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Winter Journal

Volume 31, Issue 4

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A top executive at one of America’s largest insurance companies has jokingly given me worldwide bragging rights to the title of “Mr. Catastrophe.” True, after 10 years in the catastrophe management business, I’ve helped reconstruct everything from hurricane-wrecked industrial plants on the East Coast to last year’s earthquake devastation in San Francisco--and hundreds of less well-known business disasters in between.

But catastrophes are no joking matter. Forty-three percent of companies struck by a serious catastrophe never resume operations, and 28% of companies that do manage to reopen are so weakened that they close permanently within three years. While these statistics may be skewed toward small and medium-sized businesses, a major disaster can also seriously depress the earnings of a giant corporation.

A major catastrophe can be quickly fatal to highly leveraged companies that depend on constant cash flow to service substantial levels of debt. An executive at one of the world’s best-known consumer manufacturing firms recently told me that his company operates three overseas plants, and because of its LBO the company could not afford to have a plant down for any length of time. This constraint also applies to hundreds of other companies of all sizes.

Because of debt, fiercely competitive markets and a host of other reasons, more and more companies are taking a serious look at catastrophe planning that focuses on quick business resumption as the main goal.

The main culprits for the high industry fatality rate from catastrophes are hidden, uninsured business interruption costs. We have counted more than 40 very real hidden, uninsured costs, ranging from employee severance costs and greatly increased unemployment insurance premiums for laid-off employees, to increased marketing expenses following restart.

Other costs such as lost market share and profits may not sound very real or imminent, but you can be sure that your competitors would be quick to move in if your operations were suddenly crippled for the next nine months.
I have recently been travelling across the nation and Europe like a modern-day Paul Revere, shouting “catastrophes are coming, catastrophes are coming!” I’m convinced that catastrophe planning will become a major, strategic management tool for the 1990s.

The catastrophe planning industry has existed for years, but the problem has been that pre-planning has not always translated into a rapid recovery. Recent technological and management advances have greatly “pushed the envelope” of catastrophe management to the point where facilities can be reconstructed up to 21 times faster than construction industry averages. Business resumption planning allows companies to continue operating throughout the reconstruction by isolating damage, opening alternate sites and re-routing distribution.

The catastrophic risk factor for American industry is increasing. The new trend of centralizing facilities may create efficiencies, but it is analogous to putting all the eggs in one basket and waiting for disaster. The sheer number of catastrophes may also increase. There is strong evidence that fires are increasing because sprinkler technology has not kept pace with new storage and production densities and hazardous materials being housed. Ominously, meteorological trends have spurred forecasters to predict an increase in hurricane and storm activity in the next decade.

And if that weren’t enough, seismologists are predicting a major earthquake by the end of the century along the New Madrid Fault that threads through much of the industrial American Midwest. This is the same fault that in 1812 produced an earthquake so severe it caused the Mississippi River to run backwards for several hours, and made church bells ring in Boston.

Catastrophe planning can dramatically boost a company’s potential for survival after a major disaster. Planning prompts management to review insurance policies, analyze all sites, building structures, hazardous contents and adjacent exposure hazards. Planning also evaluates all possible disaster scenarios, including low probability/high consequence catastrophes.

Most importantly, catastrophe planning forces management to evaluate the potential financial impact of a major disaster. Risk quantification includes analyzing the income stream, ranking revenue sources, deciding which departments are most critical to revenue flow, and determining future profits that may be in jeopardy.

After a catastrophe, there are hundreds of decisions to be made. The most important decisions are related to maintaining cash flow and otherwise minimizing negative financial impact. Building and contents losses are often dramatic and attention-grabbing, but these well-insured items almost always distract valuable management attention from serious, uninsured hidden losses.

As I see it, catastrophe planning for American industry should come from the top down, with a firm commitment to assess every risk and prepare to bounce back from disaster. I have seen too many large, well-insured companies that are still reeling financially several years after a major catastrophe. It doesn’t have to be that way.

Nelson Bean is the president of the Evans American Corporation, an international catastrophe management specialist based in Houston.

This article adapted from Vol. 4 No. 1, p. 44.