"This Is a Mega-Event."

The aftershocks of Japan's earthquake continue to ripple through the insurance market. An interview with Jeff Burchill, CFO of FM Global.

In a year that has thus far seen an earthquake in New Zealand; flooding in Brisbane, Australia; and a stunning combination of earthquakes, a tsunami, and nuclear-radiation leakage in Japan, insurance-industry CFOs have even more cause than usual to alert their clients to risk-management strategies. For his part, FM Global CFO Jeff Burchill has been traveling around the United States meeting with clients to preach the company’s particular risk-management gospel. The motto? All loss is preventable. As the finance chief at the 175-year-old commercial-property insurer, which last year had $4.7 billion in revenue, Burchill worries even more about risk management than most of his fellow CFOs. Right now, he says he’s focusing on three things: Japan, Japan, and Japan.

How has FM Global been affected by the crisis in Japan?

It is the event of the moment, and it appears it’s going to have some legs to it. It’s affecting us not only because we’re in the insurance industry, but also because we have an office in Japan, so we have employees there. We’re obviously concerned about their safety and well-being. We’ve long prided ourselves on the fact that we have our claims personnel and engineers on the ground as soon as the Red Cross shows up, and this is the first event that I’m aware of where we weren’t able to do that. We’re actually holding people back in Hong Kong because of concerns about radiation exposure.

What will the impact be on your clients?

That’s hard to say at this point; things are still developing [Editor's note: this interview was conducted on March 30]. I think there’s going to be some significant property damage. There will be some business-interruption claims, of course. There will also be dependent time-element claims. Those occur if XYZ company in New York gets a component made in Japan, and that component is a critical part of the company’s manufacturing process and it’s going to run out of that part in, say, December. That type of gap has some coverage under our policy.

How frequently does that kind of coverage get triggered?

This is going to be the first event where we have a lot of contingent time-element aggregation from one event. That’s because Japan is the third-largest economy in the world and this is a mega-event within that economy.

What are the biggest lessons that CFOs can take away from this catastrophe, regardless of whether they are doing business in Japan or have suppliers there?

The issue is, how well do you know the risk to your supply chain? I think a lot of CFOs are reactive to that issue. And some need to get proactive and think about how to prevent such risks from happening again.

What would have been an appropriate way to hedge that supply-chain risk?

That’s a very interesting question because, especially since 2008 with the weak economy, a lot of companies have made their profitability targets by reducing costs. That means they’ve gone to the lowest-cost supplier in many instances without knowing the risk of making one supplier a sole source of product.

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