Businesses could see their organisational value drop by as much as 30 per cent if they’re underprepared for intangible losses, according to new data
According to loss prevention specialist and insurer FM Global, around two-thirds of business losses following a catastrophe are due to uninsurable, intangible risks – relating, for example, to a firm’s reputation or branding.
Speaking exclusively to Strategic Risk at Amrae’s Rencontre event in Deauville, France this week, Antoine Millot, business risk consultant at FM Global, explained: “It’s a very strong trend upwards about the amount of financial loss that companies have to sustain after a catastrophe.
“Overall, if you look at the catastrophes’ financial loss, about two-thirds of the losses are non-insurable. And that’s a very strong trend that we see. The picture of the iceberg, where you’ve got the insurable risk at the top and the hidden risk below.”
Millot warned that organisations need to be more prepared when it comes to these “hidden risks”.
He said: “Companies nowadays, when they have a catastrophe, if they’re well prepared, they tend to see the value of their enterprise increase by up to 20 per cent, but if they’re not well prepared or well protected, they see the value of their enterprise [reduce] by as much as 30 per cent. And that gap between the two has increased over the last 20 years.
”If you look at the catastrophes’ financial loss, about two-thirds of the losses are non-insurable”
“What we see is that the value of the enterprise after catastrophe, if you’re well prepared, within about 30 days you will recuperate the level of value in your enterprise and they will start increasing. Whereas, if you are a bad risk, it will continue to deteriorate over the rest of the following year.”
But how should risk managers calculate these intangible risks?
The three key areas that are measured within FM Global’s new Total Financial Loss modeller includes the loss of market share, the loss of opportunities - for example the elimination of any cost saving opportunities or the halting of any product launches to market – as well as the potential nosedive of investor confidence in the business, which can affect a firm’s cash flow.
“There are some opportunities that you are going to miss,” Millot said. “Either you’re not going to grow the market, or you’re not going to reduce your costs or improve your EBITDA.
“We will see the impact on the cost of capital following a catastrophe and that’s something we also take into account. So, loss of market, loss of growth and then the fact that just to finance your company is going to cost you more if you have a catastrophe and you don’t react well.”
For Millot, interest is certainly peaking in being able to capture total financial loss figures.
He said: “Everybody’s talking about that non-insurable portion of the risk. If you look at the company’s financial statement over the last 20 years, the intangible assets have increased by factor 4.
”Everybody’s talking about that non-insurable portion of the risk”
“So, in all those assets which are intangible – the reputation of the company, to the brand – and that makes for all the uninsurable loss. So, there is definitely a trend to try to capture that and put a number on that and that’s really where we’re trying to innovate. Try to plug a number on that portion of the risk.”
In terms of mitigating total financial losses, Millot said that risk managers and insurers should look at an organisation’s industrial footprint as well as its supply chain.
Millot concluded: “There is a genuine interest in preserving the value of the company, so there is a need to better understand how the risk can impact the value and that connection between the value of the enterprise and the risk is not really evidenced as yet.