Rocket Science for Risk ManagersCorey Gooch, Aon Global Risk Consulting

Christopher Iovino, Aon Global Risk ConsultingMaureen Offord, SES AMERICOM/SES New Skies

Wednesday, June 24th

11:30AM – 12:30PM

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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

Why is Managing Variability Important?

1. Economic slowdown (+7)

2. Regulatory/legislative changes (+4)

3. Business interruption (-1)

4. Increasing competition New entry

5. Commodity price risk New entry

6. Damage to reputation (-5)

7. Cash flow/liquidity risk New entry

8. Distribution or supply chain failure (-4)

9. Third party liability (-6)

10. Failure to attract or retain top talent (-3)*Taken from Aon’s Global Risk Management Survey 2009

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Top 10 Risks Around the World*

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

Reality

Model

• 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 tools…all models are wrong, some are useful

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Generalized Modeling Framework

Simulate

Determine Underlying

Risk Process

Build Risk Modules

Identify Inputs/

Parameters

Compare Current and Proposed Mitigation

Action, Monitoring

Qu

antitative M

od

eling

Fram

ewo

rk

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.

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.).

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Variability Spectrum – Black Swan Event

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• 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?

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– Changes in health care 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

ProductFactors Under Consideration

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

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.

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Counterfeit/Tampering Risk Case Study

Recall Cost

Counterfeit / Tampering

EventValue of Product Recalled

Shareholder(D&O)

Lawsuit

Product Liability Lawsuit

Lost Sales & Market Share

Impact

AND

Y/N

Y/N

Y/N

Y/N

To understand the impact of an event once it occurs, we used a decision tree approach based on the potential event severity

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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

CURRENT STATE

C/T Risk C/T Risk SAVINGS C/T Risk SAVINGS C/T Risk SAVINGS75% 4 $150 $140 $10 $100 $50 $90 $6080% 5 $180 $168 $12 $120 $60 $108 $7290% 10 $216 $202 $14 $144 $72 $130 $8695% 20 $259 $242 $17 $173 $86 $156 $10496% 25 $311 $290 $21 $207 $104 $187 $12497% 33 $404 $377 $27 $270 $135 $243 $16298% 50 $526 $491 $35 $350 $175 $315 $210

99.0% 100 $683 $638 $46 $456 $228 $410 $27399.5% 200 $957 $893 $64 $638 $319 $574 $38399.9% 1,000 $1,339 $1,250 $89 $893 $446 $804 $536

Expected Value $100 $93 $7 $80 $20 $73 $27Standard Deviation $50 $47 $3 $40 $7 $40 $11

5yr 10% NPV IMPACT ($MM)

Confidence Level

1/N Year Event

Mitigation A Mitigation B Mitigations A AND B

c/t risk is counterfeit/tampering risk and represents TCOR 15

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 VariabilityCan 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

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

Risk Diagnostic MethodsEnterprise Risk Management (ERM)

• Risk Governance – S&P 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

Risk Mitigation SolutionsManage 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

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

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%

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

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

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

Managing Variability

SMART Goals

Results

Analytics&

Analysis

Risk Solutions

TCORReduction

1. Data analysis process comprised using actuarial techniques identify primary loss drivers and respectiveimpact on TCOR

2. Specific, Measurable, Achievable, Reasonable & Timely risk improvement and financial Impact goals based on identification of primary TCORinfluencers and produces dashboard metrics

3. Solutions designed, Developed and implemented

4. Stewardship process identifies specific ROI and monitors results against expected outcome as compared to established dashboardmetrics using actuarial science

SES – who we are

• The world’s 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 Europe’s 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

SES TodayThe SES Fleet

• 40 satellites• 26 orbital positionsA

ST

RA

H

AS

TR

A 1C

*

Sirius 4

AS

TR

A 1M

AS

TR

A 1K

R

AS

TR

A 1L

AS

TR

A 1G

AS

TR

A 1F

NS

S-9

NS

S-10

NS

S-6

NS

S-703

AS

TR

A 2C

AS

TR

A 2A

AS

TR

A 2B

NS

S-806

NS

S-7

AM

C-7

AM

C-10

AM

C-11A

MC

-1

AM

C-4

AM

C-15

AM

C-3

AM

C-9

AM

C-5

AM

C-6

Satcom

C3*

AM

C-2

AM

C-16

AS

TR

A 3A

AS

TR

A 1E

AM

C-18

Sirius 3

AM

C-21

AS

TR

A 2D

NS

S-11

AM

C-8

AS

TR

A 1D

*

Ciel-2

NS

S-5

* Denotes flying in inclined orbit

• 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)

Characteristics of space risks

• 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

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.

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 industry’s 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.

Risk profile of various space phases

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.

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 doesn’t 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.

The space insurance market cycle

6%

9%

12%

15%

18%

21%

24%

Janu

ary-

93

Janu

ary-

94

Janu

ary-

95

Janu

ary-

96

Janu

ary-

97

Janu

ary-

98

Janu

ary-

99

Janu

ary-

00

Janu

ary-

01

Janu

ary-

02

Janu

ary-

03

Janu

ary-

04

Janu

ary-

05

Janu

ary-

06

Janu

ary-

07

Janu

ary-

08

Janu

ary-

09

Date

Rat

e (

%)

* Trend line calculated on a 'rolling average' basis of 12 placements

1.00%

1.25%

1.50%

1.75%

2.00%

2.25%

2.50%

2.75%

3.00%

3.25%

3.50%

Jan

-98

Jul-9

8

Jan

-99

Jul-9

9

Jan

-00

Jul-0

0

Jan

-01

Jul-0

1

Jan

-02

Jul-0

2

Jan

-03

Jul-0

3

Jan

-04

Jul-0

4

Jan

-05

Jul-0

5

Jan

-06

Jul-0

6

Jan

-07

Jul-0

7

Jan

-08

Jul-0

8

Jan

-09

Date

Pre

miu

m R

ate

* Trend line calculated on the basis of a 'rolling average' of 40 placements

• 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%.

Launch + 1 year rates

In-orbit rates

Space InsuranceAnnual Premium and Claims

$ M

illi

on

s

-$1,100

-$800

-$500

-$200

$100

$400

$700

$1,000

$1,300

$1,600

$1,900

Premium 999 996 1199 588 881 721 1055 849 820 685 647

Claims 1036.6451 597 1774 743 372 468 705 83 339 833 308

Annual Profits -37 399 -575 -155 509 252 350 766 481 -148 339

Cumulative Profits -717 -318 -893 -1048.682 -539 -287 63 829 1310 1162 1501

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

$ M

illio

ns

Space Insurance market has been profitable over the long run

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 let’s look at an example of successfully managing variability!

THANK YOU!

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