When Storms and Floods Menace Business

More and more companies have operations that stretch overseas, where weather disasters are on the rise. How can they protect themselves?

by William J. Holstein

Whether related to climate change or not, recent windstorms, floods, and other natural disturbances are causing greater losses than ever to U.S. multinationals, says Shivan Subramaniam, chairman and chief executive of FM Global. The Johnston (R.I.) company insures about a third of the 1,000 largest U.S. corporations. Subramaniam says CEOs are going to have to do a better job anticipating disruptions to their global supply chains and information technology systems, among other steps, to avoid losing market share. Here are edited excerpts from a recent conversation:

What kind of help are CEOs asking for to avoid weather-related disruptions?

Our clients focus on prevention. They think: "A business disruption gives me loss of market share, maybe permanently." They lean on us to provide them with the expertise about how to avoid those disruptions.

First we help them assess their risks and develop preventive programs. Then we help develop a business continuity plan in case something does happen. The last step is providing a risk-transfer product, or insurance.

Isn't it harder to anticipate disruptions in view of how globalized everyone's supply chain has become?

Not all multinationals make what they sell anymore. More and more of them make products in places that are 5,000 and 10,000 miles away from where they sell them.

How will their enthusiasm for global supply chains be affected by weather disruptions?

The supply chains are getting very, very stretched. I don't know if it's because of climate change, but clearly there is an increase in the frequency and severity of disasters. At the same time, urbanization is increasingly occurring where you're most at risk. Areas exposed to earthquakes and windstorms are where the greatest urbanization and commercialization are occurring, primarily in Asia in places like the Pearl River Delta of southern China.

What does it all mean?

If you superimpose those two scenarios on a long supply chain, the probability of that supply chain breaking down has just increased dramatically.

What can a CEO do about that?

If I can't change where I am making this product or where I am warehousing it, can I bring to bear loss-prevention techniques—so that when the wind does blow, the building is intact? And if the water does rise, what can I do to prevent flooding?

The next step is to focus on control and mitigation—simple things like making sure the product is not stored at the lowest level. When the flood does occur, you're not swamping the product. Another simple thing is having backup power. So if your company depends on refrigeration and you have backup power, you're still in business.

Can you envision a day when CEOs might ask themselves whether it's time to bring production back to the U.S. because of supply chain disruptions?

I don't envision that because of the economic benefits. When you look at why they are extending the supply chain so far, it is because of enormous productivity and efficiency gains. Right now, the trade-off between efficiency and risk is still on the efficiency side.

How vulnerable to disruptions are the IT systems that companies have built globally?

That's the second-biggest challenge. These systems are getting more elaborate and more complex because one of their tasks is maintaining the global supply chains. That's why data centers and backup and networking are supremely important. Every major organization is looking at how they can back up the data centers. A lot of times, it's not your manufacturing that's most important. It's your data centers because they represent the ability to deal with and service clients.

The challenge is to develop as many redundant systems as you can without tipping the balance in terms of efficiency and productivity.

At some point, will U.S. companies have to spend more money to protect these systems?

Yes.