Strong risk management means stable earnings
Businesses with stronger risk management practices than their peers enjoy more stable financial performance over the long term, including much lower earnings volatility, according to the findings of a new study of more than 500 large multinational companies.
Commissioned by commercial property insurer FM Global and conducted by Oxford Metrica, an independent strategic advisor to FORTUNE 500 companies, the Risk/Earnings Ratio Study found that companies with best-practice property risk management programs produced earnings that were, on average, 40 percent less volatile than companies with less advanced risk management practices.
The study found that businesses with strong physical risk management programs produced earnings that fluctuated an average of 18 percent, compared with an average earnings volatility of more than 30 percent among companies with weak physical risk management practices.
"The key take-away from this study is clear — good risk management practices have the potential to improve earnings stability, which is a key driver of shareholder value," said Ruud Bosman, vice chair, FM Global, in a press release.
"At the same time, companies that may be considering cutting back on property risk management resources would be well-advised to consider the potentially negative bottom-line implications of such a move," added Dr. Deborah Pretty, the Oxford Metrica principal who led the research effort.
According to extensive property loss data analyzed by FM Global, the average risk of property loss for companies with weak physical risk management practices is 20 times greater than for those with strong physical risk management practices. Companies with inferior practices were more than twice as likely to experience a property loss and related business disruption.
Large businesses with weak risk management practices, compared with those with strong risk management programs, experience on average:
• 55 times greater risk of property loss due to fire
• Fire losses that are four times more costly — an average US$3.2 million per loss, compared with US$725,000
• 29 times greater risk of property loss caused by hurricanes, earthquakes and other natural hazards
• Natural catastrophe losses that are seven times more costly — an average of US$3.4 million per loss compared with US$478,000
The study compared the physical risk management practices of 520 large multinational companies with more than US$1 billion in annual revenue over a period of three years. Each company’s risk management practices were scored on a 1-to-100 point scale using a proprietary tool developed by FM Global that helps companies quantify and manage physical risk.
