Fear Factor

Sarbanes-Oxley offers one more reason to tackle enterprise risk management.

At the last outing, more than 30 areas of exposure were tabulated. In both years, the number-one risk was grain volume. “When a drought causes less grain to grow, we handle less grain volume, which depresses revenues accordingly,” explains Cox. “Last year our revenues plunged almost 50 percent due to drought.”

But Agricore went further than Peabody and Seminole to find a risk-mitigation solution to its primary risk problem. At first, the steering committee examined a weather-based financial instrument to hedge the grain-volume risk. But wide geographic regions in which grain is grown in Canada, and divergent weather patterns affecting each region, made such an instrument impossible to structure.

With help from its broker, Willis Group Solutions, Agricore assembled a unique risk-transfer program, combining nearly all its risks, including the grain-volume exposure, in a portfolio for transfer as a single block of risk to insurer The Citadel, which was reinsured by Swiss Reinsurance Co. of Canada. The losses from different risks would aggregate into an annual loss total that, if exceeding a prearranged dollar threshold, would result in an insurance payout.

A trigger for the grain-volume risk was built into the multiline insurance program, based on volumes reported by the Canadian Grain Commission, an independent body. The innovation was the fact that Agricore was able to transfer an operational risk to the insurance market that had never been transferred to insurers before.

When the novel three-year program expired at the end of 2002, Agricore sought to reinstate it. But back-to-back droughts and tightening terms, conditions, and premiums in the insurance market dissuaded Swiss Re, not to mention other reinsurers, from a similar deal. Yet Agricore again scored a unique contract, an insurance policy covering grain volume solely. The policy, bought from European International, a Swiss Re company based in Barbados, runs through July 2006, offering up to $25 million in coverage each year — minus an undisclosed deductible — and three-year coverage limits of $52.8 million. The payout is based on a simple formula that takes into account a five-year rolling average of industry grain volumes, Agricore’s market share, and average profit margin per ton of grain handled.

Adding It Up

ERM has many proponents, but companies aren’t exactly racing to install it. A survey of clients with at least $500 million in revenues conducted by KPMG found that only 28 percent had formal ERM programs, even though most of the same companies rated risk identification as their most important risk-management issue. Almost half the respondents (47 percent) without an ERM strategy stated they did not see the value proposition in ERM.

The resistance can be chalked up to two factors: cost and apathy. “Companies tend not to do something unless they have to,” says Terzuoli. “While Sarbanes-Oxley raises the bar, companies just don’t see the benefit from risk-scorecarding or matrixes or even ERM, in terms of added revenue or stock value. It’s the old story — ‘Here is what the law says and here is what I can get away with.’ I’m just hoping that with a new [Securities and Exchange Commission] chief [Wall Street veteran William Donaldson], his diligence about interpreting the law and actions taken will compel companies to really do something about their risk.”

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