SPECIAL REPORT

SPECIAL REPORT:

Property risk
contents
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PROTECTING YOUR ASSETS
Better control, costs, consistency how to get those elusive three Cs

NEW WORLD ORDER

Global commercial property programmes require careful designing

HIDDEN 48 THEFIRE COSTS OF

Protect both your business and the local community from the knock-on effects of a blaze

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THE VALUE PROPOSITION

Strengthen your property risk management and reap the rewards

This special report has been produced with input from FM Global: Martin Fessey martin.fessey@fmglobal.com Brendan MacGrath brendan.macgrath@fmglobal.com Malcolm Davis malcolm.davis@fmglobal.com

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Protecting your assets

Better control, costs and consistency the three Cs are there for the taking if risk managers can learn to manage their global loss protection programmes effectively and carefully

remises, equipment, supplies, nished products they all cost money and represent a large investment for most organisations. Commercial property loss protection clearly has to be high on the risk managers agenda. In this special report, we look at some of the considerations around this investment. For multinational organisations, a global programme can produce the three C benets better control, costs and consistency. But risk managers need to take care regarding the design of such a programme and be aware 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 subsidiaries that central insurance buying is a preferable alternative to them arranging their own cover, even though it may mean that they have to take a larger self-insured retention. Imparting the need for good risk management can also be difcult in territories where risk management does not feature highly in the business culture. For an organisation with operations in many areas, perhaps 50 or more, ensuring compliance with local insurance regulations is another challenge for both itself and its insurers. The penalties for failure to comply can be draconian, and a regulatory breach can also result in penalties for local directors and ofcers. While a global master policy may provide difference in conditions cover, with compensation beyond that provided by local policies, there can be tax issues if it is necessary to refund money to overseas subsidiaries. These are just some of the issues associated with multinational insurance programmes. If risk managers want to get the benet of the three Cs, they need to tread carefully and take heed of the advice from their insurers and brokers.

Good risk management can give an organisation a competitive edge by convincing customers of continuity of supply and services
Sustainability is also a key consideration for European companies. The need to reduce their carbon footprint is a major concern, and good risk management can help here too. Sustainability is not just about reducing power usage and adopting green supplies. For example, if a building burns down, the carbon footprint associated with ghting the re and the subsequent rebuilding can be considerable. The loss of a facility can have major repercussions, not only for the organisation concerned, but also for its employees, suppliers and the local community perhaps even for the country as a whole if that organisation decides to rebuild and relocate elsewhere.

Once again, the answer lies in preventing and mitigating losses. In the case of reducing re losses, installing sprinkler installations is a green solution, and there is considerable evidence to back up this claim (see The rst line of defence, page 48).

Reap the rewards

Companies need to invest in commercial property loss protection, but the money spent can produce nancial and reputational rewards. Offsetting the costs are the reductions that businesses can realise in insurance premiums when transferring their risks to insurers. A well risk-managed company can expect to obtain better cover as well. There are other advantages too. Reducing losses also reduces earnings volatility, which will increase shareholder value. Demonstrating good risk management practices can give an organisation a competitive edge by convincing customers of continuity of supply and services. It can smooth the path of mergers and acquisitions deals. And as good risk management now has a bearing on companies credit ratings, this will help them to reduce the cost of capital.

New hazards
While having a global programme in place can produce real benets, risk managers are only likely to reap the greatest rewards if they have robust loss protection and mitigation procedures in place. They need to look carefully at this area, as climate change is producing unforeseen weather extremes, which are affecting many countries in Europe. Losses from oods and windstorms have escalated in the past two years, affecting some areas not normally associated with such hazards. There are some basic relatively low-cost prevention strategies that can help risk managers avoid major problems, however.

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New world order

Corporate multinational property insurance programmes can provide signicant cost and control benets but risk managers should be aware of the potential pitfalls

