How to build resilience through property construction (part 1)

Published on Fri, 31/07/2015 - 23:00

The most successful businesses know that insurance is only half the answer when it comes to property damage: careful planning at the outset can improve business continuity and financial success. In the first of a two-part feature, Russell Kirby of FM Global, explains why having strong physical risk management practices can reduce the risk of property loss by twenty-fold.

Smart businesses take loss prevention into account during the early stages of specification, design and construction in both new projects and regenerated buildings. Beyond meeting the minimum codes and standards, they make planning decisions that are functional for their needs and best protect their people and assets.

Resilient businesses go a step further. During the planning or retrofitting process they aim to ask and answer questions such as: what is our objective in terms of business continuity? How resilient is our building and business should a loss occur? And how can we avoid a big incident in the first place, so that we have a business to go back to in case of a disaster?

Improved earnings

These businesses know that insurance helps alleviate some of the cost associated with property damage, but it isn’t the only answer, especially considering the loss of customers, productivity, goodwill and staff.  They also know that businesses that are able to avoid substantial losses will outperform competitors and create real and sustainable competitive advantage.

In fact, a study commissioned by FM Global, looking into FORTUNE 1000-size companies, showed that businesses with strong physical risk management practices, on average, produced earnings that fluctuated by roughly 18%, whereas those with weak physical risk management practices, on average, had earnings that fluctuated by about 31%.

Additionally, at FM Global we have discovered that the average risk of a property loss is 20 times larger for companies with weak physical risk management practices than for those with strong physical risk management practices. Factoring in the financial costs of these losses indicates that the average loss at a location deemed to have weak physical risk management practices exceeds US$3 million, compared with approximately US$620,000 for a company that manages its physical risks well. 

Competitive edge

Having a resilient business can also lead to competitive advantage. For example, in 2011 analysts gave the floods in Thailand as the primary reason for Seagate Technology recapturing the worldwide lead in hard disk drive shipments from Western Digital in the last quarter of the year. Seagate located their HDD manufacturing plant on high ground, and as such, were less adversely affected by the floods and able to continue business as usual and as a result gain the market leadership position.

Understanding the key areas of exposure for a business for either a new property project or retrofitting an existing one is a joint effort between all parties involved. However, it should be the role of a proactive insurer to help in the identification and management of risk in a collaborative manner with a client, recognising the needs of the business and the client’s business priorities.

At FM Global, for example, we are able to help clients identify where they are most likely to suffer a property loss and what the business consequences of this loss will be through a tool we’ve developed called RiskMark. The tool provides a quantitative assessment of risk for each location our engineers visit (around 60,000 locations per year), and factors in fire risk, equipment hazard risk, natural perils, organisational risks and specific occupancy risk. This in turn helps clients decide where best to prioritise their risk improvement budget, and pinpoint critical properties in terms of revenue impact.

Of course, once a business has identified their key areas of exposure, they must think about the actions that need to be taken to incorporate resilience within the stages of specification, design and construction.

 

Read part 2 of this article next month, in which the author gives practical next steps for achieving resilience through best-practice property planning.

Russell Kirby is group manager account engineering at FM Global.

Careful property planning can lead to competitive advantage