Enterprise Risk Management– Fad or Fact? Wolfgang F. Friedel President and CEO Zurich IC Squared

Enterprise Risk Management - Fad or Fact? “Insanity is doing the same thing and expecting different results” Albert Einstein

Enterprise Risk Management– Fad or Fact? Fad if we do the same thing and…… Fact if we are creating value for stakeholders

Creating Stakeholder Value – Fad or Fact? What do you do to create value? What can happen to destroy value? What degree of confidence do you have in the estimated distribution of outcomes? Source: The Value Reporting Revolution Risk is an Investment

The “Risk is an Investment” Paradigm Increased Stakeholder Value Communicate Risks, Opportunities and Actions Create sustainable Competitive Advantage (identify, quantify and model risks and opportunities) Risks can create value Risk is an Investment Risks can destroy value

Stakeholder Value Creation Process Identification Stakeholder Value Creation Implementation/ Measurements Cultural Buy - in Operational Hazard Strategic Financial Performance Communication Measurement/ Prioritization Execution Plans

The IC2 “Reward - Risk Continuum” Risk Mgmt. / Int. Audit COO, CFO, Treasurer Board, CEO, CRO Uncertainty (Variance) Reward Risk Hazard Financial Operational Strategic Adopted from PWC

Enterprise Risk Management – The Challenge High Operational Strategic Financial Impact Hazard Financial Low Easy Difficult Complexity to Manage

Example: Strategic Alliance

Example: Strategic Alliance AMEX/National West Announcement Share Price Movement 1990-1996 Harvard/Yale Study of 1000 Alliances Showed Statistical Evidence of Positive Share Price Movement Share Price SAMPLE - VALUE CREATION ON DAY OF ANNOUNCEMENT Alliance $Billions Mobil/BP $5.7 Merck/RPR $5.3 HP/Microsoft/ Oracle/Netscape $3.8 GE/Pratt & Whitney $1.9 Millennium/AHP $1.0 December, 1996 Sources: WSJ & Booz Allen & Hamilton

Example: Strategic Alliance 100% SUCCESS RATES IN ALLIANCES 90% 80% 70% 60% Alliances 50% 40% Leveraging Risks 30% 20% 10% 0% Low Skilled Alliance Firm High Skilled Alliance Firm Source: Booz Allen & Hamilton studies of 2000 U.S. firms 1993 to 1998 (covering 10,000 alliances) & Association of Corporate Growth January 2000 survey of alliance practices at 1300 companies

Example: Business Model Based on Perception 60 to 20 in 12 = ($38b) 39 to 19 in 9 = ($150b) -42% in 1 It’s the business model, stupid! Geoffrey Colvin, Fortune Magazine

Business Profile Business Profile Low High A B C D E F IV III II I 3 2 Financial Impact Likelihood A B C D E F IV III II I Company: Scope: Analysis Date Low High 14.04.2000 XYZ Co Corp Level Business Objectives 3 2 7 1 4 8 5 6

Collaboration is an innovator 60% Rule For over 60% of identified issues, common - sense based action plans can be agreed upon without any need for further costly research or time consuming and file filling documentation.

Collaboration is an innovator 40 % Rule The balance of issues requires additional input, data, information or consideration before execution plans are developed. Most frequent issue is the inability of the team to conclusively quantify financial impact and likely hood of occurrence.

Dynamic Modeling: 40 - 80 High Operational Strategic Financial Impact Hazard Financial Low Easy Difficult Complexity to Manage

Dynamic Modeling - Structural View Model = Selected Variables Identification, simplification … and their dependence Modeling interactions Simulation = Evolution over time Number crunching Improved decision speed & capability Evaluation EXTERNAL, e.g. Stochastic Dependence Functional Dependence Correlation path by path (Monte Carlo) or all paths at once (Markov Chain) high performance software (speed is essential) Optimal reward / risk trade-off Evaluating alternative business models Break even analysis etc... Economy Competition Customers INTERNAL, e.g. Strategy Resources Cash Flow

so what! Data, data, data, data! “Insanity is doing the same thing and expecting different results” Albert Einstein

Projected Year End Profit Dynamic modeling -300 -100 100 300 500 Projected Year End Profit Profit (US $ ‘000) Probability Strategy 3 Strategy 2 Strategy 1 Strategy 2 Strategy 1 Strategy 3 = 90% Confidence outcomes

Optimize Risk/Reward Trade Off

Risk is an Investment The New Game Time is an Ally Creating exponential results through understanding rewards and their risks and communicating related strategies to achieve sustainable value for stakeholders. FAST! Time is an Ally