well-protected property · production production manager sheena carter production coordinator amy...
TRANSCRIPT
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global.comw
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.fmglobal.com
securitymaximum
well-protected
property
qualitiesof a
the Value of VirtueMcKesson understands the business need for patience and perseverance
+ bringin’ it downRecreating a massive earthquake for research purposes
+
p r O p E r T y r I S k A N D I N S U r A N C E S O L U T I O N S f O r A C O m p L E X w O r L D
ISSUE 1 : 2013
Reason
ISSUE 1 : 2013
harold studies seismology and seismic hazards. since 2009, when he began his career with FM Global, his research has centered on understanding how different soil properties can affect seis-mic waves. “i never expected to work for an insurance company, but at FM Global it’s where the rubber meets the road in terms of how society deals with earthquake hazards.” Research holds a critical place in the FM Global business model. With scientists and researchers from 14 countries, speaking 16 languages, with 50 advanced degrees, the department blends integrated computational and experimental/testing activities, including both small- and large-scale experiments and testing at our 1,600-acre (647-hectare) Research campus, as well as 10+ teraflop scientific computing at our center for Property Risk solutions.
Visit fmglobal.com/research
introducing…Harold Magistrale, Ph.D.senioR ReseaRch sPecialist technical teaM leadeRGeoloGical sciences
contents : issUe 1 2013
coVER StoRy34 Maximum Security: the 10 Qualities
of a Well-Protected Property
FEAtuRES42 Changing the Culture at McKesson
thE LAtESt08 NASA Project: Moon with a view 09 Updates: news and notes 11 On The Agenda: events 12 Around the World: tropical cyclones14 The Perils of Prediction16 Book Report: nicholas taleb’s Antifragile
thE idEA17 CIVETS: the tiger economies19 Risk Behaviors: Planning for Prevention21 Finance: taking taxes to task 24 Codes and Standards: Mandating sprinklers?26 Supply Chain: Business interruption
thE SciEncE29 Water Under the Bridge: eco-friendly sprinklers30 Research: hospital earthquake experiment
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ReasonEXECUTIVE EDITOR Johanna Hetherton
MANAGING EDITOR Bob Gulla
ART DIRECTOR Jennifer Cournoyer
EDITORIAl
deputy editor Christian Campbell
senior editors Andrew Erskine, Kerri Germani, Patricia Iannotti, John Rufo
contributing writers Steve Turgeon, Alan Earls, Stephanie Van Ness, Hank Giles
technical editor John C. Harrington
ART
creative director Rebecca Marino
associate art director Nicole Caddell
designers Elizabeth Kenty, Stephen Pine
design intern Veronica Morena
contributing photographers Lou Bopp, Tom Kates
contributing illustrators Jesse Lefkowitz, Justin Gabbard, Rick Shiers
PRODUCTION
production manager Sheena Carter
production coordinator Amy Carbone
VIDEO PRODUCTION
producers Bob Gulla, Nicole Caddell, Stephen Pine
contributing videographers Lou Bopp, Jon Ryan
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P07001 © 2013 FM Global. All rights reserved. In the United Kingdom: FM Insurance Company Limited, 1 Windsor Dials, Windsor, Berkshire, SL4 1RS. Regulated by the Financial Services Authority.
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To view Reason magazine online, visit fmglobal.com/reason. To download FM Global’s Risk Essentials app for your iPad, visit itunes.com/apps/riskessentials.
R. EDWARD bEIGHlEy, PH.D., is a senior research specialist at FM Global. He works to improve FM Global’s understanding of hydrologic hazards using remotely sensed data, spatial data analysis and numerical modeling to characterize flood hazards for areas where data are limited.
n RECENT READ: Into Thin Air, by Jon Krakauern FAVORITE FILM: The Matrix, directed by Andy and Lana Wachowskin FAVORITE RECORDING: Hybrid Theory, by Linkin Park
KENNETH DAVEy is senior vice president, EMEA division manager, at FM Global. He is responsible for developing FM Global’s core European markets and for expanding the company’s business in Africa and Eastern Europe.
n RECENT READ: Bring Up the Bodies, by Hilary Manteln FAVORITE FILM: The Shawshank Redemption, directed by Frank Darabontn FAVORITE RECORDING: Wish You Were Here, by Pink Floyd
bRENDAN MACGRATH is manager, international codes and standards at FM Global. He is responsible for overseeing the company’s efforts to support building code and installation standard organizations outside of North America.
n RECENT READ: Isn’t Well for Ye? The book of Irish Mammies, by Colm O’Regann FAVORITE FILM: Moonrise Kingdom, directed by Wes Andersonn FAVORITE RECORDING: XX, by The XX
HAROlD MAGIsTRAlE is a senior research specialist at FM Global. He is responsible for generating and maintaining FM Global’s earthquake zone maps; he is the technical team leader of the geological sciences group.
n RECENT READ: The Shock Doctrine, by Naomi Kleinn FAVORITE FILM: Star Trek, directed by J.J. Abramsn FAVORITE RECORDING: Aoxomoxoa, by the Grateful Dead
THOMAs ROCHE is operations vice president and operations engineering manager, Northern Europe operations, FM Global. He oversees engineering services delivered to FM Global clients in Northern Europe.
n RECENT READ: Selling Hitler: His Classic Account of the Hitler Diaries, by Robert Harrisn FAVORITE FILM: North by Northwest, directed by Alfred Hitchcockn FAVORITE RECORDING: Substance 1987, by New Order
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[ Contributors ]
6 [ Reason ] issUe 1 : 2013
[ editor’s note ]
Standing the Test of Time
Bob Gulla, managing [email protected]
With a history that dates back to, well, a really long time ago, FM Global has the advantage of viewing its business through the looking glass of experience. Founded near the beginning of the original Industrial Revolution, the company has spent almost two centuries refining its product, perfecting its business model and focusing on what it does best: preserving the value our clients create. As you know, FM Global specializes in protecting property, mitigating risk and partnering with its clients to help prevent loss. through the years, it has built up a healthy repository of intellectual material in support of its efforts. One of those pieces is our cover story this month, “the 10 Qualities of a Well-Protected Facility.” It’s the Magna Carta of FM Global’s view on best practices in property protection. And for your benefit, we’ve dusted it off and refreshed it with new commentary from the risk management community. Most of you probably know that FM Global goes to fairly tremendous lengths to support our clients in their efforts to protect their property and ensure their resil-ience, whether that means conducting fire tests at our Research Campus, practicing engineering exercises at the new SimZone or partnering with other institutions like nASA to collaborate on valuable research projects. In this issue, we tell the story of one such remarkable project that FM Global helped sponsor in conjunction with the University of California, San diego. Specifically, it involves the construction of an ersatz hospital on a massive shake table. the building was actually created to be destroyed—in this case, by an artificial earthquake—in order to closely study the physical damage done to the building. At FM Global, we do this kind of thing all the time. It’s just another day at the office. And the best part is, we tackle these projects for the benefit of our client community.
