How to replace qualitative guessing with a capital view A look into - - PowerPoint PPT Presentation
How to replace qualitative guessing with a capital view A look into quantitative based ERM programs February 14, 2017 Agenda 1. Who is Highmark Health? 2. Highmark Health Risk Management & Capital Allocation, how is our ERM program
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All remaining data within this presentation is fictitious and for example purposes only.
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Risk Management Function
Capital Risk Management Enterprise Risk Management Insurance Management Business Continuity & Resiliency
Corporate Legal Function
Corporate Audit Function
Internal Audit Government Compliance Integrity & Compliance Provider Fraud & Investigations
Litigation Management Privacy Corporate Governance Business Services
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(with quantitative metrics & limits)
(with approval authority for investment & strategy)
(or Delegate Committee)
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8 Credit: Kevin Rudy (the Minitab Blog), Based on US hurricanes from 1950 to 2012, N=92, Normalized Damage is in $B, Katrina and Audrey excluded
9 Business Plan (50% prob.) Earnings at Risk (EaR) 1-in-10 (10% prob.) Solvency Level (REC) 1-in-200 (0.5% prob.)
Segment
Financial Statement Line Expected Result Volatility Potential Deviation
Product 1
Product Revenue $ % $ Product Expense $ % $ Admin Expense $ % $ Balance Sheet $ % $
Product 2
Product Revenue $ % $ Product Expense $ % $ Admin Expense $ % $ Balance Sheet $ % $
Product 3
Product Revenue $ % $ Product Expense $ % $ Admin Expense $ % $ Balance Sheet $ % $
Diversification (not everything goes good or bad at once)
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$8.50 $8.00 $6.50
GAAP Equity Available Economic Capital (AEC) Required Economic Capital (REC)
$1.5 B Capital buffer Difficult to Access Assets (i.e. Goodwill, PP&E, & Restricted Assets) Available assets Shown in $ billions
The capital we have available to invest in the business and absorb risk. The potential variation in our earnings and balance sheet based
plan. Risk Measures Calculation What is it for? Capital Buffer AEC – REC Expressed in $ What is our remaining capacity for risk taking? Return on Risk Adjusted Capital (RAROC) Earnings / REC Expressed as % What is the return for the risk we are taking? Economic Value Added (EVA) Net Operating Profit – (Hurdle Rate X REC) Expressed in $ What accretive value will the investment contribute to the enterprise?
11 1- https://www.bloomberg.com/news/articles/2017-01-03/ford-cancels-1-6-billion-mexico-plant-after-trump-s-criticism 2- Ford Motor Company December 2016 Sales Release 3- https://www.iea.org/publications/freepublications/publication/Global_EV_Outlook_2016.pdf
Consolidate Ford Focus production in the Flat Rock & Hermosillo plants into the new San Luis Potosi plant for $1.6B in capital1 [and maintain vehicle production.]
Consolidate Ford Focus Flat Rock plant into Hermosillo [and reduce vehicle production]. Invest $700M in capital in Flat Rock plant to add autonomous hybrid and electric SUV line.1
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Questions How risk measures can bring insight? Which investment improves the overall return of our business portfolio?
each option.
How much investment capacity is left for other initiatives?
each option.
diversification effect of each
If things go bad, how bad will they be?
(bad).
(really really bad). If we make a bet on a new car type, how big should that bet be?
needed for other initiatives?
deviation can the plan absorb?
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The Chronical of Higher Education: Why a Novel Way to Pay for College Appeals to Conservatives
Segment
Sub Segment Expected Result Invested Capital Volatility RAROC EVA REC
Engineering Programs
Mechanical $ $ % 5% $100 $ Electrical $ $ % 7% $200 $ Chemical $ $ % 10% $50 $ Computer $ $ % 9% $25 $
Business Programs
Accounting $ $ % 6% $400 $ Marketing $ $ % 2% $10 $ Business Logistics $ $ % 8% $50 $ Actuarial Science $ $ % 9% $15 $
Social Science Programs
Social Work $ $ %
$-150 $ Psychology $ $ %
$-50 $ Education $ $ % 1% $100 $ Anthropology $ $ %
$-25 $
Diversification (not everything goes good or bad at once)
Overall Portfolio $ $ % 3% $200 $3,000
is left to support students?
that support our mission?
education programs to produce better graduates?
graduates’ futures?
increase financing of a degree program?
stable in the future?
internal capital to sustain and grow itself?
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How much D&O coverage should we have (from a Board Member)? How do we deal with the risk of cyber events? We cannot buy enough coverage! What should we include in our budget for expected losses this year? We need to reduce administrative costs, how can we cut insurance premiums? Is there a better way than benchmarking to make sure our exposures are covered?
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Minimum 1st Quartile Median Average 3rd Quartile Maxiumum Company X Limits 5 20 30 38 40 140 40 Retention 10000 150000 200000 250000 275000 1000000 200000
$0 $200,000 $400,000 $600,000 $800,000 $1,000,000 $1,200,000 $0 M $20 M $40 M $60 M $80 M $100 M $120 M $140 M $160 M
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$4.0 M $3.0 M $2.5 M $2.0 M $1.0 M $1.5 M $3.5 M $8.0 M $7.0 M $6.0 M $5.0 M $1.0 M $2.0 M $1.5 M $0 M $2 M $4 M $6 M $8 M $10 M $12 M $14 M No Insurance Policy A Policy B Policy C
Expected Retained Losses Estimated Premiums Cost of Volatility "Value"
Comparative Cost of Risk example is derived from Willis Towers Watson output from PRISM model.
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