Honeywell, Inc. and Integrated Risk Management Essay

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Would Honeywell have the same degree of protection under the new program as it had had under its existing program? Honeywell claims that it will have the same degree of protection under the new program that it held in the current program. By combining each individual risk and its respective insurance plan into one master insurance policy, Honeywell believes that it will offer the firm the same degree of coverage and policy protection that it has under the current strategy at a reduced (15-20% less) cost. When comparing the two programs aggregate retentions (deductibles), the case states: “This aggregate retention was set to approximately equal the sum of the separate retentions under the current program. The $30 million retention also…show more content…
The program design allows for Honeywell to maintain roughly the same level of insurance coverage, while paying only $8,509,000 in insurance premiums, as opposed to the current plan that calls for premiums of $11,236,000 – a savings of $2,727,000 (Exhibit 9). This represents a very sizeable savings for Honeywell, but one must consider how the insurers allow this to occur. When analyzing why the insurers are giving such a large discount to Honeywell, there are a number of different factors to consider. One large one being that by combining policies under one comprehensive plan, the insurers themselves are also hedging their own risk. Under such a plan, the insurers would not be subject to extraordinarily large claims. Pooling into a larger insurance plan allows the insurance firms to smoothen out potential payouts for covered losses, as evidenced in Exhibit 9. This exhibit displays a standard deviation in cost of risk of 15,793,879 under the existing plan, but only 3,819,568 under the new plan. This represents a massive difference in the variance of payouts that would be required. As such, the insurers can also more reasonably predict their costs related to Honeywell coverage, which in it of itself is yet another benefit that helps offset the lower premium collections. In addition to these considerations that relate to benefits of such a plan, there is another major

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