Honeywell, Inc.

and Integrated Risk Management
Case Analysis Submitted to: Prof. A. Kanagaraj By Vivek Gupta Section C, 944

Honeywell’s risk management activities were dispersed throughout the firm as shown in the table. It was the largest producer of control systems and products used to regulate heating and air conditioning in commercial buildings and of systems in avionics systems.Executive Summary: Honeywell was a multibillion-dollar. International Corporation employing 53000 people and managing operations in 95 countries. and whether the coverage provided by the new contract would be adequate. the finance committee’s decision would establish Honeywell’s risk management strategy for some years to come. . Other risks were managed operationally. The committee voting for this new program depends on whether the anticipated savings of the program would be realized. Carrying out business in 95 countries firm faced a number of risks. The proposed plan is a first step in a firm wide integrated risk management program that would extend to cover all of Honeywell’s financial and operational risks.

Unit Treasury . rather than managing each risk separately. Though the idea seems promising the organizational barriers involved in developing such a program were daunting. . Hazard) Risks Currency Risks Other Financial (interest rate. credit and liquidity) Risks Pension Fund Risk Operational Risk Credit Risk Environmental Risks Department Handling Risk Treasury . The team wondered about the applicability of the relatively new concept of enterprise risk management. which is grouping many risks together into a portfolio of risks. how should its risk be managed? Type of Risk Traditionally Insured (i. Problem Statement: Honeywell was the first to introduce an integrated risk management program that combined traditionally insured risks with other risks in an insurance contract.e. Unit Treasury . The proposed program had one time annual aggregate retention of $30 million. Given this. Operating Units Operating Units Health. the integrated risk management concept had not yet reached such a degree of acceptance by the broader business community.Insurance Risk Mgmt. Safety and Environment Dept. While traditional insurance was viewed as a business necessity. A significant challenge for the Honeywell team members designing the new integrated program was finding out the optimal risk management structure in terms of appropriate retention and insurance coverage levels and adapting the insurance program to incorporate foreign-currency translation risk. This case identifies the benefits of integrating risks and shows how such an approach might be valuable. & Capital Markets Unit Financial Dept.Honeywell’s existing strategy was consistent with its risk management objective of minimizing earnings volatility and its cost of risk. Honeywell has diverse variety and variant degree of risks. rather than a separate retention for each individual risk. The team thought that the new enterprise management concept could be implemented through an innovative insurance contract. The integrated risk management program was a multiyear insurance based strategy that covered all traditionally insured risk and currency translation risk in a single master insurance policy.Financial Risk Mgmt. The program subject to a maximum payout of $100 million over the two one-half year term of the policy and also have an excess coverage subjected to a maximum pay out of an additional $200 million.Financial Risk Mgmt.

Cash management unit managing the cash requirements.Interest rate r and      Credit risk Currency hedging operations were independent of any other hedging or insuring carried out in other parts of the firm Used at-the-money options Used basket-option of 20 currencies that matured quarterly These 20 currencies represented 85% of HW’s foreign profits Provided protection when UD$ strengthened against the currency basket iv. Currently.      Used separate annually-renewable insurance policies for each type of insurable risks Each policy had specified deductible (retention) in an amount ranged between 0 and $6 million HW would absorb losses up-to retention level before calling insurance company for any claim Each loss was subject to separate retention HW paid a new deductible for each loss that occurred New Risk Management Program • • • • • • First of its kind Provided combined protection against HW’s currency risks along with other traditionally insurable risks Multi-year Insurance based Integrated risk management program Would extend its innovation into the financial arena Features included:  Traditionally insured risks should be consistent with currency risk management program .Legal Risks Market Risks Office of General Counsel Marketing Mgmt. Insurance risk management unit which managed risk generally covered by insurance. Financial risk management unit which managed the Currency . iii. various units managed under Treasury managed their risks in the following way: i. Capital market unit which managed the Capital structure and Liquidity risk ii.

.   Monthly cross-functional meeting to interact with two groups to understand the other’s tasks Multi-specialty team: insurance unit + currency risk management team All members were named as member treasury management team Challenges to the program include:       New program to provide. Equal or greater level of earnings protection Total cost is less than existing program costs Flexibility to incorporate additional risks in the future Comply with all accounting standards Finding optimal risk management structure Integrated Risk Management Program Specific risks covered in the program included             Global general liability Global products liability Global property and business interruptions Global fidelity Global employees crime Global ocean marine transit Global political risk Director and officer liability US auto liability US worker’s compensation Foreign currency translation Aviation product liability (covered under a separate $1 bn per occurrence policy) Analysis of the alternatives: ..

2 8.2 5.4 4.5 -0.5 4.5 2.3 7.5 12.3 -0.7 -0.2 4.4 0.1 0 -0.3 -10.4 5 4.Expecte d Loss Mean Std Dev.7 1. Side B Currency Risk Individual Risk Management value 12.3 0. Individual risk management Advantages Meets needs of individual risks by providing customized solution for each risk  No risk of relying upon single insurance provider as it has flexibility to distribute risk of insurer to different players .1 11.4 3.4 3.3 5 0.3 4 4.5 4.4 0 -2. Expecte Of Expecte d loss d cost risk of Std Value of Insurance Dev.5 2.1 0.4 4. Of under different probability of cost of risk risk 14% 50% 84% -0.1 General Liabilities Property Worker Compensation Auto D&O.5 11.5 2.4 -3.1 -4.9 0 -4.5 1.3 4.1 -1 -5.8 0 -0.

So. Integrated risk management Advantages  Minimizes cost of risk when probability of risk approaches to 50%  Provides higher level of earnings protection by minimizing variability in earnings  Disadvantages  Being first firm to introduce this innovation. Higher risk coverage as it has higher limits for different risks whose total is much larger than new option’s $ 100 million Disadvantages Higher cost of risk as probability of risk approach to mean  Pays higher premium 2. . Honeywell should go for new policy of risk management. firm runs in risk of innovation  Brings down coverage significantly Conclusion The proposal of integrated insurance policy gives better benefits than individual risk management. It minimizes cost of risk and stabilizes earnings while forcing consistency in risk management in different segments of risks and addressing specific needs of different risks.

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