Case Analysis on Honeywell, Inc

Case Analysis on Honeywell, Inc

  • Submitted By: lxr04
  • Date Submitted: 01/17/2010 7:04 PM
  • Category: Social Issues
  • Words: 2186
  • Page: 9
  • Views: 18

Risk Management

Case analysis on Honeywell, Inc. and Integrated Risk Management 

Case analysis on Honeywell, Inc. and Integrated Risk Management

Risk Management

Case analysis on Honeywell, Inc. and Integrated Risk Management 

Executive Summary
Honeywell entered into an “Integrated Risk Management Program” with American International Group (AIG) in 1997. This new risk management program is to provide combined protection against Honeywell’s currency translation risk along with all traditionally-insured global risks, in a multiyear, insurance-based, integrated risk management program, which is expected to be more cost-efficient: the estimated insurance premium cost of the new program would be 15%-20% less than that of the existing program. This case identifies the benefits of integrated risk management and shows how such an approach might be valuable. There are two assumptions in the proposed contract: A. There is “portfolio effect” for the risk portfolio, which is similar to the financial portfolio theory: when stocks are less than perfectly correlated, the total risk of a portfolio of stocks will be less than the sum of the risk of each individual stock. The currency movements had little to do with the loss pattern experienced from traditionally insured risks so the correlation between the two major groups of risk is zero.

B.

If Honeywell treated its risk exposures as a portfolio of risks and the two assumptions above are adequate, perhaps this “portfolio effect” would reduce its total risk exposure, thereby warranting a lower premium from the underwriter. It is a new concept and only with simulating program results under some unverified assumptions. We cannot answer the following questions without practical evidences: Whether the estimates of 20% annual premium savings are real or illusory? Would Honeywell have the same degree of protection under the new program as it had had under its existing program? How could the insurance underwriters...

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