ROLE OF INSURANCE MANAGEMENT IN ERM

1. ROLE OF INSURANCE MANAGEMENT IN ERM The 2nd International Istanbul Insurance Conference Insurance Practitioners’Association Dr. Tamer Saka, Managing Director of Willis London 01/10/10

2. AGENDA • What is Enterprise Risk Management ? • Why is Enterprise Risk ManagementImportant? • Process of Risk Management • Role of Insurance Management in ERM 2

3. Risks are embedded throughout the businesses. ‘Playingsafe is probablythemostunsafething in theworld. Youcannotstandstill. Youmustgoforward. ’ Robert Collier, 1885 – 1950 3

4. Risk management failure has been the cause of most recent industry losses. • Missing the underlying issues – management problems, control weaknesses, failing models – can lead to adverse financial impact and reputational damage to the Company. 4

5. Enterprise Risk management is a ... “process, effected by an entity’s board of directors, management and other personnel, applied in strategy – setting and across enterprise,designed to identifypotential events that may affect the entity, and managerisk to be within its,risk appetiteto provide reasonableassuranceregarding the achievement of entity objectives.” 5

6. Elements of Enterprise Risk Management • A process, ongoing and flowing through an entity • Effected by people at every level of an organization • Applied in strategy setting • Applied across the enterprise, at every level and unit, and includes taking an entity level portfolio view of risk • Designed to identify potential events affecting the entity and manage risk within its risk appetite • Able to provide reasonable assurance to an entity’s management and board • Geared to the achievement of objectives in one or more separate but overlapping categories – it is a means to an end, not an end in itself 9

7. Why is Enterprise Risk ManagementImportant ? ERM makes your business more‘visible’. Are we taking the right risks? Arewetakingtherightamount of risks? Do wehavetherightprocessestomanagerisks? 6

8. Why ERM ? • Are we aware of our risks and do we prioritize them? • How are our risks related to our targets and goals? • Do these risks add value to our business, bring in competitive advantage? • Do we recognize that business is about taking risks and do we make conscious choices concerning these risks? Are wetaking the right risks? • Are we getting a return that is consistent with our overall level of risk? • Does our organizational culture promote or discourage the right level of risk taking a • activities? • Do we have a well defined organizational risk appetite? • Has our risk appetite been quantified in aggregate and per occurrence? • Is our actual risk level consistent with our risk appetite? Are we taking the right amount of risks? Do we havetheright processes to manage risks? Are our risk management processes aligned with our strategic decision-making process andexisting performance measures? Are our risk management processes coordinated and consistent across the entire enterprise? Does everyone use the same definition of risk? Do we have gaps and/or overlaps in our risk coverage? Is our risk management process cost effective? 7

9. ERM is The Most Cost-Effective Strategy for… • Improved Business Performance • Optimize Risk Management Cost • Competitive Advantage • Reduced Surprises and Losses • Regulatory Compliance • Protected Reputation and Brand Image • Aggregate Risk Transfer and Acceptance • Management of Enterprise-wide Risks 8

10. ERM Scope 10

11. Critical Success Factors • Be empathetic to Business People, Help to implement actions • Focus on both “opportunities” and “threats”, not only on threats! • Recommendations must be practical and down to earth • Focus on quantifiable and easy to understand benefits first (insurance, IT security, brand etc.) • Systematic and continuous, disciplined risk management activities • Try to show your value in terms of $ • Implementing risk management based performance measurement • Acceptance and commitment from the mid-level managers 10

12. RisksWe Face Are Enormous Finansal Risks Operational Risks External Risks Customer Satisfaction Human Resources Product/Service Dev. Efficiency Capacity Process Mng. Partnership Concentration Business Interruption Prod/Serv.Quality Env. Health Workers’ health and Safety Brand Management Information Technology Information Security Pricing Employee Commitment Tax Authority and Limit Supply Performance Management Communication Foreign Currency Interest Rate Liquidity Credit Financial Instruments Investment Portfolio Insurance Equity Price Commodity Price Competitor Legal and Compliance Shareholder Political Economical Customer Trends Change Mng. Natural Disasters Industrial Strategic Risks Investment Evaluation Business Model Business Portfolio Budget and Planning Organizational Structure 11

13. 1 2 3 Process of Risk Management 13

14. Alternative Risk Management Strategies Reduce Exploit Transfer Retain Avoid Divest Prohibit Stop Target Screen Eliminate Allocate Diversify Expand Create Redesign Reorganize Price Arbitrage Influence Insure Reinsure Hedge Securitize Share Outsource Indemity Disperse Control Accept Reprice Self Insure Offset Plan 13

15. Insurance Risk Management 14

16. Insurance Management as a Part of ERM Step-1 Developing Common Risk Universe and Risk Management Policies and Procedures Step-2 Identification of risks which organization currently faces (Internal-External, Financial- Operational- Strategic, Pure-Speculative etc) Step-3 Identification of Current Level of Risks (Exposure, Volatility, Probability, Impact, Time Horizon, Correlation, Capital, Business Plans…etc) as High- Medium-Low or Acceptable-No acceptable etc. Step-4 Defining of Risk Tolerance Levels Step-5 Defining and Analyzing of the Gap Between Current Level of Risk and Company’s Risk Tolerance Levels Step-6 Developing of Risk Management Solutions to be able to reduce gaps to desire levels (Cost of Risk & Benefit of Solutions) 14

17. Insurance Management as a Part of ERM Step-7 Defining of needs of Insurance types (All Risk PD/BI, Liabilities, Marine&Cargo, Terrorism, Theft…etc) Step-8 Defining of Basic Elements of Program Structure (Values, Limits and Retentions) in line with outputs of Steps 4 and 6. Step-9 Defining of Wordings (Terms and conditions and clauses) • Step- 10 Selection of Insurer (Industry Rating, Claims Settlement ability, Sustainability of the company, Service levels & infrastructure etc) • Step-11 Choice of Intermediary (Representation of the insurance market, Knowledge of insurance amongst all industry segments, Service levels & infrastructure, Transparency and Trust…etc) • Step-12 Issuing Individual Policies • Step-13 Continuously Review and Monitor. (Existing Risk Control Measures Review. Risk inspection Risk Audit 14

18. Insurance Management as a Part of ERM STEPS 1 To 6 are relatively new perspective to managing insurable risks as a result of developments in ERM STEPS 7- 13 Traditional approach 14

19. Conclusion: Effective ERM can help organizations to; 1- better identify and prioritize risks 2- better link between risk management and insurance management 3- better risk management coordination between different locations, business units or departments 4- better understand “Aggregated Risks Exposure” 5- develop integrated insurance programs 6- have a systematic approach to manage insurances 7- saving money by better understanding risks and avoid unnecessary policies and create firm wide policies. 8- achieve lower P/L ratios 9- increase over risk ownership cross the organization 10-have better risk profile and have much better relationships with Insurance Markets 14

20. Thank You … Dr. Tamer Saka Managing Director Willis London