Strategic Risk Report on Property Risk

8/3/2019 Strategic Risk Report on Property Risk

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SPECIAL REPORT:Property risk

Strategic RISK SEPTEMBER 2010 | www.strategicrisk.co.uk 43

This special report has been produced with input from FM Global:

Martin Fessey [email protected] [email protected] [email protected]

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contents44

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PROTECTING

YOUR ASSETSBetter control, costs,consistency how to getthose elusive three Cs

NEW WORLD ORDERGlobal commercial propertyprogrammes require carefuldesigning

THE HIDDEN COSTSOF FIREProtect both your businessand the local community from the

knock-on effects of a blaze

THE VALUE PROPOSITIONStrengthen your propertyrisk management and reapthe rewards


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44 Strategic RISK SEPTEMBER 2010 | www.strategicrisk.co.uk

Premises, equipment, supplies, nishedproducts they all cost money and representa large investment for most organisations.Commercial property loss protection clearly

has to be high on the risk managers agenda. In thisspecial report, we look at some of the considerationsaround this investment.

For multinational organisations, a global programme

can produce the three C benets better control,costs and consistency. But risk managers need to takecare regarding the design of such a programme and beaware of the potential pitfalls.

The business arena is becoming ever-more complex and there are many risk management challenges.Not least of these is the need to convince subsidiariesthat central insurance buying is a preferablealternative to them arranging their own cover, eventhough it may mean that they have to take a largerself-insured retention.

Imparting the need for good risk management canalso be difcult in territories where risk managementdoes not feature highly in the business culture.

For an organisation with operations in many areas,perhaps 50 or more, ensuring compliance with localinsurance regulations is another challenge for bothitself and its insurers. The penalties for failure tocomply can be draconian, and a regulatory breach canalso result in penalties for local directors and ofcers.

While a global master policy may provide differencein conditions cover, with compensation beyond thatprovided by local policies, there can be tax issues if itis necessary to refund money to overseas subsidiaries.

These are just some of the issues associated withmultinational insurance programmes. If risk managerswant to get the benet of the three Cs, they need totread carefully and take heed of the advice from theirinsurers and brokers.

New hazardsWhile having a global programme in place can producereal benets, risk managers are only likely to reap thegreatest rewards if they have robust loss protectionand mitigation procedures in place.

They need to look carefully at this area, asclimate change is producing unforeseen weatherextremes, which are affecting many countries inEurope. Losses from oods and windstorms haveescalated in the past two years, affecting some areasnot normally associated with such hazards. Thereare some basic relatively low-cost preventionstrategies that can help risk managers avoid majorproblems, however.

Sustainability is also a key consideration for

European companies. The need to reduce theircarbon footprint is a major concern, and good riskmanagement can help here too.

Sustainability is not just about reducing powerusage and adopting green supplies. For example, if abuilding burns down, the carbon footprint associatedwith ghting the re and the subsequent rebuildingcan be considerable.

The loss of a facility can have major repercussions,not only for the organisation concerned, but also for itsemployees, suppliers and the local community perhapseven for the country as a whole if that organisationdecides to rebuild and relocate elsewhere.

Once again, the answer lies in preventing andmitigating losses. In the case of reducing relosses, installing sprinkler installations is a greensolution, and there is considerable evidence to backup this claim (see The rst line of defence, page 48).

Reap the rewardsCompanies need to invest in commercialproperty loss protection, but the money spent canproduce nancial and reputational rewards. Offsettingthe costs are the reductions that businesses can

realise in insurance premiums when transferring theirrisks to insurers. A well risk-managed company canexpect to obtain better cover as well.

There are other advantages too. Reducinglosses also reduces earnings volatility, which willincrease shareholder value. Demonstrating goodrisk management practices can give an organisationa competitive edge by convincing customers of continuity of supply and services. It can smooth thepath of mergers and acquisitions deals.

And as good risk management now has a bearing oncompanies credit ratings, this will help them to reducethe cost of capital.

Good risk managementcan give an organisationa competitive edge by convincing customersof continuity of supply and services

Protecting your assetsBetter control, costs and consistency the three Cs are there for the taking if risk managers can learnto manage their global loss protection programmes effectively and carefully


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New world orderCorporate multinational property insurance programmes can provide signicant cost and controlbenets but risk managers should be aware of the potential pitfallsT

he trend for going global started severalyears ago as organisations based in the moredeveloped regions expanded their activities.However, a big economic shift is taking place

between the emerging BRIC (Brazil, Russia, Indiaand China) countries and the more developed ones,prompting a second phase of globalisation.

