A lot depends on the strength of their enterprise-risk-management process. Did they inquire about the risk to that supplier, not only from a physical risk perspective but also about their downstream suppliers, like the company that supplies the steel to make that bearing that they need to put in their manufacturing process?
We’ve been very proactive in advising clients about the possibility of physical damage to suppliers not only from a fire standpoint but also because of natural disasters. I think a lot of companies will react to the situation in Japan, but they have similar risk with other suppliers throughout the world. You have to balance your desire for low cost with the risk that’s associated with that in the continuing production of your product.
China would be a much bigger concern than Japan as far as supply-chain risk, wouldn’t it?
Huge. We are probably more concerned about China than we are about Japan because not only do you have the earth-movement exposure in China, you also have typhoon risk. You have the Pearl River Delta. A major typhoon in that area would be comparable to putting a typhoon in some of the largest industrial areas in the southeast United States. And they don’t have the same codes and standards to prevent the damage that we do in the United States.
What’s your approach to entering emerging markets?
We tend to follow our clients: as they expand into new markets we go there, too, usually to address the needs of our [current] global customers, versus pursuing new business with indigenous companies.
Why not target local companies?
It all goes back to the risk-management philosophy. In emerging markets, does a company have the appetite and desire to protect its risks? Most often they lack the codes and standards that [support] good risk-management practices, and it’s not fair to our other clients to take on a subpar client where we know our loss costs long-term will probably be higher.
Are companies considering any new factors in their risk-management processes? Are they broadening their view of risk or including new things in their risk models?
After Japan, I think they’ll now be putting a lot of new things into their risk-management models. Before Japan, the risk-management function was being downsized a lot as part of companies’ cost-containment efforts. So a lot of risk managers were asked to do more with less. They had more responsibilities with fewer resources. In light of Japan, there might be another look at that. A lot of companies have to ask themselves, “What could we have done better in identifying risk to suppliers?”
Do you think that companies and CFOs think of risk management as an investment that they make in the business, or simply as a cost?
Historically, they’ve viewed it as a transactional function. In other words, insurance is a commodity that has to be purchased to protect the financial resources of the enterprise. They’ve probably tried to operate the risk-management department at the lowest possible cost. Now, I think they might look at not just the cost of the department, but also at the risk to the enterprise.
What do you think is the biggest mistake that companies make in thinking about risk and insurance?
In general, I think a lot of CFOs think of insurance as a commodity that they buy, and that all insurance is created equal. It’s not until you have an event that you find out that it is not created equal. Some coverages, capacities, and third-party counter-risks are better than others. That’s what I would say is probably the most common mistake: thinking that once you’ve transferred the risk you don’t have to manage it. That’s not true at all.