[ thelaTeST ]
Moon with a Viewnasa mission will enhance understanding of flood behavior
edward Beighley, senior research specialist at FM Global, is currently advising the U.s. national aeronautics and space administration (nasa) on a proposed mission that has been in the planning stages since 2002. u
8 [ Reason ] issUe 1 : 2013
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Key facts about NASA’s S.W.o.t. MiSSion
Prior to joining FM Global, Beighley worked with nasa while he was a researcher at the University of california, santa Barbara, and then as a professor at san diego state University. after Beigh-ley joined FM Global in 2011, he continued his relationship with nasa as a science applications specialist on the proposed surface Water ocean topography (s.W.o.t.) satellite mission. his role is to advise nasa on what it can do to make sure that information garnered during the s.W.o.t. mission will be useful to private sector groups such as FM Global. the company’s flood team will be able to use this data to better understand flood hazards, which will enhance FM Global’s knowledge of the hazard and translate to helping clients better protect their facilities. “s.W.o.t. proposes to make the first global survey of the earth’s surface water with a goal of covering at least 90 percent of the globe,” Beighley explained. “Measurements taken by the satel-lite will provide a better understanding of the world’s oceans and its terrestrial surface waters. the mission brings together hydrologists and oceanographers worldwide.” according to Beighley, FM Global is participating in this work to understand what the satellite can actually deliver and to advise as a private-sector player. s.W.o.t. data will help FM Global better understand flood hazards by providing measurements on bodies of water for which no data currently exists, particularly in developing countries, and by providing more precise data than currently exists. “this collaboration with nasa gives us new and unique insight into flood behavior that we can use to help protect our clients worldwide,” Beighley said.
“this collaboration with nasa gives us new and unique insight into flood
behavior that we can use to help protect our
clients worldwide.”
Edward Beighley senioR ReseaRch sPecialist
at FM GloBal
it proposes to make the first global survey of the earth’s surface water, including oceans and terrestrial waters.
estimated launch date is circa 2020.
the satellite will retrieve data for at least three years.
the U.s. national aeronautics and space administration and France’s space agency are funding the mission.
About 100 scientists from canada, europe, France, Japan and the United states have been contributing to the mission since 2002.
the satellite will measure water-surface elevations with an accuracy of plus or minus 10 centimeters; a significant por-tion of the world’s rivers several times per month; and the full width of a river’s two-dimensional surface from edge to edge.
issUe 1 : 2013 [ Reason ] 9
[ thelatest ]
Pay RaiseFM Global increases the threshold for accelerated claims
to allow more clients to benefit from its accelerated claims process—which gives adjusters authority to quickly resolve gross claims of less than US$100,000—FM Global recently extended the threshold to gross claims less than US$250,000. In recent surveys, clients have indicated they would appreciate a more expedited claims process, which led, in part, to the new procedure introduced in 2012. When filing these smaller claims in the past, clients were faced with time-consuming documentation requirements, which included acquiring esti-mates and answering various queries before payments could be issued. the growth of Affiliated FM, a member of the FM Global Group that specializes in commercial property insurance for the middle-market segment of business and industry, also contributed to the procedural change because of the increase in smaller claims that were being filed. the initiative relies on the expertise of FM Global claims adjusters to recommend payment estimates for clients, but final adjustments can be made, if needed. Payments are usually made within days without the need for fur-ther approvals, assuring business operations resume sooner after a loss. Clients may elect to have their claims handled the traditional way; not all claims are eligible for the expedited process.
Branching Outcontact information for our switzerland branch office has changed.
FM insurance company Limited, WindsorSwitzerland Branch Zurichtheaterstrasse 48001 Zurichswitzerlandtel.: +41 43 222 67 50Fax: +41 43 222 67 51
UPDaTeS
a life’S workdeRis’ lifetime of achievement recognized
dr. John l. deRis will receive the 2013 sjölin award from the international Forum of Fire Research directors. dr. deRis, who retired from FM Global in 2011 after a 40-year career with the company, has been one of the world’s leading researchers in fire science, with work ranging from the first experimental studies of flame spread and pool fires, to the latest theoretical developments for use in detailed computational fluid dynamics-based numerical fire modeling. his work has advanced the state of the art in fire safety engineering practice by supplying new, usable knowledge for assessing and reducing fire risk for a broad spectrum of fire hazard applica-tions ranging from pool fire physics, pressure scal-ing, to material flammability, to thermal measure-ments for research, development and certification. among his many contributions, the most notable is his work on flame radiation and heat transfer in the pyrolysis and flame zones, an essential part of characterizing fire spread and growth. his work forms the basis for common fire safety engineer-ing practice worldwide and is an essential part of any fire research-related education. dr. deRis will receive the award at the next symposium of the international association of Fire safety science, in February 2014, at the University of canterbury, christchurch, new Zealand.
10 [ Reason ] issUe 1 : 2013
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UPDaTeS
riMS 2013Risk and insurance Management society annual conferenceLos Angeles, Calif., USAApril 21–24, 2013
launched in 1963, RiMs annual conference and exhibition attracts some 10,000 risk and insurance professionals at all experience levels, business executives with risk man-agement interests, brokers, insurers and service providers for the ultimate educational and networking experi-ence. the four-day event offers more than 120 educational sessions, keynote presentations, special events and an expansive exhibit hall with more than 400 exhibitors.
oTC 2013offshore technology conferenceHouston, Texas, USAMay 6–9, 2013
Founded in 1969, the offshore technology conference (otc) is the world’s foremost event for the development of offshore resources in the fields of drilling, exploration, production and environmental protection.
BiBa ConferenCe anD exHiBiTion 2013British insurance Brokers’ associationLondon, United KingdomMay 15–16, 2013
the British insurance Brokers’ association (BiBa) is the United Kingdom’s leading general insurance organization representing the interests of insurance brokers, intermediaries and their customers.
aSSoCiaTion of STaTe flooD ManagerS (aSfPM)Hartford, Conn., USAJune 9–14, 2013
the association of state Floodplain Managers is an organization of profes-sionals involved in floodplain manage-ment, flood hazard mitigation, the U.s. national Flood insurance Program, and flood preparedness, warning and recovery.
airMiC ConferenCe 2013association of insurance and Risk ManagersBrighton, East Sussex, United KingdomJune 10–12, 2013
aiRMic supports those responsible for risk management and insurance within their own companies by providing research, training, networking, lobbying and market information for the benefit of members.
fewinternational Fuel ethanol Workshop (FeW) and expo 2013St. Louis, Mo., USAJune 10–13, 2013
FeW provides the global ethanol industry with cutting-edge content and unparalleled networking opportunities in a dynamic business-to-business environment. the FeW is the largest, longest running ethanol conference in the world—and the only event powered by ethanol Producer Magazine.
on The agenDa
2012 Annual report
corporate executives are taking a more active role in property risk man-agement. changes in the global busi-ness landscape, the sharp increase in natural catastrophes and the magnitude of supply chain risk have captured the attention of governing bodies and the investment commu-nity. Physical risk is now embedded in a complex manufacturing and distribution web where every strand is likely to lead to another interde-pendency and greater vulnerability. in FM Global’s 2012 annual Report, senior leaders from sKF, celestica, the cooper companies and Fedex discuss this changing dynamic at their organizations and share their perspectives on the quality of risk worldwide, supply chain continuity, asset protection and enterprise resilience. the annual report is available to anyone upon request. clients are sent copies as part of FM Global’s poli-cyholder mailing, which takes place in March. to download a copy, visit www.fmglobal.com/annualreport.