he trend for going global started several years ago as organisations based in the more developed regions expanded their activities. However, a big economic shift is taking place between the emerging BRIC (Brazil, Russia, India and 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 in regions such as Asia, Latin America and the Middle East, which are becoming increasingly signicant. They in turn are expanding into the USA and Europe, developing their operations there and in some cases looking to make acquisitions. Its a trend that looks set to continue, with some commentators predicting that the economies of BRIC countries will be larger than those of the industrialised G7 countries by 2030. Wherever the push for globalisation occurs, one thing is certain: it drives the need for exible, far-reaching global services in which insurance buying plays a big part. But designing and operating a multinational commercial property insurance programme is far from straightforward. The world is becoming a far more complicated place to do business, Davis says. If you are a risk manager in a big multinational corporation, there are signicant challenges in operating in this increasingly complex world. And the more countries your corporation goes into, the more challenges you may have to grapple with in making sure your companys assets are protected and also endeavouring to promote and encourage risk improvement activity. There is an increasing realisation in the risk management community of the benets in having a single programme that insures the companys property wherever it operates. Aon UKs managing director, property and casualty group, Andrew Laing, says: A major benet of global programmes can be cost efciency, with the ability to leverage a larger premium as opposed to having individual smaller covers. A centralised approach also gives the risk manager greater control. And there is efciency associated with just having to manage one premium, while the risk manager enjoys the certainty that coverage is being purchased more consistently. Simon Edge, a partner in JLTs property team, agrees that a global programme gives the risk manager increased control and can often produce big cost savings. When we are involved in setting up a global programme, we often nd there has

been signicant duplication of cover. This happens because local ofces have been buying their own policies and in many cases additionally paying fees to local brokers. Centralisation can often eliminate local brokers fees and remove duplication, which keeps down costs. The company will generally be able to obtain improved and more consistent cover worldwide.

Challenges
But 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 minds of risk managers. How can I extend our global programme to our new Chinese subsidiaries? Bearing in mind language and travel constraints, how do I communicate with managers in these new subsidiaries and talk to them about risk improvement or insurance protection? Seeking answers to such questions can present a real hurdle, says Davis, particularly in the current economic climate. Many risk managers in big corporations are now working alone or with smaller teams, which can make it doubly difcult to cope

with this new landscape of extra countries and risk management challenges. It can also be difcult to secure senior management backing to implement a consistent corporate risk management philosophy across an organisation. In theory, the cost savings should present a persuasive argument 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 and insurance purchasing are made by head ofce. These are then rolled out to subsidiaries around the world, which will generally adopt them with little, if any, argument. However, other organisations particularly those that have grown globally by acquiring companies may not have that complete corporate control from head ofce because of differences in corporate and local cultures. Businesses with key divisions in regions remote from head ofce may have quite senior management in place; its not unusual in terms of employee numbers,

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turnover and prot contribution for these regional business units to generate a signicant proportion of the entire organisations result. In such situations, those regional senior managers may take the view that they should have a say in what happens in their regional area and may well question or even resist some elements of the policies that emerge from the corporate head ofce. With that sort of prole, its much harder for the risk manager in the head ofce to achieve consistent outcomes with all business units worldwide. Aons Laing agrees, also citing problems with premiums and retentions. Once you have put the global programme together, issues can arise with the allocation of costs back out to the subsidiaries. There may be problems with local divisions that believe they can buy cheaper in their local market. That may be true in some cases but overall the business would lose out on efciency. He adds: When you are arranging a big global programme, the insurance markets are typically more competitive if the insured carries a sensibly sized retention to reect what is essentially a much bigger organisation. There can be issues with the local organisations that are not used to having such a large retention, but there are ways in which we can structure a retention strategy that effectively addresses both the needs of the insurers and the local organisation. Regional divisions may not just need convincing over central insurance buying. Davis explains: In emerging countries such as Asia and South America, risk management philosophies and cultures are much less developed than in Europe or North America. This can present challenges for the sophisticated risk manager at head ofce who is trying to implement a global risk management programme and pursue loss prevention strategies. It can be difcult to communicate the corporate risk management philosophy and plans to some business units around the world and persuade them that its in their local interests to adopt such approaches. While theres certainly value in communicating consistent global risk management guidelines and policies, there are many benets to be gained from helping employees globally understand why it makes sense to invest money in loss protection. Enterprise-wide learning can go a long way.

