By DAN REYNOLDS, senior editor of Risk & Insurance®
FM Global, in conjunction with strategic advisor Oxford Metrica, has published study results that hammer home the connection between physical risk management and earnings volatility.
Using data culled from more than 520 companies, each of which has revenues of more than $1 billion, the Risk/Earnings Ratio Study found that earnings fluctuations between 2005 and 2007 for companies with strong risk management practices were around 17.9 percent. Volatility for companies with weak risk management practices was somewhere around 31.4 percent.
The difference was just as stark when measuring the average risk of a property loss, which is 20 times larger for companies with weak risk management practices than it is for companies with strong risk management practices.
The average property loss between 2005 and 2008 for a company with strong physical risk management processes, Oxford Metrica and FM Global found, was $620,000. What about for those with weak physical risk management processes? Try $3 million.
But how is FM Global in a position to take such measurements? The answer, from the commercial property insurer's perspective anyway, is engineering.
Ruud Bosman, FM Global's vice chairman, pointed to the fact that the Johnston, R.I.-based insurer has more than 1,600 engineers who visit and service client properties, taking detailed notes on their operations and physical risk management capabilities.
"So we have a very broad database now of a risk measure that is very strongly correlated to actual loss experience. So we had started with that, and then we asked the question: How does that relate to corporate performance, a company's financial performance, which is where this Oxford Metrica firm comes into it," Bosman said.
Bosman said that many FM Global clients understand the connection between physical risk management and paring losses. But what about companies that aren't FM Global customers, or aren't paired with an insurer that has the capabilities to guide them?
There is the purpose of this recent study, which is to make that connection between risk management and profitability, a connection which people don't intuitively make, he said.
June 17, 2010
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