issUe 1 : 2013 [ Reason ] 11
[ thelatest ]
Bestselling author nassim nicho-las taleb (The Black Swan, 2010) advocates for what he calls a black swan-robust society, one that can
not only withstand difficult-to-predict events (black swans), but also thrive from them. In his most recent book, Antifragile: Things That Gain from Disorder, he explains how to be effective in a black swan society. taleb identifies objects, processes and systems (human and ecological), and then categorizes them into three distinct types—fragile, resilient and antifragile. Fragile and resilient are familiar concepts, however, the third category is less so. taleb contends that something antifragile actually gets stronger or improves when met with some force of stress (up to a point). According to taleb, the concept of antifragile is important to understand because it can inform how we design and approach these various systems, objects and processes—and profit from them. He says that failing to understand it can cause us to unwittingly harm or even destroy these vari-ous systems, objects and processes—or be harmed by them. taleb has determined that most com-plex systems not only gain from small stress-ors, but also are designed to gain more when these stressors are distributed irregularly or randomly. Sudden change, disorder and ran-domness are difficult for humans to accept, he says. We attempt to remove the random and disorderly from our systems, hoping to eliminate the shocks. taleb disagrees with this approach and contends that removing the small shocks in a complex system may create stability for a time, but actually upsets the system and makes it prone to major shocks in the long term. Small shocks refine and improve the sys-
tem, preparing it to withstand major shocks. Removing the small shocks from a complex system doesn’t create stability, says taleb, but rather creates the illusion of stability. In removing the small shocks, we end up creating systems that are prone to major damage and even outright destruction. taleb argues that it would be better to accept and welcome a certain amount of disorder, ran-domness or jaggedness and position our-selves to profit from it, rather than attempt to eradicate it. In recognizing what systems are frag-ile and what systems are antifragile, we can avoid the former and embrace the latter. this applies not only to large, overarching systems like corporations, economies and political societies, but also to our own bod-ies and minds, asserts taleb. In the context of risk management, a prime example of antifragility can be seen in dealing with events that impact a company’s global supply chain or its own operations. take what happened to Seagate and a com-peting hard drive manufacturer during the thailand flood: Seagate not only continued to produce hard disks while its competitor was down—leading to increased market share—but it also benefitted from the sub-stantial increase in prices. One could argue that designing a sup-ply chain that protects itself from disruption is not a resilient system, but an antifragile one. Future risk managers should take note that designing and implementing antifragile operations and supply chains can lead to sig-nificant lasting competitive advantage over time. What taleb is suggesting is a change in mindset. embracing and dealing with black swan events for profit is far better than try-ing to smooth out disruptions that may arise from them.
AntiFRAGiLE: thinGS thAt GAin FRoM diSoRdERby Nassim Nicholas TalebRandom House, 2012
Shocks to the Systemthe controversial author of the The Black Swan argues that humans—and businesses—gain strength from the random shocks and extreme events of real life
huRRicAnES
huRRicAnES
FREqUENCy OF TROPICAl sTORMs AND TROPICAl CyClONEs
Atlantic Ocean June through October
Pacific Ocean June through October
Typical path of storm
Major storm zones
Equator
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around the worlda global look at the prevailing directional patterns of tropical storms and tropical cyclones
0 5 10 15 20 25 30
Western North Pacific Ocean
Eastern North Pacific Ocean
North Atlantic Ocean
Southwestern Indian Ocean
Northern Indian Ocean
Australian (SE Indian and SW Pacific) Ocean
FREqUENCy OF TROPICAl sTORMs AND TROPICAl CyClONEs
Tropical CycloneTropical Storm
tyPhoonS
Pacific Ocean June through December
cycLonES
Indian Ocean January through March
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depending on where you live, major windstorms are called hurricanes, typhoons or cyclones, but the scientific term for these storms is “tropical cyclone.” those that form over the Atlantic Ocean, for example, are called “hurri-
canes.” Whatever they’re called, they all form the same way. tropical cyclones are like giant engines that use warm, moist air as fuel. that is why they form only over warm ocean waters near the equator. Air from surrounding areas with higher air pressure pushes into the low pressure area. then that air becomes warm and moist and rises as well. As the warm air rises, the surrounding air swirls in to take its
place. As the warm air rises and cools, the moisture in the air forms clouds. the whole system of clouds and wind spins and grows, fed by the ocean’s heat and water evaporating from the surface. Storms that form north of the equator spin counterclockwise. Storms south of the equator spin clockwise. this occurs because of the earth’s rotation on its axis. When the winds in the rotating storm reach 39 mph (63 km/hr), the storm is called a “tropical storm.” And when the wind speeds reach 74 mph (119 km/hr), the storm is officially a “tropical cyclone,” or hurricane.
Note: Material provided in this map was compiled from Encyclopedia Britannica
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come to court in other countries, but it is worrisome within Italy, which is a country with many natural hazards,” said R. Brooks Hanson, deputy editor, physical sciences, at Science magazine, a publication of the American Association for the Advancement of Science. “It is worrisome in terms of the message it sends to other experts within Italy,” he added. In particular, he noted, the larger implication for society is that there will be greater difficulty in getting hazard information in the future because experts will be reluctant to express opinions or even share information. However, dr. John e. ebel, director of the Weston Observatory, a U.S. seismo-logical center, sees impact beyond europe. “I would say it is obviously a scary thing to most seismologists primarily because it looks like in Italy, at least, the decision of the legal system does not match up with the capabilities of science.”
Parallels with medicine?drawing a comparison with medicine, ebel noted that, in U.S. law, in order for a mal-practice suit to succeed, the doctor must have operated outside of accepted standards of practice. “We don’t have any such stan-dards in earthquake seismology,” said ebel. “I can’t say whether the Italian seismologists did something wrong or not because there isn’t such a clear consensus among seismol-ogists about how to discuss the possibilities of future earthquake activity,” he added. ebel sees conflicting currents in the culture that may have contributed to the Ital-ian verdict. For instance, he noted, because meteorologists have learned to deliver rea-sonably accurate weather predictions, and because there are now genetic tests that can provide insight into who will get certain
the unusual case, which has caused consternation in scientific circles globally, and outright fear among the illuminati of that european country, is still a subject of legal appeals. the April 6, 2009, earthquake, which struck the Italian region around L’Aquila, killed more than 300 people. the court said the seven defendants failed to adequately warn of the earthquake risk and sentenced each of the defendants to six years in prison and barred them from holding public office. the defendants, members of Italy’s national Commission for the Forecast and Prevention of Major Risks, had stated that, despite recent tremors in the region, there was no special reason to expect a major quake in the region—a “prediction” that was proven wrong a few days later—provoking ire and dismay among the families of vic-tims and leading to the court’s action. Reaction outside of Italy has been sharp and clear. “I don’t think this case would have
Prognostication is a tough busi-ness. Consider the fate of the mythical Cassandra, the daugh-ter of King Priam of troy whom
the gods granted the power of seeing the future—but cursed with the fate of never being believed. Modern scientific prognosticators have a different problem—a public that hungers for certainty. Whether it is climate change or medical outcomes, there’s a vast demand to know what the future holds. However, pro-fessionals know the limits of science and, naturally, shy away from offering predic-tions or, when they do proffer advice, usu-ally deliver with numerous caveats. But those caveats were not enough to shield six scientists and a government offi-cial when an Italian court recently convicted all of them of manslaughter for failing to warn residents of the town of Onna of an impending earthquake.
