The changing nature of risk: how to protect your business;
When it comes to the changing nature of risk for businesses worldwide, there are few as ‘in-the-know’ than FM Global’s Alex Eichstadt – Operations Vice President EMEA, Business Risk Consulting. He has recently been imparting his wisdom at this year’s Airmic Conference – the highlight of the risk management calendar.
The changing nature of risk – what exactly does this mean for businesses?
Alex Eichstadt: It’s about resilience in the supply chain ecosystem in parallel to the changing nature of risk. One of the big things is the change in the global political landscape. After World War II, there was a big shift from protectionism towards greater globalisation, with most first world nations being more or less committed to greater flows of people, capital and goods. But that’s been changing since the financial crisis of 2008 – with the Brexit vote last year, Trump’s election success last November, pursuit of bi-lateral trade deals over multi-national deals and the number of protectionist-type measures that we are now seeing implemented. When I talk about protectionist-type measures, I am talking about barriers to trade – things like tariffs. These highlight that there has been a shift towards greater protectionism. I am not saying globalisation is going away, but protectionism is increasing and its important to note that when this occurred in the 1930’s global trade was impacted by approximately 50%.
When it comes to natural catastrophes, can you say that one is more dangerous or costly for businesses than another?
Alex Eichstadt: All natural catastrophes are incredibly damaging and they are all costly – and will continue to be even more costly, due to the rise in the world’s population and the rapid development of emerging economies that are less resilient. And that’s partly why we’ve added a new factor into our Resilience Index this year, called ‘the rate of urbanisation’. While they are all damaging, we are continuing to see that flood is the most costly for businesses. A recent study highlights that businesses suffer about $6 billion in insurable property losses roughly every year. At the same time, that’s a risk that’s very predictable and preventable. Right now, there are about 1 in 10 commercial locations within a flood zone. The only way to handle this is with vigilance – flood walls, sealed walls, raising things off the floor and having a good plan in place.
Resilience is at the core of FM Global’s services and what it stands for – how do you think businesses can become more resilient to risk?
Alex Eichstadt: It’s about avoiding loss, but also how you can recover from it. There is so much that can arm a company with the information that they need to understand their risk better – for example, FM Global’s Flood Map and Resilience Index. Companies need to utilise the data at their fingertips to drive action to protect their facilities to the greatest extent possible, but also to have a plan in place so they can respond and recover as quickly as possible if the worst does happen. In the area I work in – business risk consulting – we help clients understand their exposures, but also come up with coherent, logical and actionable recovery plans, so that if the worst does happen they can respond.
Are some businesses complacent to risks involuntarily, as everyone is just trying to get on with their day jobs?
Alex Eichstadt: When there are large regional events on a global scale, it helps refocus attention. That drives people for a while, but then they get back to their day jobs. This happened in 2011 with the earthquake, tsunami, flooding in Thailand, and a lot of other events (it was kind of a ‘black swan year’ in many respects). Since then, there have been natural catastrophes, but not on the same level. So I think there are some companies that have become complacent since then.
What is FM Global’s Global Resilience Index, and why is it useful to businesses across the world?
Alex Eichstadt: It’s a data-driven tool that companies can use to evaluate their established supply chains, or to select new suppliers and to highlight which locations are potentially more resilient to a disruptive event. It ranks 130 countries and territories according to their enterprise resilience. It looks at 12 different drivers in three broad categories: economic, supply chain and risk quality. This year there are three new drivers: rate of urbanisation, inherent cyber risk and supply chain visibility within a country. So it really helps a company look at its locations – internal or external – and evaluate on an apples-to-apples basis, such as: is this location potentially more resilient? If not, should they change their view of their supply chain partnerships, their diversification strategy or inventory management practices, if they’re dealing with a supplier in a less resilient location?
FM Global has launched its own Global Flood Map. There are lots of flood maps available online – why is this one superior?
Alex Eichstadt: Until now, there has been a lack of consistency. What’s unique about FM Global’s Flood Map is that it makes almost anywhere in the world instantly accessible at the click of a button. You can see how exposed a location in a remote village in China is compared to your facility in the United States, for example. It highlights moderate and high hazard flood risks and that’s pretty unique. It’s the global nature of it that makes it superior. Companies in the past have had to look at a lot of studies and reports to fully understand their location’s risk. If you’re high risk, you then have to work out how critical that is to your revenue; does it support 50% of your revenue, or does it support 5%? And then you can decide whether to invest in that facility with flood barriers, sealed walls etc. It allows businesses to make informed decisions, otherwise they’re in the dark about what they should do.