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Risk management - a tool
to achieve success
Nina Kukuskina
Aon Latvia, CEO
©2005
Aon
Aon is a Fortune 500 company, based in Chicago
Listed in NY and London;
53,000 employees in 120 countries
World leaders in insurance broking and risk
management
o
o
o
©2005
In 1983 Aon set up a commercial property specialisation
Aon European real estate group set up in 1999, now has 80+
specialist staff, based in UK, Belgium, Chech Republic, Poland,
Hungary, France, Germany, Italy, Netherlands & Spain, Baltic
countries
Corporate member of FIABCI since 1999
Insurance Brokers
• Practitioners in Risk
• Intermediaries between risk takers and
risk carriers - insurers
• Needed to access some of the market
• Advisers on risk management strategy
• Should be regarded as part of your
professional team
©2005
Hold onto your hats there’s a lot of
ground to cover
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What is RISK?
Exposure to chance of
injury or loss
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RISK !
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Why manage risk...
• We always have!
• Formality will help to cope
with complexity
• In a competitive world - ever
smaller margins need to be
more robust
• Insurance may be impossible
without it
• It is good management
practice
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RISK !
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RISK MANAGEMENT
A four part process:
Risk analysis and
quantification
REVIEW
Elimination or
reduction of risk
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Transfer or retention
planning
Don’t worry - We’re Insured!
Insurance is no substitute
for effective risk
management
It will not cover all the loss
Insurance may not exist
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If you think that you are
protected by insurance
arranged by someone
else
Check it - quick!
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Risk Analysis
Types of Risk - insured or not?
– Material Damage - fire/corrosion
– Consequential - flood/latent defect
– Social - sudden pollution/public opinion
– Legal Liability - injury/deliberate act
– Political - terrorism/government policy
– Finance - credit/marketing errors
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Key elements Corporate Operations
Key Element
Description, notes
1
Business Development
Identification of opportunities, evaluation, bid preparation
2
Financing
Financial engineering, choice of vehicle, tax
3
Approvals
Political
4
Joint ventures
Preparation, engagement, negotiation, formation, operation,
exit; capabilities of joint venture partners; customer alliances
5
Asset management
Investment management, conflicts of interest
6
T echnology
IT systems, communication
7
Human Resources
Skills, locality
8
Management
Resources, systems, processes, controls, change management
9
Legal & compliance
Integration with business, contracts (general issues),
compliance and due diligence issues not covered elsewhere
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10
Specific projects
Project-specific issues, financial arrangements
11
Country issues
Issues specific to individual countries not covered above
12
Other issues
Intellectual capital, conflicts of interest, other issues
Element
Description, notes
Feasibility
phase
Initiative/concept
Feasibility
Key elements
Project definition/refinement
Conceptual design
Design phase
Planning and permits
Pre-design
Budgetting
Analysis - Project Management
Letting and project finance
Final design
phase
T ender specification
Modification/
Decommission
phase
Post
completio
n phase
Pre construction
Detailed specification
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Contract awards
Preliminaries & logistics
Undertaken by a small project group
Construction
Commissioning & handover
Occupation
Maintenance
Property management
Modification/refurbishment
Decommissioning &
demolition
The Gap!!!
The Developer
The Contractor
Everyone has their own agenda
The Banker
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The Tenant
Categories of risk
•Performance risks
•Liability risks
• Design risks
•Performance risks
Strategic
•Financial risks
•Liability risks
Market
•Procedural risks
•Information risks
•Availability risks
Economic
Organization
•Political risks
Political
•Performance risks
•Property risks
•Construction risks
•Design risks
Processes
& assets
Society
Human
resources
•Labour risks
•Liability risks
•Information risks
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•Crime risks
•Liability risks
•Social risks
Nature
•Natural risks
•Property risks
•Construction risks
•Liability risks
INTERNAL THREATS
EXTERNAL THREATS
Likelihood Analysis
RatIng
LIKELIHOOD
The potentIal for problems to occur In a year
A
VERY HIGH: Almost certain, will occur at least several times per year
B
HIGH:
C
MODERATE: Possible, may arise at least once in a one to ten year period
D
LOW:
Likely to arise about once per year
Unlikely but not impossible, likely to occur during the next
ten to forty years
E
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VERY LOW:
Rare, very unlikely during the next forty years
Impact analysis
Rating
Financial
Safety
Public Image & Reputation
Performance
A
(Catastrophic)
Direct loss or
opportunity cost of
> £x million
Sustained negative
return on
investment or
negative growth
Multiple fatalities
of staff, agents
or public
Major milestone or
deadline missed by >
1 year
Major adverse quality
problem
Failure to achieve
performance goals
B
(Major)
Direct loss or
opportunity cost of
£x – y million
Negative return on
investment or
negative growth in a
period
Direct loss or
opportunity cost of
£x – y million
Zero return on
investment or
growth
Single fatality of
staff, agents or
public
Adverse global/national
media coverage
Parliamentary inquiry
Major public concerns
raised
Major loss of shareholder
support
Stock Exchange suspends
share trading
Adverse national media
coverage
Significant decrease in
shareholder support
Stock Exchange required
immediate press statement
Serious health
impact on
multiple
members of
staff, agents or
public
Adverse local media
coverage
Concerns on performance
raised by shareholders
Major milestone or
