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Enterprise Risk Management - Final Case Study

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Ian Hopkins

Enterprise Risk Management RMI 5401

Final Assignment – Individual

March 6, 2016

Sherman-Wayne Case Study

As an analyst sitting under the office of the Chief Risk officer I have been asked to complete an assessment of Sherman-Wayne (SW) Enterprise Risk Management program.  In doing so we will to at a minimum identify, define, and suggest improvements in several areas of SW’s ERM program to assist in building a more efficient method to achieve the goals of the organization.

Risk Financing Goals

With risk financing being on the forefront of our project we have broken out four risk financing goals for Sherman-Wayne.  Along with each goal we have provided commentary for our reasoning.

  1. Pay for losses

With this goal in mind, simply put ensuring the funds available to pay for losses, pure or speculative.  Having and retaining the capital, or the ability to access to capital, is critical to an ERM program – without this access/pay out function Sherman-Wayne’s business operations could be detrimentally effected.  It is particularly important to achieve this goal when speaking to adverse situations that disrupt normal business activities, for example a damaged property event where restoration, operations, and public image issues could snow ball quickly.  This goal is to include:

  • Paying for actual losses/retained losses (i.e. retention & self-insurance)
  • Transfer costs (losses paid by insurer, but insured pays for transferring risk)
  • Hedging costs hedge against exchange rate risk

  1. Manage cost of risk

As a risk management analyst we must always be prudent in wearing our cost of risk hat.  By establishing and achieving a cost effecting risk management program is an exhaustive & thorough process that ties any endeavors we undertake directly to the bottom line.  All is done with the overall goal of our organization seeking to minimize the cost of risk.  We can break down the cost of managing risk in to 3 main categories:

  • Administrative expenses – more often than not these expenses are going to be unavoidable.  The potential for savings here exists in the ability for Sherman-Wayne to modify or eliminate unneeded, outdated, repetitive, or overlapping procedures in our risk management flow chart.
  • Example - Internal admin & Purchasing services (staffing & maintenance costs)

  • Risk Control expenses – This category of risk management cost can be addressed on three fronts, mostly to limit loss exposure:
  • Reduce frequency – By taking actions which could quantifiably reduce how often risk events could take place Sherman-Wayne is securing a lower cost alternative.
  • Reduce severity – Potential downside cost must always be a cause for concern and identifying which risks (risk heat map) could have the greatest potential cost, and devising ERM strategies around those is an effect control tactic.
  • Increase predictability (defining tolerable uncertainty) – Sherman-Wayne business operation are built on assumptions & predictability.  By incorporating a predictability element to the ERM platform they will be able to have a stronger hold on their cost structure, which will allow for more effective capital use in the revenue generating business.

All three factors above must be engaged in a situation where the benefit of risk control measure is greater that it’s cost (Pi > Pe).  A great example for Sherman-is the pending Product Liability SIR issue where the cost looks to be greater than the benefit available in the market.  Finding a work around to this will be a key to driving success.

  • Risk financing expenses – Again these are typically unavoidable costs that are incurred to manage risk financing tools and mechanisms.  Generally these can be defined as transaction costs (i.e. premiums), broker commissions (insurance placement agents), and fees associated with completing transactions in the marketplace.  These costs are contingent on the measure chosen, as well as being market dependent.  In any given condition, industry, or economic environment risk financing expenses may become quite costly.  

Sherman-Wayne would look mitigate these costs by exploring all options and providers of services, by shopping around to different broker & insurance providers we will be able to find the most cost effective and properly placed coverages.

  1. Manage cash flow variability 

This category will be heavily dependent on risk appetite of Sherman-Wayne.  What we know is that SW is a very strong cash flow based company with a growing EBITDA with a 2015 figure of $800mm, based of $4 billion revenue figure.  EBITDA’s growth outpaced revenue growth, ~9% vs. 7.5%.

What risk appetite is allowable will be measured even further based of several points of influence:

  • Organization's size
  • A growing organization 1,400 consumer /contractors strong that currently operates in 3 countries is a sizable business, but on a multinational is moderately sized.
  • Financial strength
  • Touched on previously, we know that SW operates a profitable business with a strong income statement (only statements made available)
  • Risk tolerance – management
  • Management has a strict dedication to ERM, and by way of SW’s financials we see that risk tolerance is on the lower end of the spectrum.  Managements, specifically the CEO has made it evident the stakeholders are not willing to accept a high level of risk.

  1. Managing appropriate level of liquidity

Liquidity & availability of credit can be seen as the lifeblood of a company from a financial standpoint.  Arguably so the statement of cash flows could be the most important financial statement to the overall continuous operation & success of Sherman-Wayne.  If liquidity and credit were to dry up business operations as they stand could cease, and the viability of the company could & would come into question.  Risk plays a huge part in this assessment and but successfully managing the level of liquidity necessary to not only operate, but operate efficiently & profitably will be a key goal.



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