There may be problems with local divisions that believe they can buy cheaper in their local market Andrew Laing, Aon
This leads inevitably to what many believe is the most important issue for multinational insurance programmes compliance. Davis says: Compliance is the issue that drives clients, insurance companies and brokers. Many organisations now devote substantial time and effort to making sure their insurance programme is compliant and that their assets across the globe are protected in accordance with local laws and regulations. Compliance can affect the way policies and premium invoices are issued and the currency in which premiums are invoiced in fact, most elements surrounding the insurance contract and premium payment arrangements. Many countries have detailed regulations 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 limit insurers from putting in place exactly the cover they would prefer. At FM Global, we try to maximise the amount of locally admitted cover that we put in place in each country and thus minimise the amount of difference in conditions or gap cover included on the master policy. The aim is to make sure clients have a programme where they have a known amount of local coverage in place in each country that complies with any local regulatory rules, and that any identiable gaps with the corporate programme specication can be made up in the master policy. In recent years, many countries regulators have become increasingly prescriptive in terms of how they want insurance cover to be arranged. In some cases, arranging non-admitted cover (cover provided by an insurer that is not locally licensed) for assets in certain countries is illegal. Breaching regulations can result in severe penalties and nes for the local division involved and could also expose its directors and ofcers to nes and penalties. JLTs Edge explains: Insurers who have a locally licensed ofce or a partner with a locally licensed ofce in the territory concerned will ask that ofce to issue the local policy. But the master policy will generally be issued to the parent organisation in the country where their head ofce is located. Where required, a local policy will be issued to the local entity, which ensures compliance with local regulations. The master policy will generally cover differences in cover and limits.

Local policies are usually issued to what is known as good local standards. JLT property partner David Powell adds: Another reason for having a local policy is that it can be difcult for the insurer writing the master policy to pay a claim to the local subsidiary without the insured incurring an additional tax liability. Where a multinational has a truly global spread, there are not many fronting insurers that are licensed to issue policies in all the territories themselves. Some partner with a number of other underwriters to provide the necessary network. But he warns: The more people you have involved with issuing local paper, the more complicated it can become. Edge adds: The local ofce will often impose a minimum premium charge and may add a servicing fee, which means it is not always viable to cede to a global. The inclusion of difference in conditions cover in the master policy might suggest that theres no need to worry if the local policy doesnt match the global one too closely. But Edge points to the danger in this approach. In the event of a loss where the global master policy is called into play (because the local policy is restrictive in cover or limits), the local entity will be paid out by the local policy, and anything additional thats covered by the master policy will normally be paid centrally to the parent. Reimbursing that money to the local entity may have tax implications because it may be treated as a capital payment or asset coming in, rather than an insurance payment. In order to minimise the likelihood of that kind of central payment, insurers such as FM Global have endeavoured to ensure that their local policies are as close to the master policy wording as possible. It is possible to structure master policies so that they include payment of any additional taxes as a result of losses being compensated by the master policy.

Cost efciency
Cost efciency rates high among the benets of multinational programmes. So how exactly can this be achieved? Powell stresses that all large multinational programmes are different. Most of the programmes we design are bespoke to suit our clients needs. Each programme will have a different spread of territories involved, resulting in varying levels of catastrophe exposures that will, in turn, have aggregation considerations for risk carriers. You also need to consider what level of loss limit the client is looking to buy or needs. Inevitably, the laws of supply and demand can have an impact. The higher limit you have to buy, the more you need to draw in slightly more expensive capacity to complete placement.

Consistency and compliance

Achieving consistency around the world should be an integral benet of multinational programmes, whether in terms of the approach to loss prevention and risk management or insurance coverage. Yet it is not always possible to install in every country a local insurance policy that matches the corporate head ofce model of what they would like to see in place.

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He also points out that it can be benecial to arrange a layered programme rather than using purely quota share support. Layering can help you to generate cheaper capacity because underwriters model risk exposures differently. When setting premiums, their models work on the basis that losses will be skewed towards the bottom of the limit of liability but not necessarily in the same proportions. Taking a simple example, if you take the rst 50% of the limit of liability, while one underwriters model might 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 put 75% and 20% together, there is clearly a saving to the insured assuming both underwriters are working to the same base rate.

Security
By their very nature, multinational policies involve insurers putting all their eggs in one basket that of the fronting insurer. Not surprisingly, insurer security is an issue and theres a great deal of focus on insurers ratings. For risk managers, a crucial part of arranging a multinational programme is supplying high-quality data to underwriters. Laing says: Insurers and reinsurers are reliant on good-quality data its absolutely essential for cat modelling and brokers want to make sure they present the risk in the best possible way. For organisations that are already centralised, providing the data is fairly straightforward because they already have it. For decentralised organisations it is much more challenging. Risk managers can call on their brokers to help here, while insurers such as FM Global, which have representatives in the various territories, can also assist. As corporations grow and move into more countries, it becomes more difcult to stay on top of changes going on around the world, Davis says. For example, the risk manager of a company that has taken over several companies in a fairly short time may have great difculty in getting information about their global locations, asset values and so on. Our local service personnel around the world can help get that information and report it back to the risk manager in the home country. He stresses that even companies of a similar size with an equal number of subsidiaries in the same regions may have very different servicing needs. In some cases, we are asked to visit each of a clients local subsidiaries around the world, explain the new insurance policy, describe how the programme is designed to work and get feedback for the risk manager. In other cases, we manage the issuance and distribution of policy documentation but do not make face-to-face visits to local subsidiaries.

