The Business Case for Preparedness
Impacting Borrowing Costs / Debt Service
May 23, 2008 11:31 PM
Corporations risk substantial legal liability if they do put in place appropriate emergency preparedness programs.
A firm's level of preparedness can clearly impact its ability to repay debt and deliver value to shareholders. Rating agencies are beginning to recognize this.
Source: "Crediting Preparedness", William G. Raisch - Director & Matt Statler, Ph.D. - Associate Director, International Center for Enterprise Preparedness, New York University, 8/2/2006
- "Businesses operate in an increasingly uncertain global environment with growing operational risks from a diversity of sources ranging from technology failures and supply chain interruptions to natural disasters and pandemics. A business' capacity to manage these risks has become an increasingly important component of its financial condition. In the interest of enabling more informed financial decisions by both investors and creditors, rating agencies should include an assessment of corporate preparedness in the rating process."
- Effective management response and corporate preparedness programs can significantly mitigate the impact of operational risk events and affect corporate recovery."
- There are significant developments in securities regulation, among insurance industry rating agencies, and among private sector companies that demonstrate the relevance of preparedness to a firm's capacity to repay debt and deliver value to stakeholders."
- Specific and higher profile inclusion of corporate preparedness in rating agency underwriting processes would yield multiple benefits.
- First, by acknowledging the importance of preparedness for operational risks, it would provide creditors and investors with more comprehensive and accurate assessment of creditworthiness;
- Second, it would allow investors and creditors to identify those industry-leading firms that have already learned lessons from 9/11, Katrina and other catastrophic events, and proactively undertaken key preparedness measures;
- And finally, by introducing a competitive dimension to preparedness through specific acknowledgement in the underwriting process, it would provide an incentive for firms to develop more robust preparedness programs and consequently improve the overall resilience of the global marketplace."
- A compelling illustration of the impact of organizational preparedness can be found in recent research by FM Global, the major property and casualty insurance firm. The firm acknowledges that business interruption insurance is the last line of defense against business interruption, and that the first and most important step is a holistic risk management program that includes all aspects of the organization. FM Global provides site-specific, scientifically-based loss prevention recommendations as part of its coverage. In the aftermath of last year's hurricanes, FM Global compared the loss history of those of its policyholders which implemented its loss prevention recommendations versus those that still had recommendations to complete. They found that those policyholders that fully implemented the preparedness recommendations had on average 75% to 85% lower dollar losses than those policyholders which did not implement such measures. As to the cost of physical improvements and preparedness, the research indicated a remarkable return on investment. In the case of Hurricane Katrina, across 476 locations with a total of $42 billion in insured property exposed to the hurricane's impact, FM Global clients collectively spent $2.3 million to prevent a projected $480 million in loss, with cost of those improvements averaging only $7,400 per facility. That equals a 208 to 1 payback - or in other words, for every $1 spent on targeted preparedness measures, $208 in resources were saved in one single event." Link to InterCEP's Case Study: http://www.nyu.edu/intercep/events/20061009-256.html
- InterCEP has additionally gathered anecdotal data suggesting that within this competitive environment, some industry-leading firms are already embracing 'all-hazards preparedness' as a point of strategic differentiation and advantage. Preparedness programs in some cases are seen as adding agility to respond to changes in the business environment. Additionally, other firms have found that their customers value the perception of safety and security that results from effective corporate preparedness, especially in the commercial office space and retail environments."