The Perils of Predictiona great hunger for certainty and accuracy puts prognosticators on the hot seat
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In a case from the early 1980s, the families of Massachusetts, USA, fisher-men, killed in a storm that was not pre-dicted by the national Oceanic and Atmo-spheric Administration’s (nOAA) national Weather Service sued the government—in part because they discovered a weather observation buoy had been malfunctioning for months, potentially affecting the accu-racy of the forecast. After a lengthy trial, a judge found in favor of the fishermen’s families. However, according to Michael tougias, an author who has written extensively about the case (known as Honour Brown vs. the United
States), the verdict was overturned on appeal, and then went to the Supreme Court, which upheld the appeals court. “So bottom line, the fishermen’s families never got a dime. But the good news was that it changed the way nOAA handled forecasts,” said tou-gias, who is now completing “A Storm too Soon,” a book that discusses another lawsuit where passengers on a cruise ship sued the ship’s captain for sailing into dangerous weather, causing extensive damage to the ship and endangering lives. According to Mike Smith, senior vice president of Accuweather Services Weather Solutions, the Honour Brown case helped settle the law regarding forecasting liabili-ties in the United States, making it all but impossible to sue over a weather forecast later deemed to have been inaccurate. Still, he noted, anyone in the prediction busi-ness should stay clear of any language that implies certainty. “Just because something happens very rarely doesn’t mean it can’t ever happen,” he noted.
kinds of cancer, the public expects equally actionable insights into other phenomena such as solar flares and earthquakes. “In the scientific community, we would like to be able to predict earthquakes, too, but that is still a distant goal,” he said. even though scientists in other coun-tries may be operating in a different legal environment, ebel speculated that they may become more reluctant to comment in any way that could be construed as predictive. “It will be more like medicine, where doc-tors often order additional tests as a form of insurance, in case they are ever sued for mal-practice,” he said.
However, explained FM Global’s Luca Zeni, group manager field engineering in Italy, the verdict, which was rendered by a court in the town affected by the disaster, needs to be put in context with that disaster. Zeni said the commission delivered a “politi-cal” statement—intended to calm the legiti-mate fears in the population—possibly ampli-fied by other scientists who had prophesized a quake in the region based on a theory, as unreliable as any other theory at the present stage, which focused on radon emission rates as an indicator of earthquake potential. “they really went beyond the kind of statement a scientist should make and gave some people a false sense of security in the days before the quake,” said Zeni.
Breathing room in the united StatesRegardless of the specific language used, prediction is perilous. And, in the United States at least, court cases have, in meteorol-ogy, secured some “breathing room.”
“ [the commission] really went beyond the kind of statement a scientist should make and gave some people a false sense of security in the days before the quake.”
Luca Zeni, GRoUP ManaGeR Field enGineeRinG
DOWNlOAD THE RIsK EssENTAls APP IN ITUNEs to find addition information on earthquakes
By thE nuMBERSThe L’Aquila Earthquake
April 6, 2009 earthquake occurs in l’aquila, in the abruzzo region of central italy
3:32 a.m.local time at which the earthquake struck
6.3Rating of the earthquake on the moment magnitude scale (MMs)
309number of people killed in the earthquake
7number of earthquake experts convicted of man- slaughter for failing to give adequate warning to the residents of a seismically active area in the months preceding the earthquake
uS$16 billionestimated cost for reconstruction
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THe Tiger eConoMieS are colombia, indonesia, vietnam, egypt, turkey and south africa (civets) the world’s next economic dynamos?
the global business world is abuzz with anticipation. Why the excitement? A second wave of emergent econ-omies now seems to be following on the heels of the BRIC countries (Brazil, Russia, India and China). these economies, flush with potential, are poised to provide multinational businesses with jolts of hope and a great deal of business opportunity. u
[ the iDea ]
Beyond the convenient acronym, there are many reasons why economists have pointed to these nations as hotbeds of growth. they all have large, growing, youth-ful populations, with an average age of 27. this simple statistic means these countries will see, over the next decade, fast-rising domestic consumption. they are also fast-growing, relatively diverse economies in themselves, meaning they won’t be as heav-ily dependent on external demand as the BRIC countries. the CIvetS countries are also seeing vast improvement in infrastructure, a boost in the reliability of their financial systems, and the ability to sidestep problems with high inflation. In addition, many multi-national companies have already located/relocated to sites within the BRIC terri-tories, essentially ending the early mover advantage. But the CIvetS countries are just now beginning to provide an attractive, politically stable opportunity for entrepre-neurial-styled investment. Many business prognosticators believe that, today, with competition still fixated on BRIC, is an ideal time to take advantage of untapped CIvetS marketplaces. Of course, caveat emptor. each of these regions has a downside. Analysts are con-cerned, for example, about vietnam’s infla-tion and South Africa’s high unemployment. In turkey, the government is stable but occa-sionally unpredictable in an unpredictable region. And, in Colombia, national security is a big issue that its government is now addressing. Still, with risk comes reward. Over the last decade, businesses swarmed to the BRIC countries. But that growth is slowing. now, those same entities that took advantage of those regions are set to explore the CIv-etS countries. It’s no wonder that with their hunger for growth, wildly high upside and expansive new frontier, these countries are referred to as the tiger economies.
PoPUlaTion / MeDian age
INDONESIA VIETNAM COLUMBIA
248 million
28 years
91.5 million
28 years
45 million
28 years
TURKEY SOUTH AFRICA EGYPT
80 million
28.5 years
49 million
25 years
84 million
24 years
U.S.
1.5% COLUMBIA
2.1%
VIETNAM
5.4%INDONESIA
6.1%
eConoMiC growTH 2012 GdP GRoWth Rates
inTerneT aCCeSS
VIETNAM
31millioninternet users
34% of country population
25millioninternet users
56% of country population
COLUMBIA55millioninternet users
22.4% of country population
INDONESIA
Statistics from Internet World
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In the current economic climate, where there are a num-ber of competing risks with which to contend, property
risk management is often the last thing on many business leaders’ minds. In an environment where the focus is on cutting costs, property loss prevention can, in fact, be per-ceived as an unnecessary expense. However, when disas-ter strikes, the loss of a key facility can be catastrophic for business—affecting bottom line, market leadership and even share price.
the reality is that, at senior manage-ment level, property loss prevention is often dismissed under the assumption that com-prehensive insurance will protect a business if the worst should happen. While insurance is crucial for any business, it is only part of the story. Insurance will allow a business to rebuild a major facility or critical manufac-turing plant, but it won’t prevent the signifi-cant interruption faced while those facilities are unable to function. Further complications can lead to lengthy claims processing, and it may be a while before a loss is recovered. Given the global challenges that companies can face, it is best to engineer resilience into a busi-ness and its supply chain. the important thing for businesses to remember is that the majority of property loss is preventable, and in the long term, adequate risk prevention today can ensure resilience in the future. When considering natural catastrophes, people tend to believe it will never happen to them. the assumption is that if a natu-ral catastrophe occurs, the consequences will have greater impact elsewhere. there is also a behavioral trait, known by some psychologists as the “Gambler’s Fallacy,” which assumes that because a disaster has happened once, it won’t happen again. to change these behaviors, it is impor-tant to look at risks relevant to the lifetime of a property, rather than discussing risks in terms of probability. For example, there may only be a 1 percent chance of flooding at a site each year, but if a site has a lifetime of 50 years, then the risk of that site flooding increases to 39 percent. Statistics presented in this way are far more compelling, such as highlighting that if a facility is located in a high-risk area, it’s not a case of if a catastro-phe will happen, but when.