FM Global operations vice-president Malcolm Davis

says: We are seeing new companies emerging inregions such as Asia, Latin America and the MiddleEast, which are becoming increasingly signicant.They in turn are expanding into the USA and Europe,developing their operations there and in some caseslooking to make acquisitions.

Its a trend that looks set to continue, with somecommentators predicting that the economies of BRICcountries will be larger than those of the industrialisedG7 countries by 2030. Wherever the push forglobalisation occurs, one thing is certain: it drives theneed for exible, far-reaching global services in whichinsurance buying plays a big part.

But designing and operating a multinationalcommercial property insurance programme is far fromstraightforward.

The world is becoming a far more complicatedplace to do business, Davis says. If you are a riskmanager in a big multinational corporation, there aresignicant challenges in operating in this increasinglycomplex world. And the more countries yourcorporation goes into, the more challenges you mayhave to grapple with in making sure your companysassets are protected and also endeavouring topromote and encourage risk improvement activity.

There is an increasing realisation in the riskmanagement community of the benets in having asingle programme that insures the companys propertywherever it operates.

Aon UKs managing director, property and casualtygroup, Andrew Laing, says: A major benet of global

programmes can be cost efciency, with the abilityto leverage a larger premium as opposed to havingindividual smaller covers.

A centralised approach also gives the risk managergreater control. And there is efciency associated withjust having to manage one premium, while the riskmanager enjoys the certainty that coverage is beingpurchased more consistently.

Simon Edge, a partner in JLTs property team,agrees that a global programme gives the riskmanager increased control and can often produce bigcost savings. When we are involved in setting up aglobal programme, we often nd there has

been signicant duplication of cover. This happensbecause local ofces have been buying their ownpolicies and in many cases additionally paying feesto local brokers.

Centralisation can often eliminate local brokersfees and remove duplication, which keeps down costs.The company will generally be able to obtain improvedand more consistent cover worldwide.

ChallengesBut while it may make economic sense for a

business to expand into a country such as China,the move may raise many questions in the mindsof risk managers. How can I extend our globalprogramme to our new Chinese subsidiaries?Bearing in mind language and travel constraints,how do I communicate with managers in these newsubsidiaries and talk to them about risk improvementor insurance protection?

Seeking answers to such questions can presenta real hurdle, says Davis, particularly in the currenteconomic climate. Many risk managers in bigcorporations are now working alone or with smallerteams, which can make it doubly difcult to cope

with this new landscape of extra countries and r iskmanagement challenges.

It can also be difcult to secure senior managementbacking to implement a consistent corporate riskmanagement philosophy across an organisation. Intheory, the cost savings should present a persuasiveargument at head ofce, particularly at the moment,but will it be equally convincing for senior managers of subsidiaries around the globe?

Much depends on the corporate culture, says Davis.In a highly centralised corporation, the culture is

very much that decisions on risk management andinsurance purchasing are made by head ofce. Theseare then rolled out to subsidiaries around the world,which will generally adopt them with little, if any,argument.

However, other organisations particularly thosethat have grown globally by acquiring companies may not have that complete corporate control fromhead ofce because of differences in corporate andlocal cultures.

Businesses with key divisions in regions remotefrom head ofce may have quite senior management inplace; its not unusual in terms of employee numbers,


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turnover and prot contribution for these regionalbusiness units to generate a signicant proportion of the entire organisations result.

In such situations, those regional senior managersmay take the view that they should have a say in whathappens in their regional area and may well questionor even resist some elements of the policies thatemerge from the corporate head ofce. With that sortof prole, its much harder for the risk manager in thehead ofce to achieve consistent outcomes with allbusiness units worldwide.

Aons Laing agrees, also citing problems withpremiums and retentions. Once you have put theglobal programme together, issues can arise with the

allocation of costs back out to the subsidiaries. Theremay be problems with local divisions that believe theycan buy cheaper in their local market. That may be truein some cases but overall the business would lose outon efciency.

He adds: When you are arranging a big globalprogramme, the insurance markets are typicallymore competitive if the insured carries a sensiblysized retention to reect what is essentially a muchbigger organisation. There can be issues with thelocal organisations that are not used to having sucha large retention, but there are ways in which wecan structure a retention strategy that effectivelyaddresses both the needs of the insurers and the localorganisation.