Clients may also need assistance with risk improvement at their local facilities. FM Globals approach is to have a consistently trained team of local loss prevention engineers around the world who know the languages and the cultures of the countries where they work. They visit a clients local facilities, help them understand the property risks they may have, and recommend appropriate risk improvements, Davis says. Powell says there can be a number of advantages to a multinational company using a captive insurance

Layering can help you generate cheaper capacity because underwriters model risk exposures differently David Powell, JLT
company to retain some of the risk. Specialist advice can be provided to ensure such a solution is properly tailored to the insureds unique circumstances. One obvious advantage would be the insured groups retention of part of their overall premium spend, especially where the premium being quoted at the primary level has been inated by (re)insurers due to 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 a licensed insurer in the territories where the primary paper needs to be issued, he says. This generally has credit implications because the fronting company will want to be condent that they will be reimbursed for any claims they pay out on behalf of the captive. Letters of credit or a parental guarantee are often therefore required.

Jurisdiction
The applicable jurisdiction for policy disputes is another area for consideration when designing the programme, says Edge. While the master

policy is usually subject to the law of the parent companys home country, any local policies will be subject to local jurisdiction. If there is a conict between the local policy and the global master, where the fronting company and the local policy issuing company are part of the same group a problem should not arise. However, its important to ensure that the reinsurance cover is subject to the same law and jurisdiction for dispute resolution as the master policy, he adds. Otherwise there is potential for disputes to be held in more than one jurisdiction and under conicting laws, which could result in different outcomes for the fronting policy and the reinsurance contracts. With a programme encompassing many client locations in a large number of countries, managing premium ow is an important consideration. Many of our bigger clients have their own captive insurer, David says. Were often asked to lead their global programme, issue local policies and collect premiums from countries around the world. We then share an agreed amount of the risk and premium with the captive. We therefore need to manage the entire premium ow from the front to the back end, and we need to work quickly to get policies and premium invoices issued in the various countries, collect premiums and then pay the agreed share to the captive. Obviously, the captive wants its money as quickly as possible after the policy inception or renewal date. We are often able to achieve payment to the captive within 30 and 45 days after the renewal date. Global commercial property programmes can offer signicant advantages to companies but clearly theres a lot to consider when designing and arranging them. Davis concludes: As a mutual organisation, FM Global has always focused on service delivery to clients. As more of our clients opt for multinational property programmes, we have extended that principle worldwide to help clients navigate the challenges of going global.

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The rst line of defence

The 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 sprinkler protection could take businesses out of the line of re, says FM Globals Brendan MacGrath
t around 11pm on a Saturday night in February 2005, a small re started in a room on the 21st story of the Torre Windsor high-rise ofce building in downtown Madrid, Spain. Despite the efforts of the permanent security staff and the professional re brigade which used 1.6 million gallons (six million litres) of water to prevent the blaze from spreading to adjacent neighbouring propertiesthe 32-story, 100-metre-high building became engulfed in ames; by morning it had partially collapsed. Fearing further collapse, the city set up a 500 metre exclusion zone around the building, forcing nearby businesses to shut. This affected some 30,000 workers. At the same time, many roads and railways feeding this important business district were shut down. And, because of the buildings central location, its demolition had to be a gradual dismantling a process that led to signicant disruption in the area for the next six months. The estimated cost of the re, including insured damages to third parties, approached 300m. More difcult to measure was the damage this highly publicised catastrophe had on Madrids image as the business capital of Spains economy, and as an important tourist destination especially at a time when it was considered a front-running contender to host the 2012 Olympics. A few years earlier, also in Madrid, on New Years Day 2002, a short circuit from an operating portable electrical heater started a re in a seven-story ofce building. But unlike the Torre Windsor, this facility was tted with a sprinkler system. Three sprinkler heads operated, successfully controlling and ultimately extinguishing the re by the time the public re brigade, notied by the water ow alarm, arrived. An estimated 26,000 litres of sprinkler water was applied; 230 times less than that consumed by hose streams during the Torre Windsor ofce re. The estimated total loss cost was just 175,000. Perhaps most important, the buildings staff returned to

