In February 1997, Honeywell Inc. took an “intrepid step forward transfer-ring its risks”4 by blending its property and casualty exposures and foreign exchange translation risks in a single policy insured by American Interna-tional Group and brokered by J&H Marsh & McLennan. “Our objective was to significantly reduce our overall cost of risk, as well as our administra-tive costs,” says Larry Stranghoener, Honeywell’s CFO and vice president.5 Mr. Stranghoener was looking for a policy that would limit the volatility of Honeywell’s financial results under the assumption that, as was discussed earlier in this chapter, stock markets punish earnings volatility with some-times significantly lower stock prices. By taking an integrated view of their risk exposure and using alterna-tive risk transfer methods, Tom Seuntjens, director of risk management at Honeywell, estimates that Honeywell was able to save more than 20 percent over its traditional risk management practices. It was able to cut the number of insurance carriers it used from 17 down to 10, and noted real savings in staff time and overhead because of simplified transactions.6 Honeywell has been pleased with the policy’s performance thus far, and is now considering adding a weather risk transfer element to help offset the risk of mild winters on sales of its thermostats. Honeywell is also evaluating the possibility of adding interest rate risks and foreign exchange transaction risks to the mix.7 Furthermore, it is deliberating movement in the direction of full enterprise risk management. “We believe it makes sense from a risk management standpoint to evaluate our total risk profile, not just hazard and financial risks, but also our operational and strategic risks. Once we do that, the next logical step is to find a comprehensive way of mitigating those risks. It’s still too early to say if we will go this way, but I think we already have the reputation for being aggressive and innovative in this area.”In February 1997, Honeywell Inc. took an “intrepid step forward transfer-ring its risks”4 by blending its property and casualty exposures and foreign exchange translation risks in a single policy insured by American Interna-tional Group and brokered by J&H Marsh & McLennan. “Our objective was to significantly reduce our overall cost of risk, as well as our administra-tive costs,” says Larry Stranghoener, Honeywell’s CFO and vice president.5 Mr. Stranghoener was looking for a policy that would limit the volatility of Honeywell’s financial results under the assumption that, as was discussed earlier in this chapter, stock markets punish earnings volatility with some-times significantly lower stock prices. By taking an integrated view of their risk exposure and using alterna-tive risk transfer methods, Tom Seuntjens, director of risk management at Honeywell, estimates that Honeywell was able to save more than 20 percent over its traditional risk management practices. It was able to cut the number of insurance carriers it used from 17 down to 10, and noted real savings in staff time and overhead because of simplified transactions.6 Honeywell has been pleased with the policy’s performance thus far, and is now considering adding a weather risk transfer element to help offset the risk of mild winters on sales of its thermostats. Honeywell is also evaluating the possibility of adding interest rate risks and foreign exchange transaction risks to the mix.7 Furthermore, it is deliberating movement in the direction of full enterprise risk management. “We believe it makes sense from a risk management standpoint to evaluate our total risk profile, not just hazard and financial risks, but also our operational and strategic risks. Once we do that, the next logical step is to find a comprehensive way of mitigating those risks. It’s still too early to say if we will go this way, but I think we already have the reputation for being aggressive and innovative in this area.”

Questions

Are there “good ERM practices” in the case? If yes, identify each and explain why you believe it is a good practice.
Are there “bad ERM practices” in the case? If yes, identify each and explain why you believe it is a bad practice.

Answer rating: 100% (QA)

Good ERM Practices Integrated Risk Management Approach Honeywells decision to blend its property and casualty exposures and foreign exchange translation risks into a single policy is a good ERM practi... View the full answer