Regional divisions may not just need convincingover central insurance buying. Davis explains: Inemerging countries such as Asia and South America,risk management philosophies and cultures are muchless developed than in Europe or North America. Thiscan present challenges for the sophisticated riskmanager at head ofce who is trying to implement aglobal risk management programme and pursue lossprevention strategies.

It can be difcult to communicate the corporate riskmanagement philosophy and plans to some businessunits around the world and persuade them that its intheir local interests to adopt such approaches. Whiletheres certainly value in communicating consistentglobal risk management guidelines and policies,there are many benets to be gained from helping

employees globally understand why it makes senseto invest money in loss protection. Enterprise-widelearning can go a long way.

Consistency and complianceAchieving consistency around the world should bean integral benet of multinational programmes,whether in terms of the approach to loss preventionand risk management or insurance coverage. Yet itis not always possible to install in every country alocal insurance policy that matches the corporatehead ofce model of what they would like to seein place.

This leads inevitably to what many believe is themost important issue for multinational insuranceprogrammes compliance.

Davis says: Compliance is the issue that drivesclients, insurance companies and brokers. Many

organisations now devote substantial time andeffort to making sure their insurance programmeis compliant and that their assets across the globeare protected in accordance with local laws andregulations. Compliance can affect the way policiesand premium invoices are issued and the currency inwhich premiums are invoiced in fact, most elementssurrounding the insurance contract and premiumpayment arrangements. Many countries have detailedregulations that set out how things should be done.

He continues: All parties have to get this right,including ourselves as an insurer. In some countries,there are local regulations or tariff wordings that limitinsurers from putting in place exactly the cover theywould prefer.

At FM Global, we try to maximise the amount of locally admitted cover that we put in place in eachcountry and thus minimise the amount of differencein conditions or gap cover included on the masterpolicy. The aim is to make sure c lients have aprogramme where they have a known amount of localcoverage in place in each country that complies withany local regulatory rules, and that any identiablegaps with the corporate programme specication canbe made up in the master policy.

In recent years, many countries regulators havebecome increasingly prescriptive in terms of how theywant insurance cover to be arranged. In some cases,arranging non-admitted cover (cover provided by aninsurer that is not locally licensed) for assets in cer taincountries is illegal. Breaching regulations can result

in severe penalties and nes for the local divisioninvolved and could also expose its directors andofcers to nes and penalties.

JLTs Edge explains: Insurers who have a locallylicensed ofce or a par tner with a locally licensedofce in the territory concerned will ask thatofce to issue the local policy. But the masterpolicy will generally be issued to the parentorganisation in the country where their headofce is located. Where required, a local policy willbe issued to the local entity, which ensures compliancewith local regulations. The master policy willgenerally cover differences in cover and limits.

Local policies are usually issued to what is known asgood local standards.

JLT property partner David Powell adds: Anotherreason for having a local policy is that it can be difcultfor the insurer writing the master policy to pay a claimto the local subsidiary without the insured incurringan additional tax liability. Where a multinational hasa truly global spread, there are not many frontinginsurers that are licensed to issue policies in all theterritories themselves. Some partner with a number of other underwriters to provide the necessary network.

But he warns: The more people you have involvedwith issuing local paper, the more complicated itcan become.

Edge adds: The local ofce will often impose aminimum premium charge and may add a servicingfee, which means it is not always viable to cede toa global.

The inclusion of difference in conditions cover inthe master policy might suggest that theres no needto worry if the local policy doesnt match the globalone too closely. But Edge points to the danger inthis approach.

In the event of a loss where the global masterpolicy is called into play (because the local policy isrestrictive in cover or limits), the local entity will bepaid out by the local policy, and anything additionalthats covered by the master policy will normally bepaid centrally to the parent.

Reimbursing that money to the local entity may havetax implications because it may be treated as a capitalpayment or asset coming in, rather than an insurancepayment. In order to minimise the likelihood of that kindof central payment, insurers such as FM Global haveendeavoured to ensure that their local policies are asclose to the master policy wording as possible.

It is possible to structure master policies sothat they include payment of any additional taxesas a result of losses being compensated by themaster policy.

Cost efciency Cost efciency rates high among the benets of multinational programmes. So how exactly can thisbe achieved?

Powell stresses that all large multinationalprogrammes are different. Most of the programmeswe design are bespoke to suit our clients needs.Each programme will have a different spread of territories involved, resulting in varying levelsof catastrophe exposures that will, in turn, haveaggregation considerations for risk carriers.

