Insurance and Risk Finance 640 - PowerPoint PPT Presentation

1 / 15
About This Presentation
Title:

Insurance and Risk Finance 640

Description:

UGG Lowered Their Cost of Risk. Insurance Premiums remained about the same. Better Coverage ... Lowered Cost of Debt Capital. Better Understanding of their ... – PowerPoint PPT presentation

Number of Views:100
Avg rating:3.0/5.0
Slides: 16
Provided by: ValuedGate741
Category:

less

Transcript and Presenter's Notes

Title: Insurance and Risk Finance 640


1
Insurance and RiskFinance 640
  • Class 19
  • December 1, 2004

2
Enterprise Risk Management
  • Traditional approach
  • Manage each type of risk separately (silo
    approach)
  • Enterprise risk management approach
  • Manage all risks in a unified framework
  • Focus more on overall firm risk
  • Some firms have established a new position chief
    risk officer

3
Enterprise Risk Management
  • Arguments for ERM
  • Process provides managers with a better
    understanding of the firms risks
  • Many of the reasons for managing risk suggest
    looking at an aggregate performance measure
    (e.g., cash flows)
  • Arguments against ERM
  • Too costly to implement

4
United Grain Growers Case
  • UGG was one of the first to use ERM
  • Background on UGG
  • Operates in western Canada
  • Provides services to farmers
  • Main business grain handling
  • Capital expenditure program replace old grain
    silos
  • Recently increased financial leverage

5
EBIT for UGGs Business Segments
6
The ERM Process
  • Formed a RM Committee
  • CEO, RM, CFO, Treasurer, Manager of Audit
    Services
  • Brainstorming session
  • Willis Corroon, RM committee, other employees
  • Identified 47 main risks
  • Six risks were chosen for further investigation
  • Environmental liability
  • Effects of weather on grain volume
  • Counter-party risk
  • Credit risk
  • Commodity price and basis risk
  • Inventory risk

7
Example of Analysis of each of the 6 Risks
8
Focus on Weather Risk
  • Ken Risko, statistician for Willis Risk
    Solutions, found weather was most important
    source of risk
  • Weather
  • affects Crop yields (Table 27.4)
  • which affects UGGs grain shipments (Table 27.1)
  • which affects UGGs gross profit (Table 27.2)

9
Removing Effects of Weather
10
Choices and their Disadvantages
Disadvantages
  • Retention
  • Weather derivatives
  • Insurance contract

Planned capital expenditures Increased
leverage Protect reputation
Basis risk (weather index ?crop yields ?shipments
?UGG profitability Thin market ? low
liquidity high costs
Moral hazard ? use industry volume Basis risk
(industry shipments ?UGG profitability) Thin
market ? low liquidity high costs Should UGG
integrate with other coverages?
11
What did UGG Do?
  • Purchased multi-year insurance contract
  • bundled PC coverages with grain volume
  • grain volume coverage based on industry
    shipments

12
Grain Volume Coverage
  • AvgShpmnts Average industry shipments in past
    five years (in tons)
  • Shpmntst industry shipments in year t
  • If Shpmntst lt AvgShpmnts, then a loss occurs
  • Magnitude of loss 25 (0.15) ( AvgShpmnts
    Shpmntst )
  • Coverage depends on loss subject to retentions
    and limits

13
Bundling of Coverages
Illustration of how coverage was bundled
14
Accomplishments
  • UGG Lowered Their Cost of Risk
  • Insurance Premiums remained about the same
  • Better Coverage
  • Better able to carryout strategic plan
  • Capital Expenditures
  • Lowered Cost of Debt Capital
  • Better Understanding of their risks

15
Lessons from UGGs Experience
  • Cooperation from many individuals
  • Buy-in from top managers was important
  • Technical expertise Willis
  • Patience ERM takes time it is on-going
Write a Comment
User Comments (0)
About PowerShow.com