Honeywell Inc Integrated Risk Management Case Solution
Zane Baity – International Finance and Risk Management – MIM 2019 – ESMT Berlin
1. What are the objectives of Honeywell's new risk management program?
The main objectives of Honeywell's new risk management program are as follows
a. The new Honeywell's new risk management protects against Honeywell's currency risk along with other,
more traditionally insurable risks, in a multiyear, insurance based, integrated risk management program.
b. The integrated risk management program or enterprise risk management would extend to cover all of
Honeywell's financial and operational risks; besides, it would establish Honeywell 's risk management
strategy for some years to come.
c. It aims to reduce cost by changing the retention method to the aggregate one for $30 million, this will lead
to reduction of the claim cost, including the premium cost that reduces up to 20%.
d. Presumably, Honeywell' s new risk management wants to reduce loss volatility . It can be tackled from a
number of different angles, one of them is via insurance with various retention level s and in this case, they
do it thr ough insurance. Claims can experience two kinds of volatility, in order to shield themselves from
volatility causing claims to increase unmanageable levels, companies usually purchase insurance plan wi th
a typically static retention level. In the new risk management program, they changed their retention level
from per occurrence to Aggregate.
2. Consider the proposed insurance contract that covers both currency and insurance risk. Aside from the
specific risks covered by the proposed contract, does it differ in other ways from Honeywell's old policy?
Yes, it is. The switch of retention level le ads to a better protection shield for any incurred loss faced by
Honeywell. As far as I understand, the retention level influences cu mulative loss amount at the end. For instance,
in the table below, I took an example for Auto risk from Exhibit 8 in the Study Case. The existing risk management
program, example 1, has per occurrence ret ention limit with the amount 3 million, so every loss/claim above 3
million will be steady at 3 million ( highlighted in red). The retention policy of 3 million will be in the same state until
it reaches maximum coverage.
The new integrated risk management system will be using aggregate retention , example 2, it works
similarly to per occurrence re tentions, but instead of limiting each loss/claim, the company decide s a total incurred
loss amount per policy period that they do not wish to pay more. As we can see, the company will stop to underwrite
the claim/loss when the cumulative retention reaches the aggregate retention or 30 million, albeit the company still
have several losses after it reaches 30 million. The aggregate retention of 30 million will be steady until it extends
the coverage limit.
Conclusion: Another distinction between existing policy and the proposed policy is the amount of the incurred
losses/claims that the company has to underwrite. As we see, under per occurrence retention level, with the same
number of losses, the company needs to pay for 44 million, meanwhile the aggregate retention reduced the total
losses retaine d by 14 million (44 million – 30 million).
Honeywell Inc Integrated Risk Management Case Solution
Source: https://www.studocu.com/de/document/european-school-of-management-and-technology/corporate-finane/honeywell-case-study-note-b/9914468