You also need to consider what level of loss limitthe client is looking to buy or needs. Inevitably, thelaws of supply and demand can have an impact.The higher limit you have to buy, the more you needto draw in slightly more expensive capacity tocomplete placement.

There may be problems withlocal divisions that believethey can buy cheaper in theirlocal market Andrew Laing, Aon


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He also points out that it can be benecial toarrange a layered programme rather than using purelyquota share support.

Layering can help you to generate cheaper capacitybecause underwriters model risk exposures differently.When setting premiums, their models work on thebasis that losses will be skewed towards the bottomof the limit of liability but not necessarily in the sameproportions.

Taking a simple example, if you take the rst 50%of the limit of liability, while one underwriters modelmight calculate it was worth 80% of the premium,anothers might calculate that it was worth 75%.Similarly, for the upper 50%, one insurer might require

20% of the premium and another 25%. If you put75% and 20% together, there is clearly a saving to theinsured assuming both underwriters are working tothe same base rate.

Security By their very nature, multinational policies involveinsurers putting all their eggs in one basket that of the fronting insurer. Not surprisingly, insurer securityis an issue and theres a great deal of focus oninsurers ratings.

For risk managers, a crucial part of arranging amultinational programme is supplying high-quality datato underwriters. Laing says: Insurers and reinsurersare reliant on good-quality data its absolutelyessential for cat modelling and brokers want to makesure they present the risk in the best possible way.

For organisations that are already centralised,providing the data is fairly straightforward becausethey already have it. For decentralised organisationsit is much more challenging. Risk managers can callon their brokers to help here, while insurers such asFM Global, which have representatives in the variousterritories, can also assist.

As corporations grow and move into more countries,it becomes more difcult to stay on top of changesgoing on around the world, Davis says. For example,the risk manager of a company that has taken overseveral companies in a fairly short time may havegreat difculty in getting information about theirglobal locations, asset values and so on. Our local

service personnel around the world can help get thatinformation and report it back to the risk manager in thehome country.

He stresses that even companies of a similar sizewith an equal number of subsidiaries in the sameregions may have very different servicing needs. Insome cases, we are asked to visit each of a clientslocal subsidiaries around the world, explain thenew insurance policy, describe how the programmeis designed to work and get feedback for the riskmanager. In other cases, we manage the issuance anddistribution of policy documentation but do not makeface-to-face visits to local subsidiaries.

Clients may also need assistance with riskimprovement at their local facilities. FM Globalsapproach is to have a consistently trained team of localloss prevention engineers around the world who knowthe languages and the cultures of the countries wherethey work. They visit a clients local facilities, helpthem understand the property risks they may have, andrecommend appropriate risk improvements,Davis says.

Powell says there can be a number of advantagesto a multinational company using a captive insurance

company to retain some of the risk. Specialist advicecan be provided to ensure such a solution is properlytailored to the insureds unique circumstances.

One obvious advantage would be the insuredgroups retention of par t of their overall premiumspend, especially where the premium being quoted atthe primary level has been inated by (re)insurers dueto a recent run of losses.

When participating on a primary basis, the captive will

normally need to be fronted because it is unlikely to be alicensed insurer in the territories where the primary paperneeds to be issued, he says.

This generally has credit implications because thefronting company will want to be condent that theywill be reimbursed for any claims they pay out on behalf of the captive. Letters of credit or a parental guaranteeare often therefore required.

JurisdictionThe applicable jurisdiction for policy disputes isanother area for consideration when designingthe programme, says Edge. While the master

policy is usually subject to the law of the parentcompanys home country, any local policies will besubject to local jurisdiction. If there is a conictbetween the local policy and the global master,where the fronting company and the local policyissuing company are part of the same group aproblem should not arise.

However, its important to ensure that thereinsurance cover is subject to the same law andjurisdiction for dispute resolution as the masterpolicy, he adds. Otherwise there is potential fordisputes to be held in more than one jurisdictionand under conicting laws, which could result indifferent outcomes for the fronting policy and thereinsurance contracts.

With a programme encompassing many clientlocations in a large number of countries, managingpremium ow is an important consideration. Manyof our bigger clients have their own captive insurer,David says. Were often asked to lead their globalprogramme, issue local policies and collect premiumsfrom countries around the world.