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

Knock-on effects
There are countless examples of res in facilities in Europe and around the globe that have caused widespread disruption and ruin, and the wider effects can be disasterous to communities. In Denmark, for example, two separate res destroyed two large pork-product processing facilities. During the time it took for demolition, rebuilding and repairs to be completed, more than 1,300 employees were forced to look for work elsewhere not to mention the impact to the staff working at those companies supplying raw materials and services to

The sprinkler is a device for the protection not only of properties and their assets, but also of people, their livelihoods, the environment, the local community, the economy
the facilities creating a sense of uncertainty that put 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 to relocate jobs to another country with lower costs. Such was the fate of 200 jobs following a major re at an electrical manufacturing plant in the UK: the plant closed and the operations were transferred to a facility in Greece. Indeed, re affects the economy not just at the local level, but at the national level as well. In Treviso, Italy, a domestic appliance manufacturing facility 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 urban area were ordered to keep their windows closed. The toll on the community was so great that the manufacturing company involved was questioned by the authorities on whether it took the necessary measures to prevent this event and its consequences. Each of the above catastrophes has one thing in common: the buildings involved were not tted with an automatic re sprinkler system. Had an adequately designed, installed and maintained system been provided, the outcome and overall impact would almost certainly have been different. Contrast the above examples of uncontrolled re with what happened in France one Friday evening in August 2007. Following an argument with a few colleagues, a disgruntled employee at an 8,000 sq metre spare parts warehouse set re to some of the facilitys cartoned goods, which were in high-rack storage. Four sprinkler heads positioned above the re operated promptly, limiting damage to one bay of the rack. All employees safely evacuated the building, and the re brigade, upon its arrival, quickly extinguished what was essentially the size of a still incipient re. There was no reported impact to the environment, and operations at the facility resumed as usual the following Monday.

The tip of the iceberg

While the property insurance costs of major re events are readily quantiable, their total economic cost and broader impact on society on the community, on the environment, on the safety of building occupants and emergency services are not. Indeed, the property and business interruption loss costs represent only the tip of the iceberg; much of the total impact and cost of re to society remain largely hidden from view. Observed from this perspective, the sprinkler is a device for the protection not only of properties and their assets, but also of people, their livelihoods, the environment, 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-economic level to be between 1% and 2% of a countrys gross

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domestic product and the potential benets of sprinklers, it is appropriate that legislation should regulate for positive change in this area. When it comes to the wider benets of something as straightforward as automatic sprinkler protection, consider the following:

material and goods is liberated. Carbon is then consumed in treating the debris and in manufacturing replacement material. So, a re in an unsprinklered facility might generate three to four times the carbon dioxide of a facility with sprinklers.

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

SUPPLY CHAIN
A facility in an emerging economy is no longer just another supplier turning out nuts and bolts; its now a critical link in the chain of an enterprises global production line. Countries with emerging economies, then, should help companies maintain the resilience of their supply chain, by having codes that mandate wellprotected facilities. If a company outsources production overseas to a facility where a big re occurs, other companies may think twice about building a plant there. Insurance premium savings for an individual location alone will rarely justify the cost of adding an automatic re protection if a traditional cost-benet analysis is performed. Yet, a properly designed and installed sprinkler system will reduce both the probability and severity of a major re. Companies, in turn, will certainly benet from better and more stable insurance premium compared with those that do not see the value of sprinklers. Sadly, the latter approach will leave many unprotected facilities at increased risk of a major re, as well as the many wider economic, societal and sustainability consequences. Brendan MacGrath is manager of FM Globals International Codes and Standards Group

SUSTAINABILITY SOCIETY
Building codes exist to protect society and third parties namely, employees, responding re services, and neighbouring properties from the risk posed by activity carried out at a particular property. But shouldnt codes also require the protection of the facility itself, considering all the value derived from that 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 the people working there? What about the jobs of all the suppliers? The impact goes far beyond the fence line. Automatic sprinkler systems can reduce, even eliminate, the consequences a re can have on society as a whole. When we hear about the sustainable design of a building, we tend to think of the environment. But its not just a green issue. A building provides important contributions to the local and macro economies throughout its life cycle. Whats more, sustainability is a key reputation driver, for both investor and authority stakeholders. For regulators, the question is how to protect the important 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 see increased development due to foreign investment, theyre adapting more rapidly to newer protection philosophies and techniques. The more nascent or dynamic the market, in general, the quicker it is to embrace the concept and benets of sprinkler protection via regulations. The sprinklers proven reliability allows all stakeholders to feel condent that a facility is better