Truth or Consequencessolid, long-term risk management planning can—and will—ensure future resilience
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capitalizing on good risk prevention It’s clear that unpredicted interruption can have a severe financial impact on a business. the impact of the floods in thailand in 2011 is still felt by many businesses that concen-trated their operations and supply chains in Asia. Many technology companies, for exam-ple, had their operations set up in Bangkok where one-third of the world’s hard drives were produced. When the area flooded, many businesses didn’t have adequate risk preven-tion strategies in place, and those that did capitalized on this by winning market share. Since then almost all major hard drive ven-dors have raised their prices, citing the dev-astating floods as the source of their troubles. In fact, analysts have cited the thai floods as the primary reason for Seagate technology recapturing the worldwide lead in hard disk drive (Hdd) shipments in the last quarter of 2011. As Seagate’s Hdd manufacturing plant in thailand is located on high ground, the company was less adversely affected by the floods, and it was able to continue supplying hard drives when its competitors could not, which led to market leadership. thailand is also relatively unexposed; if a similar event took place in China’s Pearl River delta, where 30 percent of the world’s electronics are, one typhoon could paralyze the world. It is important for business leaders to look at events like the flood in thailand, and question whether their business oper-ates out of areas at high risk from natural catastrophes, and if so, what can be done to ensure protection against the risk. Insurance isn’t enough anymore. thailand showed that when facing business interruption a compet-itor who is better prepared would be able to supply customers in this eventuality. When moving operations, it is crucial that busi-nesses analyze the risks and ensure that they have a loss prevention plan in place, which considers long-term threats.
Acknowledging new riskWith the rise of globalization and more
companies becoming increasingly depen-dent on the BRIC (Brazil, Russia, India and China) countries and Asia for pro-duction, it is crucial that companies focus on risk prevention and protecting supply chains. If this is not followed, reputation, market leadership, bottom line and even share price can be affected. Outsourcing can reduce costs, but it can also mean that businesses unknowingly take on greater exposure to natural disasters and decrease safety standards. Businesses must acknowl-edge the new risks and protect their bottom lines. If a business doesn’t have the right loss prevention in place, outsourcing may end up costing more in the long term. It is not that companies should never outsource to emerging markets or higher-risk coun-tries, but rather they should factor the atten-dant risks into the decision-making process and, having identified those potential risks, put measures in place to prevent this from becoming a reality. From the Pearl River delta to Mon-golia, China is exposed to just about every natural catastrophe that could occur. Much of China and many of the developing busi-ness areas are in prolific earthquake zones. A recent study found that supply chains in the region are more likely to face business disruption by a natural disaster, particularly because China has not yet fully embraced many of the risk management practices fol-lowed in europe and north America. A disaster in China of the level of the 2011 Japanese earthquake and tsunami would have far-reaching and long-lasting negative economic impact. It would slow down the global economy because China is not only a major exporter, but also a major importer of goods. It would cause shortages in many consumer and industrial products that could lead to inflation and devastate the share price of companies. As a result of urbanization, mudslides and river flooding from deforestation, compa-nies with operations in Brazil are at great risk from business interruption. Businesses need to make sure that any new buildings are built
above flood lines and that existing buildings have flood and mudslide protection built in. India is a vast country with a wide range of climate zones, ranging from arid desert to mountain cold, with large subtropi-cal and tropical zones in between. In Harid-war, the temperature can fall to 35ºF (2ºC) in winter, posing a potential freeze threat. due to the high occurrence of monsoons in India, all the cities are exposed to flooding. While not sub-continent wide, there is also a high exposure to earthquakes in some areas that have concentrations of manufacturing. In an increasingly global world, business leaders need to make sure that companies have adequate loss prevention strategies in place. While risk management can often seem expensive when viewed as a one-off cost, it is clear that these leaders must consider prop-erty risk management a priority, and must look at its value over the lifetime of a facil-ity to consider the impact on share price and reputation that business interruption can have. Investment in property risk management is vital for sustained business resilience.
When moving operations, it is crucial that businesses analyze the risks and ensure that they have a loss prevention plan in place, which considers long- term threats.
Kenneth Davey is senior vice president, EMEA division manager, FM Global. This article originally appeared in european CeO Magazine.
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during the last days of 2012, U.S. President Barack Obama and the U.S. Congress fiercely debated how
the United States would address the “Fiscal Cliff,” a term used to describe a number of individual income tax pro-visions (and some corporate tax provisions) that would expire on dec. 31, 2012, raising taxes on most Americans and forcing the U.S. government to make significant cuts in spending. According to U.S. economists, failure to revoke the Fiscal Cliff tax and spending cut provisions threatened to push the coun-try back into a recession. At the heart of the issue is the fact that the U.S. government and many governments around the world typically spend more than they receive in revenue. the U.S. national debt is US$16.2 trillion and has grown at a recent rate of
Taking Taxes into accountthe taxing concerns of a multinational property insurance company and why its clients should care
US$1.2 trillion per year. In the United Kingdom, the national debt is approxi-mately US$1.8 trillion and at the current rate will grow to nearly US$2.37 trillion by the end of 2016. For substantially all coun-tries, income taxes are the largest source of revenue. taxes on U.S. individuals and cor-porations represent 90 percent of all taxes collected, with individual income and pay-
roll taxes accounting for the majority of the receipts. As a large, multinational property insurance company, FM Global pays income tax on its taxable earnings in the various countries where it conducts business. In profitable years, income tax can represent the company’s third largest expense, behind losses, salaries and benefits. tax expense varies with income. When corporations are profitable, they generally pay tax. In years when companies lose money, income taxes are usually not payable. In some countries, corporations may recover taxes paid in prior years when losses occur. FM Global used this provision to recover prior taxes paid when the com-pany posted a taxable loss driven largely by the unprecedented catastrophic events of 2011. If companies lose money for one or more years, they may choose to utilize
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those losses in future years to offset income earned that may otherwise be taxed.
how taxable income is determinedtaxable income may differ significantly from the income reported in FM Global’s annual financial report. Certain income and deductions are accounted for differently by taxing authorities than they are for financial reporting purposes. FM Global’s primary financial statements are reported on the basis of accounting termed Generally Accepted Accounting Principles (GAAP), which is the basis of accounting used by most U.S. reporting enterprises. As a U.S. regulated property and casualty (P&C) insurance company, FM Global also reports its annual results on the statutory basis of accounting, which is the starting point for reporting U.S. taxable income. taxable income in the U.K. is also based on its statutory filings (United King-dom Generally Accepted Accounting Prac-tice). Adjustments to U.S. and U.K. statu-tory income are made to arrive at taxable income. (U.S. GAAP generally seek to report the economic income earned by a corporation on the basis that the company is a “going concern,” meaning that the business is expected to continue into the foreseeable future. U.S. statutory account-ing is a “liquidation basis” of accounting necessary to determine an insurer’s net sur-plus or net assets in the event of a failure of the insurance entity. the statutory basis of accounting determines if an insurer can meet its outstanding claim obligations. Many P&C insurance companies’ primary financial statements are based on statutory rather than GAAP accounting.)