deadline missed by 3
– 6 months
Some reduction in
performance
Direct loss or
opportunity cost of
£x – y
Lower return on
Serious health
impact on one
person (staff,
agents or public)
Intra-industry knowledge
of incident, but no media
attention
Marginal decrease in
Major milestone or
deadline missed by 1
– 3 months
Minor performance
C
(Medium)
D
(Minor)
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Major milestone or
deadline missed by 6
– 12 months
Failure to achieve
some performance
targets
Environmental &
Community
Catastrophic
irreversible
environmental harm
Community outrage –
potential large-scale
class action
Major environmental
hazard caused – long
term recovery
High profile community
concerns raised –
requiring significant
rectification measures
Measurable
environmental harm –
medium term recovery
Community complaints
voiced privately –
minor rectification
measures required
Medium term,
immaterial effect on
environment/communit
y – required to inform
Employ
A larg
numbe
key
executiv
direct
leave
compa
Some
execut
leav
Compan
perceive
Employ
Choic
Poo
reputatio
an empl
General
mora
proble
A ke
Risk Map
LOSS AMOUNT
High
Acceptable
10.000.000
Continuous
improvement
Not
acceptable
1.000.000
Medium
100.000
Low
10.000
1.000
1/10
1
10
100
1.000
LOSS FREQUENCY per year
LIKELIHOOD
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Low
Medium
High
Expected loss
< $100.000,-Expected loss
from $ 100.000,-to $ 1.000.000,-Expected loss
> $ 1.000.000,--
Good Risk Management
•
•
•
•
•
Keep it Simple
Be Honest about Risk Awareness
Implement Fundamental Controls
Maintain Awareness of Business Objectives
Set up Early Warning Mechanisms and
Quick Response Strategies
• Regular Consultation with Project Team
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Case Study
Inner-City regeneration project
– Ministry of Transport are building underground motorway
and tramway alongside existing below-ground railway system
– Railway company is constructing new station complex (train,
tram, bus, taxi, metro)
– The site will be covered by a concrete raft
– The resulting new free-standing surface is being offered for the
following uses: offices, retail, housing, public areas, leisure &
entertainment (a new city within a city)
– Site use: 50 % of area remains in public ownership, balance
passes to private ownership, on 999 year lease
– Potential office development of 20,000 sq. m
– Full design team with standard construction by a main
contractor
– Planning permission is anticipated
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The Workshop Teams
B = Bankers
C = Contractors
D = Developers
Assignment:
- What are the goals?
- Establish risk profile
- Prioritize risks using the risk map
- Set up recommendations for top risks
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A Summary of the results from the
Chartered Surveyors Livery Company,
City Seminar - January 2005
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The Bankers
• Goals
– Lend to successful developer
– Achieve good return to reflect risk
– Have reliable exit strategy
– Repeat business
• Threats & Key risk controls
1 - Planning application fails
2 - Interest rate rise and inflation risk
Hedge
3 - Market conditions deteriorate
4 – Failure of Developer/Contractor
Examine track record & financials/Proof of Pre-let /Parent Guarantee
5 - Major loss is uninsured
Involve insurance broker from the start to protect own interests
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Risk Map
LOSS AMOUNT
High
10.000.000
2
4
3 5
1.000.000
Medium
Expected loss
< $100.000,--
Continuous
improvement
Expected loss
from $ 100.000,-to $ 1.000.000,--
Not
acceptable
1
100.000
Low
Acceptable
10.000
1.000
1/10
1
10
100
1.000
LOSS FREQUENCY per year
LIKELIHOOD
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Low
Medium
High
Expected loss
> $ 1.000.000,--
The Contractors
• Goals
– Make a profit
– Deliver on time (enhance reputation)
– Ensure correct quality with no defects
– Maintain a safe site
– Gain repeat business (develop long-term relationship)
• Threats & Key risk controls
1 - Disruption from other works
2 - Damage to other works - esp. railway
Regular monitoring process/ Professional Liability Insurance
3 - Supply of labour /materials
Framework Agreements
4 - Sub-contractor failure
Know your client
5 - Client insolvency
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Risk Map
LOSS AMOUNT
High
10.000.000
1.000.000
Medium
5
100.000
Low
10.000
Acceptable
Expected loss
< $100.000,--
Continuous
improvement
Expected loss
from $ 100.000,-to $ 1.000.000,--
Not
acceptable
2 1
4 3
1.000
10/1
1
10
100
1.000
LOSS FREQUENCY per year
LIKELIHOOD
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Low
Medium
High
Expected loss
> $ 1.000.000,--
The Developers
• Goals
– Obtain satisfactory planning permission
– Secure a pre-let
– Obtain funding
– Control costs
– Maximise profit
– Completion on time
• Threats and Key risk controls
1 –Delayed completion
Adequate and effective project management
2 - Deterioration in office letting market ( Failure to attract/keep tenant)
3 - Contractor insolvency
4 – Exceeded budget: interest increase/ cost
Manage interest rates risks/ tight cost control
5 - Stability of professional team
6 - Catastrophic uninsured losses
Use insurance broker to get the best available insurance cover
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Risk Map
LOSS AMOUNT
High
Acceptable
6
10.000.000
Continuous
improvement
Not
acceptable
1.000.000
1 2
Medium
100.000
Low
3
10.000
1.000
4
5
1/10
1
10
100
1.000
LOSS FREQUENCY per year
LIKELIHOOD
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Low
Medium
High
Expected loss
< $100.000,-Expected loss
from $ 100.000,-to $ 1.000.000,-Expected loss
> $ 1.000.000,--
BANKERS
2
4
3 5
CONTRACTORS
5
1
2
1
4 3
6 DEVELOPERS
Interesting how
their perceptions
differ
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12
5
4
3
A Warning!
Analysis without ownership is -
WORTHLESS
©2005
Risk in your business
is
your business
It might also be the end of it!
Take it seriously
©2005
Further information
Contact us at
telephone
fax
e-mail
Aon Latvia
+371 789 2551
+371 789 2552
[email protected]
Regular Property Risk Management updates:
www.aonproperty.com
©2005