We then share an agreed amount of the risk andpremium with the captive. We therefore need tomanage the entire premium ow from the front to theback end, and we need to work quickly to get policiesand premium invoices issued in the various countries,collect premiums and then pay the agreed share tothe captive.

Obviously, the captive wants its money as

quickly as possible after the policy inceptionor renewal date. We are often able to achievepayment to the captive within 30 and 45 days afterthe renewal date.

Global commercial property programmes can offersignicant advantages to companies but clearly theresa lot to consider when designing and arranging them.

Davis concludes: As a mutual organisation,FM Global has always focused on service delivery toclients. As more of our clients opt for multinationalproperty programmes, we have extended that principleworldwide to help clients navigate the challenges of going global.

Layering can help yougenerate cheaper capacity because underwriters modelrisk exposures differentlyDavid Powell, JLT


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At around 11pm on a Saturday night inFebruary 2005, a small re started in aroom on the 21st story of the Torre Windsorhigh-rise ofce building in downtown

Madrid, Spain.Despite the efforts of the permanent security staff

and the professional re brigade which used 1.6million gallons (six million litres) of water to preventthe blaze from spreading to adjacent neighbouringpropertiesthe 32-story, 100-metre-high buildingbecame engulfed in ames; by morning it had par tiallycollapsed.

Fearing further collapse, the city set up a 500 metreexclusion zone around the building, forcing nearbybusinesses to shut. This affected some 30,000 workers.At the same time, many roads and railways feeding thisimportant business district were shut down.

And, because of the buildings central location, itsdemolition had to be a gradual dismantling a processthat led to signicant disruption in the area for thenext six months.

The estimated cost of the re, including insureddamages to third parties, approached 300m. Moredifcult to measure was the damage this highlypublicised catastrophe had on Madrids image asthe business capital of Spains economy, and as animportant tourist destination especially at a timewhen it was considered a front-running contender tohost the 2012 Olympics.

A few years earlier, also in Madrid, on New

Years Day 2002, a shor t circuit from an operatingportable electrical heater started a re in aseven-story ofce building. But unlike the TorreWindsor, this facility was tted with a sprinklersystem. Three sprinkler heads operated, successfullycontrolling and ultimately extinguishing the re by thetime the public re brigade, notied by the water owalarm, arrived.

An estimated 26,000 litres of sprinkler water wasapplied; 230 times less than that consumed by hosestreams during the Torre Windsor ofce re. Theestimated total loss cost was just 175,000. Perhapsmost important, the buildings staff returned to

work the following day, and there was no signicantinterruption to those in the immediate area.

Knock-on effectsThere are countless examples of res in facilitiesin Europe and around the globe that have causedwidespread disruption and ruin, and the wider effectscan be disasterous to communities.

In Denmark, for example, two separate resdestroyed two large pork-product processing facilities.During the time it took for demolition, rebuilding andrepairs to be completed, more than 1,300 employeeswere forced to look for work elsewhere not tomention the impact to the staff working at thosecompanies supplying raw materials and services to

the facilities creating a sense of uncertainty thatput a strain on the local economy beyond the obvious

unemployment costs.In addition, the interim and sometimes permanent

closure of a facility will often cause a company torelocate jobs to another country with lower costs.Such was the fate of 200 jobs following a major re atan electrical manufacturing plant in the UK: the plantclosed and the operations were transferred to a facilityin Greece. Indeed, re affects the economy not just atthe local level, but at the national level as well.

In Treviso, Italy, a domestic appliance manufacturingfacility with a staff of 800 suffered a catastrophic re.With thick black smoke emanating from the plant,nearby schools were evacuated and closed, while

businesses and residences in the surrounding urbanarea were ordered to keep their windows closed.The toll on the community was so great that themanufacturing company involved was questionedby the authorities on whether it took the necessarymeasures to prevent this event and its consequences.

Each of the above catastrophes has one thing incommon: the buildings involved were not tted withan automatic re sprinkler system. Had an adequatelydesigned, installed and maintained system beenprovided, the outcome and overall impact wouldalmost certainly have been different.

Contrast the above examples of uncontrolled re withwhat happened in France one Friday evening in August2007. Following an argument with a few colleagues,a disgruntled employee at an 8,000 sq metre spareparts warehouse set re to some of the facilityscartoned goods, which were in high-rack storage. Foursprinkler heads positioned above the re operatedpromptly, limiting damage to one bay of the rack. Allemployees safely evacuated the building, and the rebrigade, upon its arrival, quickly extinguished what wasessentially the size of a still incipient re. There was noreported impact to the environment, and operations atthe facility resumed as usual the following Monday.

