third Party Liability Testing & Commissioning DSU / ALOP Maintenance Marine Cargo Marine Cargo DSU Terrorism Terrorism DSU PD/BI Terrorism/BI TPL Start of Works Environmental L
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