how FM Global is taxed FM Global is subject to U.S. tax on its worldwide “taxable income,” which includes insurance underwriting income, invest-ment income from the company’s invest-ment portfolio, real estate income generated from rental income, and fee income from
FM Approvals (a member of the FM Global Group), minus insurance losses and allow-able expenses. U.S. tax rules allow income earned in other countries to be deferred if certain rules are followed. Also, if taxes are paid on income earned in a non-U.S. location and are also payable in the United States, the U.S. tax rules allow for a “Foreign tax Credit” to be applied to minimize double taxation on the same income. In the last 10 years, FM Global has paid U.S. and non-U.S. taxes of US$2.5 billion on its world-wide GAAP net income of US$8.1 billion, at an average rate of 31 percent.
Although there are many similarities in how corporations are taxed in industri-alized countries like the United States and the United Kingdom, property and casualty insurance companies based in the United States are allowed certain favorable tax treatment that is unavailable to mercantile enterprises. For example, U.S. manufactur-ing corporations that reserve for a “write off” of a discontinued line of business or close a manufacturing plant and recognize the economic charge for financial report-ing purposes cannot take a tax deduction for the “reserve” until costs that relate to the plant shutdown are paid. However, a U.S.-based P&C insurance company may deduct, for tax purposes, insurance loss reserves
reported on the GAAP financial statements before they are paid. the tax deductibility of insurance loss reserves in the United States is limited by a mechanism called “loss discounting,” which takes into account the fact that some losses may not be paid for an extended period of time and, according to the tax rules, should not be fully deductible in the year the reserve is established. the tax rules apply a “time value of money” concept to reduce the tax deduction for a portion of those loss payments. Loss discounting amounts to about 5 percent per year, depending on the
insurance line of business. U.S. P&C insur-ance companies must also reduce the ben-efit from certain tax-exempt dividends they receive and from municipal bond interest they earn. As previously stated, the United States applies a “worldwide” tax system that includes all income from all sources in the calculation of taxable income unless it is excluded or deferred by statute. Many other nations have adopted a “territorial” system of taxation, taxing only the income earned within the country as defined. the U.K. tax system embraces the territorial tax system. the tax structure in the United States and its competitiveness in the world has been the subject of debate for many years. due
As a large, multinational property insurance company, FM Global pays income tax on its taxable earnings in the various countries where it conducts business. in profitable years, income tax can represent FM Global’s third largest expense, behind losses, salaries and benefits.
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to the high tax rates, several U.S. corpora-tions have ceased or reduced operations in the United States and have begun organizing in other, lower tax countries.
comparing the u.S. and u.K. corporate income tax rates the United States has the highest corporate income tax rates of the 50 largest economies, at 39 percent, taking into account national and sub-national taxes, such as state and provincial taxes. the United Kingdom rep-resents the 35th highest corporate tax rate at 24 percent. (the United Kingdom plans to lower its tax rate to 21 percent in 2014.) Japan and France have the second and third highest tax rates, respectively. Many countries with tax rates lower than the United States also have a significant “value added tax” system (vAt) to supple-ment revenue not generated by the income tax system. these countries include those in the european Union, Canada and others. vAt rates may be as high as 27 percent. vAt can apply at the national and/or sub-national level (i.e., states or provinces). the vAt is based on consumption (similar to a sales tax) and is paid by the buyer to the seller of goods or services at each stage of the prod-uct’s completion. the seller pays the net vAt collected to the applicable tax authority. Financial and insurance services, including FM Global’s premium, are generally exempt from the vAt. Other taxes on premium are imposed in many countries.
FM Global’s tax departmentsFM Global and its subsidiaries file approxi-mately 2,500 tax returns in 33 countries annu-ally. this includes estimated and annual tax fil-ings associated with income, premium, excise and sales tax, and vAt. the filing requirement is generally tied to the establishment of busi-ness operations in a country. Substantially all of FM Global’s tax filings are prepared by the tax department staff in FM Global’s corporate headquarters in Johnston, R.I., USA, and in Windsor, U.K.; toronto, Canada; Melbourne, Australia; Singapore; and Monterrey, Mexico.
due to local language filing require-ments, FM Global outsources the prepara-tion of certain returns. A significant part of the tax departments’ accountabilities is tax research and planning, which is con-ducted to make certain that the tax obli-gations and filings reflect the intent of the tax laws globally. tax planning also helps FM Global take advantage of related avail-able opportunities.
taxes looking forwardAs in all countries, the U.S. tax policy is driven primarily by the goal to raise rev-enue to support the needs of the country. the policy has changed over the years to offer tax benefit incentives to stimulate the economy and to help drive important inter-
ests of the country. Politicians have prom-ised an overhaul of the U.S. tax system to make it fairer and more competitive in the global economy. discussion of a national sales tax (a type of vAt) in the United States has been discussed, but, in recent years, has not gained momentum. We should begin to see new U.S. tax policy proposals emerge as President Obama begins his second term.
William Mekrut is vice president and trea-surer of FM Global. Ernst & Young provided certain statistical information used in this column.
39%
UNITED ST
ATES
38%
JAPAN
33%
FRANCE
24%
UNITED KINGDOM
HigHeST CorPoraTe inCoMe Tax rAtes oF the 50 lArGest eConoMies
The United States has the highest corporate income tax rate at 39 percent, taking into account national and sub-national taxes, such as state and provincial taxes. The United Kingdom represents the 35th highest corporate tax rate at 24 percent. (The United Kingdom plans to lower its tax rate to 21 percent in 2014.) Japan and France have the second and third highest tax rates, respectively.
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one way or the otherFocusing solely on outcomes like crisis management and insurance will not ensure resiliency
Business resilience is particularly important for warehouse and logistics compa-nies because they represent vital components of the supply chain. It’s important to remem-ber that, in the event of a fire, it’s not only the logistics company that faces major business interruption, but also the manufacturers, sup-pliers and distributors across the supply chain that face disruption as a direct consequence, and they eventually may look elsewhere for warehouse companies with a more reliable fire protection strategy. Furthermore, many manufacturers operate using a “just-in-time” model, placing trust and confidence in their respective logistics firms to operate 365 days a year. Any business disruption, such as the outbreak of fire, can result in a breakdown of relationship and trust between manufacturer and supplier. It is because of this that logis-tics companies must place great emphasis upon business continuity. despite business continuity being a criti-cal component to the warehousing industry, and the costs associated with fire damage increas-ing, many companies still haven’t updated their business continuity strategy or improved their fire risk management program accordingly.