The tip of the icebergWhile the property insurance costs of major re eventsare readily quantiable, their total economic cost andbroader impact on society on the community, on the

environment, on the safety of building occupants andemergency services are not. Indeed, the property andbusiness interruption loss costs represent only the tipof the iceberg; much of the total impact and cost of reto society remain largely hidden from view.

Observed from this perspective, the sprinkler is adevice for the protection not only of properties andtheir assets, but also of people, their livelihoods, theenvironment, the local community, the economy of sustainability in general.

Given both the impact of re on todays society estimated by several studies at the macro-economiclevel to be between 1% and 2% of a countrys gross

The sprinkler is a devicefor the protection not only of properties and theirassets, but also of people,their livelihoods, theenvironment, the localcommunity, the economy

The rst lineof defenceThe effects of a blaze in a large building or facility go beyond just safety and structural damage,and can be ruinous to the local infrastructure, economy and environment. But installing sprinklerprotection could take businesses out of the line of re, says FM Globals Brendan MacGrath


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domestic product and the potential benets of sprinklers, it is appropriate that legislation shouldregulate for positive change in this area.

When it comes to the wider benets of something as straightforward as automaticsprinkler protection, consider the following:

SOCIETY Building codes exist to protect society and thirdparties namely, employees, responding re services,and neighbouring properties from the risk posedby activity carried out at a par ticular property. Butshouldnt codes also require the protection of thefacility itself, considering all the value derived fromthat facility, value that contributes to society?

If a major re puts a production line out of operation

for several months, what happens to the jobs of thepeople working there? What about the jobs of allthe suppliers? The impact goes far beyond the fenceline. Automatic sprinkler systems can reduce, eveneliminate, the consequences a re can have on societyas a whole.

ENVIRONMENT Fighting a large, uncontrolled re with hose streamscan require much more water than controlling are with sprinklers. Plus, there are the products of combustion: contaminants, harmful gases. In a re,the embedded carbon in a buildings construction

material and goods is liberated. Carbon is thenconsumed in treating the debris and in manufacturingreplacement material. So, a re in an unsprinkleredfacility might generate three to four times the carbondioxide of a facility with sprinklers.

SUSTAINABILITY When we hear about the sustainable design of abuilding, we tend to think of the environment. But itsnot just a green issue. A building provides importantcontributions to the local and macro economiesthroughout its life cycle. Whats more, sustainabilityis a key reputation driver, for both investor andauthority stakeholders.

For regulators, the question is how to protect theimportant contributions a facility makes to a regions

or countrys reputation. Sprinklers are a big part of the answer.

GLOBALISATION As emerging economies such as those in Asia seeincreased development due to foreign investment,theyre adapting more rapidly to newer protectionphilosophies and techniques. The more nascentor dynamic the market, in general, the quicker it isto embrace the concept and benets of sprinklerprotection via regulations.

The sprinklers proven reliability allows allstakeholders to feel condent that a facility is better

protected than one relying solely on other, morepassive methods of re prevention.

SUPPLY CHAIN

A facility in an emerging economy is no longer justanother supplier turning out nuts and bolts; its nowa critical link in the chain of an enterprises globalproduction line. Countries with emerging economies,then, should help companies maintain the resilience of their supply chain, by having codes that mandate well-protected facilities. If a company outsources productionoverseas to a facility where a big re occurs, othercompanies may think twice about building a plant there.

Insurance premium savings for an individuallocation alone will rarely justify the cost of adding anautomatic re protection if a traditional cost-benet

analysis is performed. Yet, a properly designedand installed sprinkler system will reduce both theprobability and severity of a major re. Companies, inturn, will certainly benet from better and more stableinsurance premium compared with those that do notsee the value of sprinklers.

Sadly, the latter approach will leave manyunprotected facilities at increased risk of a major re,as well as the many wider economic, societal andsustainability consequences.

Brendan MacGrath is manager of FM GlobalsInternational Codes and Standards Group


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Companies that have a strong property riskmanagement strategy in place are ina good position when it comes to transferringrisk to the insurance market. And it

brings other rewards too, in terms of enhancedshareholder value.

Strong risk management will help businessessecure better terms in the insurance market, Marsh

EMEA property practice leader Caroline Woolley says.She believes that providing as much information aspossible about this can create competition in theinsurance market and put the business in a betternegotiating position.

