Study Finds Companies Need to Prepare More for Property-Related Hazards

April 19, 2002

A study focusing on Fortune 1,000 chief financial officers (CFOs), treasurers and risk managers covering a broad range of industries reports more than 50 percent say their companies are not well-prepared to come back from a “major disruption to their top earnings driver,” and fewer than 25 percent of respondents believe their present contingency planning efforts are adequate.

More than 75 percent of the approximately 200 respondents indicated such a disruption either would cause sustained impact to their firm’s earnings or threaten their business continuity, according to the ‘Protecting Value Study,’ conducted by commercial and industrial property insurer FM Global, the National Association of Corporate Treasurers and management consulting firm Sherbrooke Partners to have a greater understanding of the role and value of risk management in major corporations.

Nearly all respondents indicated that property-related hazards encompassed the majority of threats that could impact their firm’s earnings. Such hazards reported included natural disasters, fire/explosion, terrorism/sabotage/theft, mechanical/electrical breakdown or service disruption, rather than casualty-related or other hazards such as product tampering or political risk.

Moreover, the study found major differences in how CFOs, treasurers and risk managers see the risks threatening their firms compared with their superiors’ views. More than one-third of CFOs, treasurers and risk managers feel their company’s senior management team lacks a complete understanding of the impact a major disruption would have on their firm’s earnings and shareholder value, their level of preparation for such risks, and what is covered by insurance in such an event.

The study further discovered a clear difference of opinion between risk managers and CFOs/treasurers regarding contingency planning efforts, underscoring the need for better communication between these groups. CFOs and treasurers say they are less confident in their company’s contingency planning efforts and consistently understated the scope of such planning completed compared with what their risk management counterparts state. The results also indicated significant challenges have yet to be addressed, including scenario planning and identifying production bottlenecks-even though contingency planning is a core process now instituted across most of the participants’ businesses.

On the insurance front, 50 percent of respondents from companies with less than US$1 billion in sales report they have “fully transferred” to others the overall risk associated with their top earnings driver, including damage, liability and business interruption. To a much different degree, only 26 percent of respondents from companies with more than US$1 billion in sales (“Fortune 1000”) indicated full risk transfer, while the remainder of respondents decided to retain a portion of risk on their balance sheets.

The comments of more than 80 percent of respondents indicated they consider the events of Sept. 11 largely an insurance event, underscoring the need for adequate coverage and thorough disaster-recovery plans.

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