BC Risk and Insurance Management Association,16 January 2013

Michael Key, FM Global Vancouver Branch Manager

The majority of property loss is preventable…even in supply chains.

“World’s Best Supply Chain Risk Insurance Provider” Global Finance magazine in its July/August 2012 issue.

“Backed by 177 years of experience and an engineering staff with a deep knowledge of risk, FM Global is an industry winner when it comes to helping multinationals insure their supply chains,” says the magazine in its rankings of the World’s Best Supply Chain Finance Providers 2012. “With nearly US$7 billion in policyholder surplus, FM Global offers its clients extended supply chain risk insurance coverage. This envelops not only an insured's direct suppliers and customers but also suppliers and customers up and down the supply chain.”

The editorial team from Global Finance sought input from industry analysts, corporate executives and technology experts during the selection process and considered factors such as market share and global coverage, product innovation, customer service, technology, execution skills and client-specific implementations.

.

assets

$13B

revenue

$5.0B

Fortune 1000

545

employees

5000+

offices

63

assets

$13Brevenue

$5.0BFortune

1000

545

employees

5000+

offices

63

“Nearly 90 percent of firms do not conduct a risk assessment when outsourcing production.” “Supply Chain Risk: It's Time to Measure It”

Harvard Business Review Blog, Feb 5, 2010

Instead of trying to anticipate low-probability, high-impact events, we should reduce our vulnerability to them.

Let’s Get Real . . .

So What’s New?

Over 50% of Fortune 500 profit now comes from overseasSupply chains have become more complex, extending to tertiary levels and beyondDemographic change has placed more business in harm’s wayWe are in a truly intertwined global economyCatastrophe events are having deeper impact

Natural Catastrophes Worldwide;1980–2010Number

Meteorological events(Storm)

Hydrological events(Flood, mass movement)

Climatological events(Extreme temperature, drought, forest fire)

Geophysical events(Earthquake, tsunami,

volcanic eruption)

200

400

600

800

1 000

1 200

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

Source: Geo Risks Research, NatCatSERVICE.

© 2011 Munich Re

Volcanic eruption Island, March/April

Heat wave/ WildfiresRussia, July-Sept.

EarthquakeHaiti, 12 Jan.

Hurricane Karl, floodsMexico, 15-21 Sept.

Earthquake, tsunamiChile, 27 Feb.

Winter Storm Xynthia, storm surgeWestern Europe, 26-28 Feb.

Flash floodsFrance, 15 June

Earthquake China, 13 April Floods, flash floods,

landslidesChina, 13-29 June

Hailstorms, severe stormsAustralia, 22 March/6-7 March

EarthquakeNew Zealand, 4 Sept.

Severe storms, hailUnited States, 12-16 May

Severe storms, tornadoes, floodsUnited States, 30 April – 3 May

Typhoon MegiChina, Philippines,Taiwan, 18-24 Oct.

FloodsAustralia, Dec.

2010 Natural Catastrophes; 950 loss events

Source: Geo Risks Research, NatCatSERVIC.E

Root Causes Happening Concurrently

Globalization

UrbanizationInformation Technology

New emerging market leaders growing in numbers…

North Amer-

ica; 154

Rest of Developed World; 252

Emerg-ing

Mar-kets; 94

2011 Global Fortune 500

1996: 202006: 472016: >150

Seas/Space Emerging Markets Developed Markets

5%

69%

26%

4%

27%

69%Number of Events

Total Insured Losses

Source: Swiss Re Sigma Report No. 1/2011 Note: Catastrophes included are those with >$17mil insured losses,$85mil in economic losses, or 20+ deaths

Number of Catastrophes By Region, 2010

Of Particular Concern…

30% of World’s Consumer Electronics

Hong Kong

Shenzhen

Dongguan

Guangzhou

Forshan

Zhongshan

Zhuhai

Macau

“There is a 26% chance of a major flood or windstorm over the life of a building…in a 1 in 100 year flood zone.”– Lou Gritzo, VP Research FM Global, “Flirting with Disasters”, Reason

Magazine, Issue 1 2011.

Urbanization: Loss Aggregation

And Mostly In Nat Cat Areas

Beginning Phase

Establishing Phase

Mature Phase

Drive Towards Effective Supply Chain Risk

Management

Identification & Assessment

Avoidance & Reduction

Acceptanc

e &

Transfer RISK

Avoid or Mitigate the Interruption

Thoroughly understand your supply chain at every tier – loss control and business impact analysisMap the manufacturing processIdentify weaknessesHarden facilities, owned or otherwiseDuplicate if necessaryOverlay with financial mappingDefine acceptable riskCreate contingency and disaster plans

Avoid or Mitigate the Interruption

GovernanceRisk toleranceFinance and balance sheet considerationsManufacturing

LogisticsSales and MarketingHuman ResourcesRisk ManagementAnd More!

Requires top level commitment Must engage multiple disciplines

InsuranceCompany

LocalOperations

SuppliersGovernment/Regulators

Broker

StrategicAlliances

SeniorManagement

FinanceLegalInternal

External

IS

Risk Management“The Conductor”

• Property Damage• Business Interruption• Supply Chain Disruptions

Corporate Reputation Investor Confidence Market Share Self-insured Retentions/Deductibles Life Safety Environment Community and Employee Relations

What keeps CFO’s awake at night?

Opinion Research Corporation/FM Global Joint Survey of Top Business Risks to Top Revenue Drivers:

Competition is viewed as the biggest risk to revenue, followed by supply chain disruption and property-related risk

Most broadly cited consequence of disrupting a top revenue driver is a loss of competitiveness

What is the link between financial performance and risk quality?

FM Global commissioned Oxford Metrica to explore the

relationship between risk quality and financial performance.

The independent research establishes a clear connection

between skillful investment in property risk improvement and

sustained financial performance.

A clear, empirical connection was found between risk quality and shareholder value performance.

High-quality risk engineering was found to be strongly correlated with low cash flow volatility, a core value driver. Stable cash flow is a strong driver of value creation.

Risk quality is a strategic issue and an essential aspect of effective corporate governance procedures.

What is the link between financial performance and risk quality?

Q1 Q2 Q3 Q4$0

$300

$600

$900

$27 $79

$413

$816

~ 30 X

“Risk” Losses by FM Risk Mark Quartiles

Gross Loss $(Millions)

US$724,000

FirePhysical Risk Management Practices versus Ave. Loss Severity (2005-08)

US$3,200,000

US$478,000

Natural CatastrophesPhysical Risk Management Practicesversus Average Loss Severity (2005-08)

StrongPractices

US$3,400,000

WeakPractices

The Consequences Can Be Dire

StrongPractices

WeakPractices

2.34

0.34

0

0.5

1

1.5

2

2.5

UnimprovedLocations

ImprovedLocations

Do

llar

loss

per

$10

0 T

IV

Comparison of “Improved” and “Unimproved” Locations

Katrina Loss Comparison

The Opportunity….

Own and manage the riskUnderstand the exposuresHarden the supply chain, owned and non-ownedWith knowledge of the exposures, tailored supply chain insurance solutions can be created

Together these steps create: COMPETITIVE ADVANTAGE

When You’re ResilientYou’re in Business

The majority of property loss is preventable…even in supply chains.