It is surprising that many companies are not taking advantage of sprinkler systems to protect their facilities and embracing new technologies, such as the extended coverage sprinkler system, to minimize damage and business interruption. One reason why the recorded losses of commercial property in the United Kingdom are so high compared with mainland europe and the United States is because current reg-ulations do not mandate sprinkler systems for smaller buildings. the most recent Building Act of 1984 specifies that any building more than 98
Companies today face risks from all directions, but per-haps the biggest shift is in expectation. today, well-
run businesses need to demonstrate they are able to rapidly adapt and respond to risk. the key to creating business resilience lies in taking a more strategic approach to deal-ing with vulnerability, rather than focusing purely on out-comes, such as crisis management and insurance. Business resilience that is ingrained into an organization can bring real competitive advantage with increased profitability, market share and reputation.
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feet (30 meters) in height or any warehouse larger than 215,000 square feet (20,000 square meters) must be fitted with a sprin-kler system. However, this only applies to new buildings constructed after the regula-tion was introduced, so any pre-existing buildings are exempt. Furthermore, the new regulations are extremely relaxed by com-parison with other countries across europe. the maximum size a warehouse can be before it is legally obliged to have a sprin-kler system installed is only 13,000 square feet (1,200 square meters) in Germany and 22,000 square feet (2,000 square meters) in Spain, significantly smaller than the 215,000 square feet (20,000 square meters) standard set in the United Kingdom. With such relaxed parameters, busi-nesses that want to be resilient must go the extra mile to protect themselves. In doing so, they will not only enhance their reputa-tion for being reliable, but also may drive down their premium rates and make long-term savings in the future. the latest inno-vation—the extended coverage sprinkler system—is more effective at combatting fire, uses fewer resources, and is more cost-effective to install and maintain.
Benefits are significantthe benefits that an extended system will bring are significant. Classic sprinkler heads
typically cover an area of 30-39 feet (9-12 meters), while extended sprinkler systems can double the coverage resulting in half the number of sprinkler heads, which is far more economical. this new technology has also been developed and tested by manufacturers in leading research facilities. Using an extended sprinkler design reduces the size of the water tank, as well as the fire water pump, which means that less piping and resources are needed. It’s a com-mon myth that, by using less material, the level of safety may be compromised; actu-ally, these systems are not only cheaper to implement and maintain, but also they are more effective at putting out fire. Unfortunately, the sprinkler industry faces some strong misconceptions around cost and safety, when the reality is that the new system represents a major breakthrough in fire prevention technology. traditionally in the U.K., automatic sprinkler systems are per-ceived as being extremely expensive to install. However, there have been some recent devel-opments that have reduced the cost of imple-mentation and upkeep. Another assumption is that triggering a fire alarm will automatically set off all sprinklers in a building, causing untold disruption and damage, which is also untrue. there is a widespread belief that sprin-kler systems struggle to comply with local codes and regulations and that it’s difficult to gain acceptance from authorities. the truth is that, through rigorous testing, the extended coverage sprinkler has been found to exceed all the global applicable standards. the benefits that can be made from the implementation of extended coverage sprin-klers are already being seen by companies. An example of a company that has benefitted from the new system is an agricultural prod-uct facility located in Spain. the company was planning to implement a sprinkler sys-tem to a 215,000-square-feet (20,000-square-meter) extension to its facility. Following a recommendation by FM Global engineers to revert to the new system, the organiza-tion reported cost savings of US$392,000 or 33 percent, largely because the new system
only required one branch line of sprinklers per 16-foot (5-meter) bay, as opposed to two branch lines with the old system, resulting in half the number of sprinklers needed. Converting to extended coverage sprin-klers will also demonstrate cost savings to a business, even if it has older, less efficient systems in place. For example, an automo-tive parts facility in eastern europe car-ried out a retrofitting project and was able to reduce the cost of their previous system by 20 percent. this saving was possible because the new system used less piping and was completed more quickly during normal operating hours, which would not have been possible with the old system.
cost is spread over a lifetimeOf course, there will be an initial cost asso-ciated with setting up any loss prevention system. However, when looking at the cost of implementing sprinklers, it’s important to view the risk of fire outbreak over the life-time of a property, rather than on a year-by-year basis. For example, there may only be a 1 percent chance of fire at a site each year, but if a site has a lifetime of 50 years, then the risk of that site encountering an event of fire is increased to 39 percent. Statistics of risk presented in the context of a build-ing’s lifetime will truly highlight the value of installing a system such as this. Having been in existence for 150 years, sprinklers remain the most effective technol-ogy to mitigate the risk of fire. Following the new development of extended cover-age sprinklers, the argument to have them installed in industrial buildings, particularly in facilities that are critical to the supply chain, has become stronger than ever. While its installation may bring about an additional cost, an extended coverage sprinkler system will deliver significant benefits every year for the lifetime of the facility.
“ When looking at the cost of implementing sprinklers, it’s important to view the risk of fire outbreak over the lifetime of a property, rather than on a year-by-year basis.
Brendan MacGrath is manager of FM Global’s International Codes and Stan-dards Group.
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no one will miss the natural catastrophe events of 2011 and 2012 that affected supply chains across
the globe. People could be forgiven for thinking that it is these major-area events that challenge their supply chains. A fire, however, although not as widespread, could cause as severe a disruption to a business and to its supply chain. the globalization that has exposed supply chains to vary-ing degrees of natural catastrophes has also exposed them to varying levels of fire protection and prevention codes.
the severity of damage exacted upon a business is usually influenced by its level of business resilience, i.e., how efficiently the business reacts to the event of fire and the length of time that trade is disrupted as a result. While those companies that prop-erly prepare for the impact of fire outbreak have an opportunity to increase their market share, others that leave themselves exposed to the dangers of fire will often close for long periods and, in extreme cases, never reopen in the same location. Such dras-tic operational interruptions can result in socio/economic problems that impact the business, community, environment and national economy. they are, however, also entirely preventable.
Supply chains and fire riskGlobal supply chains are fundamental to business in today’s world. not only do they bring about cost efficiencies and eco-nomic conveniences, but they can also be the difference between the long-term sustainability of a business and its short-term dissolution. However, companies must acknowledge that being connected to a greater number of supplier plants and facilities across the world also increases the chances of one of those properties suffering from an interruption. the reality is that a business may have all the correct procedures and fire mitigat-ing technology in place. However, if these practices are not implemented throughout the entire supply chain, then the company still faces the risk of business interruption. to ensure a high level of business continu-ity, a good rule of thumb for companies is to work with their full network of suppliers to implement a consistency of business resil-ience across all operations.
Beyond reasonable Doubts companies must realize that longer supply chains significantly increase chances of business interruption
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For example, an explosion at an auto-motive supplier in Germany that took place on March 31, 2012, proved extremely costly to the global automotive industry. the blast severely damaged the plant, causing a sub-stantial fall in nylon 12 production. In fact, an estimated 40 percent of the world’s nylon 12 capacity was taken out following the explosion, leaving automotive custom-ers scrambling to find alternatives. this, combined with the rising demand of the resin following the increased production of commercial trucks, meant that supplies were stretched even before the explosion. now, automotive companies have been forced into researching alternative material to replace the resin and have said they are monitoring their supply chains carefully. Following a disaster such as this, the consequences of a supply chain loss can extend to months or even years after the outbreak of fire took place. In a recent study carried out by Singhal and Hendricks of more than 800 companies that announced a supply chain disruption between 1989 and 2000, it emerged that, during a three-year span, regardless of industry, disruption cause, or time period, affected companies experienced 33-40 percent lower stock returns relative to their industrial peers. Likewise, share-price volatility in the year following the disruption was 13.5 percent higher, when compared with the volatility in the year before the disruption.
