The June Baseline magazine features an article by Stephen Johnson, chief financial officer of Arc of Yates, explaining how the nonprofit uses @RISK and Monte Carlo simulation to account for potential shortfalls in annual budget planning.
Founded in 1975, Arc of Yates is a nonprofit organization for people with developmental disabilities. Arc of Yates provides a wide range of community-based services, including service coordination, residential living, clinical services, employment opportunities, and industrial and educational development throughout Yates County in upstate New York.
Johnson outlines how Arc of Yates used @RISK to develop effective strategic financial contingency plans and communicate challenges to board members and other stakeholders. Johnson writes, "We also were able to quantify the magnitude and probability of risks in our funding streams that could affect our financial planning. And we could update risks monthly or even weekly to keep up with our fast-paced environment. As a result, we were able to gain crucial insights that enabled us to develop our three-year strategic financial plan."
He continues: "Using @RISK has empowered our organization to foresee potential obstacles and shortfalls in our budgetary forecast. By understanding risks, we are able to both quantify and focus on other activities that may generate replacement revenue and produce contingency plans for cost reduction."
» Read the article in Baseline magazine
Alternative Energy eMagazine interviewed Randy Heffernan, Vice President of Palisade, for the June/July 2012 issue. Questions addressed in the interview include:
What is risk analysis? How does it work?
How can companies in the energy industry use risk analysis?
Is there a minimum project budget that you would consider to begin to benefit from risk analysis?
What are some of the benefits of analyzing risk early on?
At what stage of a project do you recommend starting the risk analysis, who should be involved and where does the data come from?
What are the costs involved with risk analysis?
Can you share some examples to illustrate how risk analysis can be an important tool for analyzing the success of clean energy projects?
The article highlights FutureMetrics' use of @RISK to hedge wood prices in the production of burning wood pellets. Based in Bethel, Maine, FutureMetrics is recognized as one of the leading domestic experts in the economics of the production and use of renewable bioenergy.
Today, the global consumption of wood pellets is approximately 15 million tons per year. It is expected to exceed 45 million tons by 2020. The largest market for wood pellets exists in Europe, where regulations encourage the use of carbon neutral fuels, like biomass. With such a dramatic jump in global wood pellet consumption predicted in the future, FutureMetrics and INRS, via their partnership in FutureEnergy Partners developed a wood price hedging product that uses @RISK to measure its effectiveness.
“I have been using @RISK since the early 1990’s, so I have a perspective on the commitment to the users that the Palisade team has,” said Dr. William Strauss, president and founder of FutureMetrics. “Every new version has new and very useful features that often are based on feedback from users. Palisade’s @RISK software has the richest feature set and has the most relevant tools for analyzing models that contain uncertainty.”
» Read the Alternative Energy eMagazine article
Risk is a given in any industry, and Palisade’s mission is to empower organizations to see the impact and probability of risk with any decision. Perhaps the most concrete example crunching the numbers of probability can be found in the insurance industry. Identifying accurate risk factors—and making decisions accordingly—is the bread and butter of insurance companies of all sizes. As a result, many rely on Monte Carlo simulation to assist in making prudent decisions that will ensure the ability to cover claims and still earn a profit.
Scottsdale Insurance Company (Scottsdale, Az.) is one of the largest excess and surplus (E&S) and specialty lines carriers in the nation. They offer a wide range of lines that many standard companies reject, which requires a very high degree of risk scrutiny. To make the best determinations, Scottsdale Insurance Company turns to @RISK to determine the probability of risk factors.
One area where Scottsdale Insurance Company relies on @RISK is in deciding whether or not to insure commercial properties. The ultimate goal in this sector of the business is to identify properties that offer the highest risk adjusted returns on capital (RAROC). Utilizing @RISK, Scottsdale Insurance Company runs simulations, such as catastrophic weather risk to determine the likelihood that a disaster would occur, the economic reserves required to insure it and whether all factors combined would generate an appropriate RAROC.
Scottsdale Insurance Group offered an inside look into to how such decisions are made in a very interesting case study. In the study, the decision-making process is simulated through the comparison two properties that appear to have very similar values. It isn’t until risk analysis is performed, that one property clearly holds more risk than the other. If you’ve ever wondered how insurance companies make such determinations, this study will provide some fascinating insight.
» Case Study: Scottsdale Insurance Company uses @RISK to choose between competing opportunities