Natural disasters are costly, commercially crippling and on the rise. Senior executives bear increasing personal responsibility for ensuring companies assess, manage and mitigate their natural hazard exposures appropriately, although not all are meeting this standard.
Hefty price tag
Lloyd's of London recently highlighted the cost of natural disasters when publishing its aggregated market results for 2018. Reporting a loss of US$1.2 billion for the year, the market cited the impact of hurricanes and wildfires as a major contributor to its poor performance.
It named hurricanes Florence and Michael, typhoon Jebi in Japan and the California wildfires among the natural catastrophes that had hit its bottom line. It states: "These disasters led to major claims costing the Lloyd's market US$3.5 billion, significantly higher than the long-term average US$2.3 billion, which contributed to a combined ratio of 104.5 percent in 2018."
Nor is it just Lloyd's of London that has found itself footing chunky bills from natural catastrophes. In the U.S., the federal government has had to cope with a string of disasters causing more than US$1.2 billion in damages.
Data collected by the National Oceanic and Atmospheric Administration shows that between 1980 and 2018 the U.S. government had to deal with an average of six billion-dollar disasters annually. But shortening the timeframe to the last five years—2014 to 2018—the yearly average more than doubled to 13 disasters.
Large losses are on the rise and the view that these sorts of events only occur once every hundred years no longer holds true.
CFOs in the crosshairs
In the face of more frequent and more costly natural disasters, there is growing pressure on companies to understand their exposures and have the appropriate risk management and mitigation strategies in place.
Where this is not the case, CFOs will come under increasing scrutiny to explain why they have not made their companies more resilient to such well-publicized exposures.
Following the 2017 hurricane season, FM Global spoke to senior executives at large U.S.-based companies with operations in affected geographies including Texas, Florida and Puerto Rico.
The research found that the hurricane season had negatively affected the operations of 64 percent of these businesses, and of those affected, 62 percent admitted they were "not completely prepared" to deal with the effects of the hurricanes.
Follow-up research published this year highlighted that some of the affected companies had suffered property damage and business disruption running to hundreds of millions of dollars from the 2017 hurricanes.
The scale of the losses and the acceptance that almost two-thirds of the biggest companies involved were ill-prepared, has led market commentators to emphasize the increasing personal responsibility that CFOs will face going forward.
Analytics to forecast the timing, severity and location of a natural weather event have improved dramatically, while risk prevention and management strategies are well-developed and demonstrably effective. Companies have the information and tools they need to protect themselves, and if they choose not to, then they will be held accountable.
But despite better predictive analytics and effective risk control techniques, there remains an ongoing reluctance, in some companies, to invest in risk improvement measures at the expense of short-term financial returns.
This was highlighted in the follow-up research and it states: "Many CFOs should be allocating more capital to reduce the financial impact of natural disasters, or risk facing volatile balance sheets and other potential consequences of their inaction."
Cost of benefit?
Improving corporate resilience to natural disasters is one of the many pressures on capital allocation, although figures from the National Institute of Building Sciences claim the return on investment is dramatic.
It analyzed results from 23 years of federally funded mitigation grants and found that for each dollar spent on hazard mitigation, the U.S. had saved US$6 in future disaster costs. It is difficult to argue that this was not money well spent.
But what do mitigation measures look like in practice?
Recommendations to mitigate against hurricane damage might include:
- Installing a backup power generator
- Inspecting and securing rooftops
- Bracing doors
- Covering windows
- Storing valuables and strapping down moveable items
Recommendations to mitigate against flooding might include:
- Elevating or sealing off valuable equipment
- Fastening down storage tanks
- Inspecting fire protection equipment
- Turning off utilities ahead of water ingress
- Using certified flood protection products to minimize reliance on sandbags
- Having a flood emergency plan
These risk mitigation measures are well within the capabilities of any business and require commitment rather than technical knowledge. They simply need careful planning, capital expenditure and ongoing review.
Given there are such low barriers to entry when it comes to enacting robust risk management and making companies more resilient to natural disaster, it is becoming increasingly difficult for CFOs to justify why they have not invested in safeguarding their company's future.
- National Oceanic and Atmospheric Administration, Billion-Dollar Weather and Climate Disasters: Overview https://www.ncdc.noaa.gov/billions/
- FM Global, https://newsroom.fmglobal.com/releases/senior-financial-executives-at-major-u-s-companies-admit-incomplete-preparations-in-the-wake-of-2017-hurricanes
- FM Global, https://newsroom.fmglobal.com/releases/cfos-beware-you-may-be-held-accountable-for-natural-catastrophe-losses-in-the-year-ahead
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