Of the company’s 4,700 employees, 1,500 are loss-prevention engineers, identifying potential hazards to client properties, as well as FM’s own. “We have such faith in our standards and people that we’re willing to bet $75 million on them,” Burchill boasts.
FM Global’s go-it-alone approach is typical of many insurance companies, and shared by other large companies as well. BP Amoco, for example, has a long-standing policy not to insure incidents worth less than $500 million, absorbing risks below this amount on its balance sheet. As Stephen Cross, CEO of Aon Captive Services Group, which manages corporate insurance captives, puts it: “Why transfer risk to insurance companies that have weaker balance sheets than you do?”
But Cross also cites the downside to absorbing natural-disaster risk. “It’s fine to ‘go bare’ — without insurance — until something bad happens,” he explains. “And when something bad happens and shareholders learn you could have bought insurance to cover it, you open yourself up to recriminations. The only way to defend yourself in an action like that is to prove you’ve adequately and appropriately analyzed the risk against the cost of bearing it internally or shedding it to an [insurer].”
Science vs. Instinct
The determination of how much risk to absorb on the balance sheet and how much to transfer to insurance or capital- markets instruments is part science, part instinct. At GE Insurance Solutions, a reinsurance and commercial-insurance subsidiary of General Electric Co., all risks — strategic, operational, and financial — are identified, assessed, and quantified as part of the company’s enterprise risk management program.
“We look at the volatility associated with natural disasters, including our own facilities and our parent’s facilities,” says Marc Meiches, CFO of the Kansas City, Missouri-based insurer, which earned $8.2 billion in net premiums last year. “We look at the concentrations of our people in one facility and the risks that can be exposed to a natural disaster, and then make a determination of how much risk we are willing to retain. Typically, we take a large deductible and reinsure the rest.”
Like other prudent companies, GE Insurance rests its faith on its contingency plan in the event of disaster. “Frankly, we’re more concerned about the business-interruption risk after a hurricane than the property risk,” says chief risk officer Samira Barakat, who works closely with Meiches in overseeing the enterprise risk management program. “Our goal is to have people back working the day after a disaster strikes.” In July, GE Insurance tested its contingency plan following the bombings in the London subway system, which shut down the company’s European disbursement and treasury operations. “Within four hours, we were back up paying bills,” says Meiches. “We’re very serious about business interruption, which is why we are willing to absorb more of this risk on our balance sheet and use reinsurance to absorb the truly catastrophic risks.”
Fireman’s Fund Insurance Co. has a similar approach to its natural-disaster risks. “We have staff who are experts when it comes to modeling our exposure to property loss,” says Jill Paterson, executive vice president and CFO of the Novato, California-based multiline insurer, with $5 billion in 2004 revenues. “They use computer models that make a determination of probability to get a clearer picture of potential losses, based on the type of structure and the characteristics and intensity of a hurricane. We then push this data down to our underwriters’ desks to compare these potential loss scenarios with our surplus and with the reinsurance prices available in the marketplace.” (Owned by the large European financial-services company Allianz, Fireman’s Fund purchases reinsurance to protect itself from catastrophic risk, a portion of which is purchased from its parent company.)