Risk Management

Bad Boy Scouts: Companies Unprepared for Big Hits

More than 50 percent of CFOs say their companies aren't ready for interruptions to their businesses.
Stephen TaubApril 22, 2002

Is your company prepared for a disruption to its major source of earnings? If not, you’re not alone.

More than 50 percent of finance executives say their companies are not well prepared for an interruption to their businesses. And around 25 percent concede their contingency plans are not adequate.

These are some of the findings of a poll of 200 chief financial officers, treasurers, and risk managers conducted by property-and-casualty insurer FM Global, the National Association of Corporate Treasurers, and management-consulting firm Sherbrooke Partners. More than 75 percent of the respondents indicated that a major disruption would have a dramatic impact on their companies’ earnings—or threaten their business continuity.

According to the study, respondents are most worried about property-related hazards—things like natural disasters, fires/explosions, terrorism/sabotage/theft, mechanical/electrical breakdowns, and service disruption. They’re not as concerned about casualty-related risks (such as product tampering and political risk).

The study also reveals a fairly sizable disconnect between finance managers and their superiors in assessing the potential damage stemming from a business interruption. More than one-third of the respondents, for instance, believe their companies’ senior management team lacks a complete understanding of what would happen to their companies’ earnings and shareholder value if an interruption occurred. That group also said their bosses don’t even know what would be covered by insurance in case of a business interruption.

The survey also shows a substantial difference in what risk managers and finance executives think about their companies’ contingency plans. “CFOs and treasurers say they are less confident in their company’s contingency planning efforts and consistently understated the scope of such planning compared with what their risk management counterparts state,” note the study’s authors. “The results also indicated significant challenges have yet to be addressed, including scenario planning and identifying production bottlenecks, even though contingency planning is a core process now instituted across most of the participants’ businesses.”

Smaller companies are more prone to buy as much as insurance as possible to fund a potential major disruption than bigger companies are, according to the survey. For example, half of the respondents from companies with less than $1 billion in revenues said they have “fully transferred” to others the overall risk associated with their top earnings driver. In contrast only one in four of the respondents from companies with more than $1 billion in sales cited full risk transfer. The remaining quarter of the survey’s participants said their companies have chosen to retain some risk on their balance sheets.

In addition, more than 80 percent of respondents consider terrorists attacks to be mostly an insurance event. “The results of this study indicate there are real, ongoing property hazards that affect a company’s top earnings drivers,” says Ruud Bosman, executive vice president of staff operations and planning at FM Global. “In particular, the potential impact property-related hazards can have has become more prominent as traditional insurance markets become less willing to indemnify all the associated risks after September 11.”