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

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

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

4. 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

5. 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

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

7. 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

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

9. Example: Strategic Alliance

10. Example: Strategic Alliance
AMEX/National West Announcement
Share Price Movement
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

11. 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

12. 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

13. 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
XYZ Co
Corp Level Business Objectives 3 2 7 1 4 8 5 6

14. 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.

15. 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.

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

17. 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

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

19. 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

20. Optimize Risk/Reward Trade Off

21. 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