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- Honeywell is a market leader in control systems and air conditioning products with $7.3 billion in annual sales and 53,000 employees in 96 countries.
- Currently Honeywell manages different risks like currency, insurance, pensions, etc. through separate departments, but is considering a new integrated risk management program.
- The proposed program would handle all risks through a single portfolio instead of separate departments, and could save 5-24% on costs while reducing risk volatility by 76% compared to the existing approach.
- Honeywell is a market leader in control systems and air conditioning products with $7.3 billion in annual sales and 53,000 employees in 96 countries.
- Currently Honeywell manages different risks like currency, insurance, pensions, etc. through separate departments, but is considering a new integrated risk management program.
- The proposed program would handle all risks through a single portfolio instead of separate departments, and could save 5-24% on costs while reducing risk volatility by 76% compared to the existing approach.
- Honeywell is a market leader in control systems and air conditioning products with $7.3 billion in annual sales and 53,000 employees in 96 countries.
- Currently Honeywell manages different risks like currency, insurance, pensions, etc. through separate departments, but is considering a new integrated risk management program.
- The proposed program would handle all risks through a single portfolio instead of separate departments, and could save 5-24% on costs while reducing risk volatility by 76% compared to the existing approach.
processing and heating and air-conditioning products Market leader with 53.000 employees Managing operations in 96 countries Sales of $7.3billion and net income of $402million Case Problem Exiting Program : Proposed Program :
Different types of risks handled separately by different departemens
Enterprise risk management handling all risk within a single porfolio
Should Honeywell proceed with the new integrated risk management program?
Comparison Of old vs New Program Exiting Program : Different types of risks handled separately by different departemens Proposed Program : Enterprise risk management handling all risk within a single porfolio Comparison of savings & protection Exiting Program Proposed Program % Change Total Retained Loss 27.545.737 26.135.432 -5% Premium Paid 11.236.00 8.509.000 -24% Total Expected Cost of Risk 39.781.737 34.644.432 11% Standar Deviation of Total Cost od Risk 15.793.879 3.819.568 -76% Why Are these savings possible? Combining the deductibles allocating funds in line with immediate needs Netting off diverse risks offsetting risks that are mutually exclusive How Can insurers provide such discounts? Reduction in risk goes both ways since volatility is reduced, the premium required will fall Competitive pressures large firms have a greater capacity to self insure The possibility of taking over all accounts Why are these savings possible? Combining the deductibles allocating funds in line with immediate needs Netting off diverse risks offsetting risks that are mutually exclusive
How can insurers provide such discounts? Reduction in risk goes both ways since volatility is reduced, the premium required will fall Competitive pressures large firms have a greater capacity to self insure The possibility of taking over all accounts
Why should Honeywell adopt IRM? A similar approach already effectively adopted for mitigating currency risks Plans for expansion in the future Potential for furher cost reductions Synergies Efficiency improvements through reduced complexity Strengthening competitive position through pioneering the new approach What needs to be done? Reorganizing the different risk management teams into one cohesive units Setting new roles & responsibilities Obtaining employee support Honeywell, Inc Market leader with 53.000 employees Managing operations in 96 countries Sales of $7.3billion and net income of $402million Producer control systems and product air conditioning for incommercial buildings and avionics system
Risks Faced by Honeywell Problem Statement Tradionally Insured (i.e Hazzard) Risks Treasury - Insurance Risk Mgmt. Unit Currency Risks Treasury - Financial Risk Mgmt. Unit Other Financial (interest rate, credit and liquidity) Risks Treasury - Financial Risk Mgmt. & Capital Markets Unit Pension Fund Risk Financial Dept. Operational Risk Operating Units Credit Risk Operating Units Environmental Risks Health, Safety and Environment Dept. Legal Risks Office of General Counsel Market Risks Marketing Mgmt. Problem Statement i. Capital market unit which managed the Capital structure and Liquidity risk ii. Cash management unit managing the cash requirements iii. Financial risk management unit which managed the Currency ,Interest rate r and Credit risk Currency hedging operations were independent of any other hedging or insuring carried out in other parts of the firm Used at-the-money options Used basket-option of 20 currencies that matured quarterly These 20 currencies represented 85% of HWs foreign profits Provided protection when UD$ strengthened against the currency basket
Problem Statement iv. Insurance risk management unit which managed risk generally covered by insurance. Used separate annually-renewable insurance policies for each type of insurable risks Each policy had specified deductible (retention) in an amount ranged between 0 and $6 million HW would absorb losses up-to retention level before calling insurance company for any claim Each loss was subject to separate retention HW paid a new deductible for each loss that occurred
New Risk Management Program First of its kind Provided combined protection against HWs currency risks along with other traditionally insurable risks Multi-year Insurance based Integrated risk management program Would extend its innovation into the financial arena
New Risk Management Program Featured included : Traditionally insured risks should be consistent with currency risk management program Monthly cross-functional meeting to interact with two groups to understand the others tasks Multi-specialty team: insurance unit + currency risk management team All members were named as member treasury management team
New Risk Management Program Challenges to the program include: New program to provide.., Equal or greater level of earnings protection Total cost is less than existing program costs Flexibility to incorporate additional risks in the future Comply with all accounting standards Finding optimal risk management structure
Integrated Risk Management Program
Specific risks covered in the program included : Global general liability Global products liability Global property and business interruptions Global fidelity Global employees crime Global ocean marine transit Global political risk Director and officer liability US auto liability US workers compensation Foreign currency translation Aviation product liability (covered under a separate $1 bn per occurrence policy)
Analysis of the alternatives: Expected Loss Mean Std Dev. Of Expected loss Expected cost of risk Std Dev. Of cost of risk Value of Insurance under different probability of risk 14% 50% 84% General Liabilities 12.2 8.5 12.5 4.1 -4.7 -0.3 4.1 Property 1.1 5.5 4.5 4.5 0 -3.4 -2.4 Worker Compensation 11.2 2.5 11.2 2.1 -0.4 0 0.4 Auto 4.3 4.4 5 4.1 -0.9 -0.7 -0.4 D&O, Side B 0.3 4.4 0.4 0.8 0 -0.1 3.5 Currency Risk 4 3.3 5 0 -4.3 -1 2.3 Individual Risk Management value -10.3 -5.5 7.5 Conclusion The proposal of integrated insurance policy gives better benefits than individual risk management. It minimizes cost of risk and stabilizes earnings while forcing consistency in risk management in different segments of risks and addressing specific needs of different risks. So, Honeywell should go for new policy of risk management.
Integrated risk management Advantages Minimizes cost of risk when probability of risk approaches to 50% Provides higher level of earnings protection by minimizing variability in earnings Disavantages Being first firm to introduce this innovation, firm runs in risk of innovation Brings down coverage significantly
Individual risk management Advantages- Meets needs of individual risks by providing customized solution for each risk No risk of relying upon single insurance provider as it has flexibility to distribute risk of insurer to different players Higher risk coverage as it has higher limits for different risks whose total is much larger than new options $ 100 million Disadvantages Higher cost of risk as probability of risk approach to mean Pays higher premium