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

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The value proposition

Robust property risk management practices may call for serious investment in loss protection but the benets for the corporate bottom line can often more than compensate

ompanies that have a strong property risk management strategy in place are in a good position when it comes to transferring risk to the insurance market. And it brings other rewards too, in terms of enhanced shareholder value. Strong risk management will help businesses secure better terms in the insurance market, Marsh EMEA property practice leader Caroline Woolley says. She believes that providing as much information as possible about this can create competition in the insurance market and put the business in a better negotiating position. Marsh Risk Consulting senior vice-president Richard Waterer adds: Those businesses that possess full information about their risks will ultimately reduce their cost of risk. As Kate Loades, group insurance and risk manager of media company Pearson, said in FM Globals 2009 annual report: The costs of a risk management programme that places an emphasis on prevention and control can be offset in the form of lower insurance premium not to mention increased capacity and higher limits for property, casualty and business interruption insurance.

PHYSICAL 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.

All property-related perils (2005-08)

$620,000
STRONG PRACTICES

$3m
WEAK PRACTICES
Source: The Risk/Earnings Ratio, FM Global

Performance benets
Its not just better insurance terms that await companies prepared to go the extra mile on physical loss protection. There is a strong correlation between risk management and earnings stability, says Dr Deborah Pretty, principal, Oxford Metrica, commenting on a recent research study on Fortune 1000-size companies. By adopting strong risk management practices to prevent re, natural hazards and other causes of property loss and business disruption, the ndings suggest a company will reduce the frequency and severity 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 by property insurer FM Global and conducted by Oxford Metrica, found that companies with best practices in managing property risks produced earnings that were on average 40% less volatile than companies with less advanced physical risk management. Thats persuasive evidence of a signicant return on investment. Commenting in the report, packaging group Ball Corporations senior vice-president and chief nancial ofcer, Scott Morrison, said: The more volatility you take out of your performance, the greater the reliability

of earnings which translates into a more consistent valuation by Wall Street. Likewise, the more resources a company earmarks toward reducing risk, the higher the opportunity for enhanced shareholder value. FM Globals own internal quantitative research shows that the average risk of property loss for companies with strong risk management practices is 20 times lower than for those with weak practices. Poorly prepared rms were more than twice as likely to experience a property loss and business disruption. And the average loss at a location deemed to have weak risk management exceeds $3m (2.3m), compared with about $620,000 for a company that manages its physical risks well. Rating agency Standard & Poors now includes enterprise risk management (ERM) as one of its criteria when assessing companies, so high scorers are likely to be better able to control, if not reduce, their capital costs, in addition to strengthening investor condence. And clearly robust risk management is a key part of ERM. Waterer believes good risk management can also give companies a competitive edge. For example, customers buying logistics services prefer suppliers that can demonstrate a high level of loss control in terms of warehouses or eets, he explains. It becomes an important part of the suppliers selling proposition to customers, particularly with so many operating on a just in time delivery basis. There can be big benets too for real estate and property companies, he adds. If a property company

loses an asset completely, or even fails to maintain good security so that the property is vandalised, it will be harder to sell that space to tenants in the future. Waterer also believes that good risk management controls can ease merger and acquisition activities. The assets and the controls and risk management around those assets can form an important part of the due diligence process. If companies can demonstrate they are taking action to reduce the likelihood of major events and also have mitigation strategies, this will facilitate the deal.

Spell it out
With European companies looking to cut costs in the current economic climate, risk managers need to put their case for investment in loss protection succinctly but strongly. They have to impart the message that good risk management adds value in a way that the board understands. Spelling out the bottom-line benets is a good strategy. FM Globals The Risk/Earnings Ratio study concludes: Preventing the potential of re and natural disasters, which are the major drivers of property loss and related business disruptions, provides conrmable bottom-line benets. Similarly, investing in preventing two other major contributors to property losses human error and equipment breakdown also can enhance corporate performance. There are no guarantees, of course. But the ndings demonstrate a signicant return on investment in loss prevention.

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