Honeywell proposed a new integrated risk management program to the Finance Committee that combined coverage for traditionally insured risks with currency translation risk into a single multi-year insurance policy. This proposed program was estimated to reduce insurance premium costs by 15-20% compared to Honeywell's existing separate risk management strategy. The integrated program had a single $30 million annual aggregate retention level rather than separate retentions for each risk. This portfolio approach to risk management was argued to provide adequate protection for Honeywell's risks while generating cost savings. The Finance Committee would decide whether to accept this new integrated strategy for managing Honeywell's risks over the next several years.

1. Honeywell, Inc. And
Integrated Risk
Management
Ape Syndicate
Yuliana Irmina 29110389
Decky Prasakti 29110391
Resti Athayani 29110402
Lamya Nur Zahidah 29110406
Harry Riusxander 29110408
Wisnumurti Rahardjo 29110412
Ronaldo Bagus Putra 29110404

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5. Inroduction
Past two years, member of Honeywell’s Treasury
Management Team in conjunction with :
•insurance specialist J&H Marsh & McLennan
• auditor Deloitte & Touche
• Insurance underwriter American International
Group (AIG)
 to create a new, more cost efficient method
for managing some of
Honeywell’s risk
Their proposal, the first of its kind, provided
combined protection against Honeywell’s
currency risk along with other, more
traditionally-insurrable risks, in a multiyear,
insurance-based, integrated risk
management program.

6. Inroduction
The Finance Committee’s vote depended on :
• whether the anticipated savings of the
program would be realized, and
• whether the coverage provided by the new
contract would be adequate
The Finance Committee’s
decision would estbalished
Honeywell’s risk
management strategy for
some years.

7. Business Description
• International corporation
• Employing 53,000 people
• Operate in 95 countries
• Largest proucer of control systems and products used
to regulate keating and air conditioning in commercial
buildings, and of system to control industrial worldwide,
and also leading supplier of commercial, military, and
space avionics systems

8. Honeywell’s Risk Management Review

9. Treasury’s Role in Risk Management
Treasury Group
• Capital Structure Risk
• Liquidity Risk
Capital Market
Unit
Cash
Management Unit
• Currency Risk • Credit Risk
• Interest Rate Risk
Financial Risk
Management Unit
• Traditional Risk Covered by Insurance
Insurance Risk
Management Unit

10. If the US dollar strengthened against the basket
20 currencies that matured quarterly
Represented 85% of foreign profits
The notional amount was typically 80%-90% of
the upcoming fiscal year’s total exposure
The basket option was constructed to weight the
currencies of the countries more heavily than
other countries
Treasury’s Role in Risk Management
Basket options

11. “Risk
manage
separately”
Honeywell’s
Existing Risk
Management
Strategy
Risk Management
Objective
“minimizing earnings
volatility and cost of risk”
ERM or
Integrated
“Portfolio
Effect”
Re-thinking Risk Management within Treasury

12. • Manage risk separately with an individual insurance
policy
– Grouping many risk together into a portfolio of risks
rather than managing each risk separately.
– Based on financial portfolio theory : when stock are
less than perfectly correlated, the total risk of a
portfolio will be less than the sum of the risk of each
individual stock
– Total risks exposure will be reduce, thereby
warranting a lower premium from the underwriter
who would then assume the risk of the entire
portfolio
Re-thinking Risk Management within Treasury

13. • Discuss possible design : Combine the
traditional hazard risk with foreign-exchange
translation risk within a unified multiyear
policy
– Expected annual cost savings would include a
reduced premium as portfolio effects across
traditional insured coverage, across multiple
currencies and across multiple years led to
decreased volatility
Re-thinking Risk Management within Treasury

14. Re-thinking Risk Management within Treasury
• The traditional insurance based risk management
area historically had little todo with the derivatives-
based currency risk management team
– Manage risk by putting all of the risk management units
on the same floor and holding monthly cross functional
meetings to encourage interaction within the two groups
– Accelerated the process and assembled a multi-specialty
team from both the insurance and currency risk
management side of the Treasury area
– Establish guidelines that any new program would have to
meet in order for it to replace

15. Modeling the Treasury-based
Integrated Program
• Designing the new integrated program was understanding
how to find the “optimal” risk management structure
– In terms of the appropriate retention
– Insurance coverage levels
– Adapting the insurance program
• Use standard approach to finding the optimal level of
insurance could be adapted to meet their needs between
the different types of risk.

16. Modeling the Treasury-based
Integrated Program
• Standard industry practice to determine insurance structure was to use
the firm’s historical loss record to estimate the future one year “expected
loss” for each insurable risk.
– Assume that the total losses follow a specific probability distribution function
– The analyst must estimate the parameters of that distribution.
• This decision involves trading off the lower premium cost associated with
assuming higher retention levels, and greater the risk retained by the firm,
the lower the insurance premium and the greater the firm’s exposure to
volatility in earnings and firm value.

17. Modeling the Treasury-based
Integrated Program
The individual probability
distributions that underlie the
existing program and the
simulated joint probability
distribution that was the basis
for identifying the expected
aggregate loss, retention level,
and premium for the proposed
program.

18. The Proposed Integrated Risk
Management Program
The “Integrated
management program”
was a multiyear
insurance-based
strategy that covered
all traditionally –
insured global risk
and currency
translation risk in a
single master
insurance policy.
The proposed program
had one annual
aggregate retention of
$30 million, rather
than a separate
retention for each
individual risk
Honeywell “self-
insured” its first $30
million of annual losses
(the aggregate of
traditionally-insured
and foreign currency
translation losses)

19. The Proposed Integrated Risk
Management Program
 The specific risks and other risks covered in
the integrated program
 The insurance premium cost of the new
program was estimated to be 15%-20% less
than that of existing program
 Honeywell would receive reimbursement
for losses in excess of the $30 million annual
aggregate retention under the combined
integrated program, subject to maximum pay
out of $100 Million over the two and one-
half year term of the policy.
 The amount of currency to be hedged was
specified in the contract for each of
upcoming years with provision of 1%-3%
adjustment in the notional amount of each
currency.

20. The Decision
Tentative support of Honeywell CEO, conditional on the Finance Committee’s in-
depth evaluation of the Treasury Team’s proposal
20% annual premium savings : Real or Illusionary?
Would Honeywell have the same degree of
protection under the new program as it had
had under its existing program? If so, how
such “generous discount” could be afforded
given their competitive nature of their
business?
Was “integration” the right approach for
Honeywell?

21. Analysis

22. Traditional and Integrated Risk Management
Traditional risk management focus
on mitigating events
Integrated risk management focus
on goals and risks that could
affect the goals
No risk stands alone, they’re all connected
Every risk has their own value
Risks and goals are connected

23. Would Honeywell have the same degree of protection under
the new program as it had had under its existing program?
Yes!
Because Honeywell could reduce their total cost
on risk management and get the combination
risk assignment that connected with each other.
Honeywell could subsidize risk in one area to
other area if it was required to achieve a better
goals

24. Was “integration” the right approach for Honeywell?
Yes!
As Honeywell become a bigger company and
they have so many risks inside the company, so
integration risk management is a right way for
Honeywell. It would be easier for Honeywell to
control the risks that could affect their goals.

25. THANK YOU