Marsh Risk Consulting senior vice-president RichardWaterer adds: Those businesses that possess fullinformation about their risks will ultimately reducetheir cost of risk.

As Kate Loades, group insurance and risk managerof media company Pearson, said in FM Globals 2009annual report: The costs of a risk managementprogramme that places an emphasis on preventionand control can be offset in the form of lower insurancepremium not to mention increased capacity andhigher limits for property, casualty and businessinterruption insurance.

Performance benetsIts not just better insurance terms that awaitcompanies prepared to go the extra mile on physicalloss protection. There is a strong correlation betweenrisk management and earnings stability, saysDr Deborah Pretty, principal, Oxford Metrica,commenting on a recent research study on Fortune1000-size companies.

By adopting strong risk management practicesto prevent re, natural hazards and other causes of property loss and business disruption, the ndingssuggest a company will reduce the frequency andseverity of these loss exposures, if not prevent them.

They may also reduce their earnings volatility too,enhancing shareholder value.

The Risk/Earnings Ratio study, commissioned byproperty insurer FM Global and conducted by OxfordMetrica, found that companies with best practices inmanaging property risks produced earnings that wereon average 40% less volatile than companies with lessadvanced physical risk management. Thats persuasiveevidence of a signicant return on investment.

Commenting in the report, packaging group BallCorporations senior vice-president and chief nancialofcer, Scott Morrison, said: The more volatility youtake out of your performance, the greater the reliability

of earnings which translates into a more consistentvaluation by Wall Street. Likewise, the more resourcesa company earmarks toward reducing risk, the higherthe opportunity for enhanced shareholder value.

FM Globals own internal quantitative researchshows that the average risk of property loss forcompanies with strong risk management practicesis 20 times lower than for those with weak practices.Poorly prepared rms were more than twice as likelyto experience a property loss and business disruption.And the average loss at a location deemed to haveweak risk management exceeds $3m ( 2.3m),compared with about $620,000 for a company thatmanages its physical risks well.

Rating agency Standard & Poors now includesenterprise risk management (ERM) as one of itscriteria when assessing companies, so high scorers arelikely to be better able to control, if not reduce, their

capital costs, in addition to strengthening investorcondence. And clearly robust risk management is akey part of ERM.

Waterer believes good risk management canalso give companies a competitive edge. For example,customers buying logistics services prefer suppliersthat can demonstrate a high level of loss controlin terms of warehouses or eets, he explains. Itbecomes an important part of the suppliers sellingproposition to customers, particularly with so manyoperating on a just in time delivery basis.

There can be big benets too for real estate andproperty companies, he adds. If a property company

loses an asset completely, or even fails to maintaingood security so that the property is vandalised, it willbe harder to sell that space to tenants in the future.

Waterer also believes that good risk managementcontrols can ease merger and acquisition activities.The assets and the controls and risk managementaround those assets can form an important part of thedue diligence process. If companies can demonstratethey are taking action to reduce the likelihood of majorevents and also have mitigation strategies, this willfacilitate the deal.

Spell it outWith European companies looking to cut costsin the current economic climate, risk managersneed to put their case for investment in loss protectionsuccinctly but strongly. They have to impart themessage that good risk management adds value in

a way that the board understands. Spelling out thebottom-line benets is a good strategy.

FM GlobalsThe Risk/Earnings Ratio studyconcludes: Preventing the potential of re and naturaldisasters, which are the major drivers of property lossand related business disruptions, provides conrmablebottom-line benets. Similarly, investing in preventingtwo other major contributors to property losses human error and equipment breakdown also canenhance corporate performance.

There are no guarantees, of course. But thendings demonstrate a signicant return oninvestment in loss prevention.

The value propositionRobust property risk management practices may call for serious investment in loss protection butthe benets for the corporate bottom line can often more than compensatePHYSICAL RISK MANAGEMENT PRACTICES

VS AVERAGE LOSS SEVERITY

The average nancial loss at a location deemed to have weak risk management practices exceeds $3m,compared with around $620,000 for a company that manages its physical risks well.

Source: The Risk/Earnings Ratio , FM Global

$620,000

$3m

All property-related perils (2005-08)

STRONG PRACTICES

WEAK PRACTICES

Strategic Risk Report on Property Risk

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Transcript of Strategic Risk Report on Property Risk