Case Study: Using Insurance to Protect Corporate Financial Objectives by Phil Ellis

15/02/2015 07:04

Optimizing insurance programs to act as a hedge to protect corporate financial objectives enables insurance buyers to deliver insurance programs that are superior in value and efficiency. Using insurance to reduce the volatility of an organization’s financial results moves insurance spend from being merely transactional to being a strategic lever that can aid organizations in achieving their corporate goals.


A Real Client Example: Protecting EBIDTA

A large multinational firm asked us to evaluate their existing insurance programs, placed by two of our competitors, in a more scientific and objective way than they were currently being executed. Discussions with the insurance buyer and the CFO about their financial and strategic objectives determined that protecting EBITDA from a certain level and frequency of reversal was paramount to the company’s success.

Armed with this information, we modelled the performance of their current insurance program against thousands of alternative programs to see how they would perform in protecting EBITDA in the case of a severe financial loss. This modelling defined the frequencies and severities of reversals to EBITDA, and enabled us to discuss the amount of risk the client was comfortable with. As a result, they decided they wanted to avoid a one-in-one-hundred-year insurable hit to EBITDA, which, at that frequency, equated to about $100 million.


Determining Which Insurance Layers Add Value

The projected savings for this client were $7 million per year in premium plus expected losses.

We were then able to calculate whether each layer of each of their insurance programs was adding value in pursuit of this client’s EBITDA objective. It was clear that several layers were not focused towards achieving this goal and should be ‘switched off,’ and it was clear that another layer, D&O excess, should be added. The projected savings for this client were $7 million per year in premium plus expected losses.

Calculating Pricing Efficiencies

In parallel, we worked with our broking teams to determine whether the price the client was currently paying for each line was efficient. To do so, we demonstrated the loss ratios their markets were achieving on their risk, versus what markets they were achieving on average for a given line of insurance. This analysis showed that even if the client didn’t change their programs, by simply re-marketing they should save up to $3 million.


Presenting the Analysis to the CFO

The insurance buyer was brave to invite us in to do this study. He knew the results had the potential to highlight flaws in his current approach and show him in a bad light. We helped him navigate this situation by explaining that very few companies have looked at their insurable risks in this way, that our work was based on objective models which provide superior insight to benchmarking against the client’s peers. Ultimately the CFO was highly impressed with the analysis and indeed the insurance buyer’s decision to have us perform the analysis in the first place.


The Result

Our evaluation of their existing insurance programs helped the CFO understand the effectiveness of insurance as a hedge to his key performance measures. While he agreed with the projected savings, he ultimately decided not to exit some layers, which surprised us. Instead, he decided to keep most of their current programs, and to consider buying more insurance, including the recommended D&O excess – ‘It’s one of the few hedges I’ve got for these risks.’ The analysis had showed him the value insurance could bring and which upgraded the reputation of insurance as a serious financial hedging instrument with C-suite. The insurance buyer emerged made a valuable contribution to the strategic direction of his company and emerged as a winner.



Phil Ellis

Phil leads Global Solutions Consulting which works with large and complex corporations to help them devise risk strategies to manage their risks through transfer, mitigation, retention, and/or avoidance. His team consists of actuaries, mathematicians, alternative risk transfer specialists, and natural catastrophe modellers and engineers. Phil is also non-executive Chairman of our Willis Global Energy specialty business.


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