Steps to mitigate fire riskthere are a number of measures companies can take to mitigate the risk of fire impact across their supply chain network. However, there are three key steps that are essential. First, businesses must take into account the complex nature of their supply chains
when protecting themselves against the out-break of fire. they need to build their under-standing of their key supplier relationships and the network of preferred and alternate suppliers. Second, businesses should use this understanding of their supply chains to develop a view of their potential expo-sures from supplier locations. this entails a deeper understanding of each supplier’s business operations and ability to recover
from a major disruption. It’s possible this detailed analysis will show the supplier is very resilient to a potential disruption and presents a much smaller risk exposure than initially thought. Finally, based on the true exposures, businesses should look to mitigation strate-gies. the tried-and-tested measures of fire protection, such as sprinkler systems, are often overlooked. However, they can be an effective part of a strategy that a business
HiTS To THe bottoM line
in a recent study, more than 800 companies announced a supply chain disruption between 1989 and 2000. during a three-year span centered around that disrup-tion—regardless of industry, cause or time period—companies saw their bottom lines directly affected.
LoWER StocK REtuRnS hiGhER ShARE PRicE VoLAtiLity
HiGHer stocK price Volatility
13.5%loWer returns
33-40%
year after Disruption
year Before Disruption
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should have in place—not only for their own facilities, but also for those of their key suppliers. Understanding the science of fire dynam-ics is anything but simple. With businesses operating in increasingly complex supply chain environments, it is important to continu-ally research the origins of fire risk, as well as efficient ways to manage its impact across the entire chain of a company’s operations.
Building fire-resilient supply chainsthe evolution of global supply chains pres-ents a tremendous opportunity for busi-nesses in driving down costs, forging key relationships and innovating collaboratively. However, their inherent complexity also car-ries risk that companies need to proactively manage and mitigate. Spreading risk across preferred and alternate suppliers is one step a business can take to ensure operational resilience. However, it is also essential that companies work with their entire network of suppliers to build a consistent standard of fire protection and, therefore, business con-tinuity. As a very practical solution, fire pro-tection systems can be the right investment to make in this regard. the changing nature of the business world today requires a certain commitment from insurance companies, their clients and relevant suppliers to work together and con-tinually develop and raise the standards of fire safety.
STePS for MiTigaTing Fire risk GlobAlly
Thomas Roche is operations vice president for FM Global’s Northern Europe operations. An earlier version of this article first appeared in the September 2012 edition of Fire Risk Man-agement (www.frmjournal.com).
Based on the true exposures, look to implement mitigation strategies, including tried and tested measures of fire protection such as sprinkler systems, not only for your own facilities, but also for those of your key suppliers.
Use this understanding of your supply chains and your suppliers’ business opera-tions to develop potential exposures from supplier locations.
Consider the complex nature of your supply chains and build your understanding of key supplier relationships and the network of preferred and alternate suppliers.
1 ASSESS yOUr SUPPLy CHAIn
2 IdEnTIfy ExPOSUrES
3 MITIGATE THE rISK
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Doing More wiTH leSSeco sprinkler options provide sufficient protection with fewer resources
FM Global worked with a client to install automatic sprinkler protection at a facility where earth-moving loaders are assembled. the facility was located in a country where the major cost of sprinkler installation involves provision of a good water supply, such as having a water tank on site. FM Global provided a protection option that required less water consumption, thus reducing the tank size and creating a cost savings of approximately US$30,000.
Planning makes it possibledue to clear guidelines up front in the project planning stage, it was possible to provide sprinkler pro-tection specifications, pump capacity and the tank size to the client at a reasonable cost. these “green” options allowed the client to obtain maximum protection for minimum cost.
[ theSCienCe ]
Making an eMergenCy
lanDinga full-scale seismic
test takes a close look at earthquake survivability
in one of the most elaborate seismic tests ever staged, experts study the survivability
of key emergency facilities with a full-scale test of a building isolation system. their findings narrow the gap between what is merely speculation and what will actually happen during and after an earthquake. While major earthquakes are relatively rare, when they occur they can do tremen-dous damage, leaving huge property and casualty losses in their wake. While the fact
that they are infrequent and that comparing losses incurred in different periods of time can be difficult, two researchers tried to develop an average for annual quake losses in the United States for the century that began with the 1906 San Francisco earth-quake. In their study, “normalized earth-quake damage and Fatalities in the United States: 1900 – 2005,” authors Kevin vranes and Roger Pielke Jr. concluded that, if trans-lated into the monetary values of 2005, 13
30 [ Reason ] issUe 1 : 2013
[ theSCienCe ] Research
events over the previous century would have caused US$1 billion or more in losses, and five would have totaled more than US$10 billion. thus, they estimated, average annual losses ranging from US$1.3 billion to US$5.7 billion, depending on the exact cal-culation method. Particularly when com-bined with the potential loss of life, those kinds of numbers have led to an increased focus on earthquake engineering and, for FM Global, on earthquake loss prevention. Recently, FM Global participated in one of the most elaborate seismic tests ever devised—a test conducted under the aus-pices of the englekirk Structural engineer-ing Center—part of the University of Cali-fornia, San diego (UCSd), Calif., USA.
to test a variety of models and con-cepts regarding seismic damage, a team of engineers planned and conducted multifac-eted tests on a five-story building mounted on one of the world’s largest “shake tables” at UCSd. to fully explore the impact of an earthquake and its aftermath, the build-ing was elaborately fitted with a wide range of components, in addition to its structural elements, including elevators, fire systems, medical equipment, computer servers and other components. Unlike some previous seismic testing, the UCSd test included an unusually large structure and a wide range of nonstructural items—even a rooftop water tower and HvAC unit. not forgetting aesthetics (but actually posing some safety risks worth studying), the exterior of the precast con-crete was covered in synthetic stucco.
Furthermore, in homage to the specific concerns of California officials about the survivability of key emergency facilities such as hospitals, the building included an intensive care unit, a surgery suite, as well as “real” plumbing and air conditioning sys-tems, fire barriers and even a working eleva-tor and data center. the US$5 million project was man-aged by the university but supported by a large group of other organizations, includ-ing manufacturing companies, government agencies and FM Global. Hosam Ali, FM Global’s director, structural hazards and response research, said FM Global’s role stems from its desire to participate in research that can improve loss prevention and mitigation strategies. He
said that, in addition to UCSd, FM Global has worked with many universities on simi-lar issues in the past. “We knew about their efforts and were especially interested in their focus on nonstructural components,” said Ali. FM Global was welcomed for its ability to provide engineering expertise as well as the client and insurer perspective. “We also liked the fact that this was a project very focused on the actual chal-lenges facing our clients,” he added. Some of the companies that partici-pated made in-kind donations in the form of products to equip the building. For example, Hilti, a global manufacturer and supplier of specialized tools and fastening systems for professional users—and an FM Global insured company—brought a number of their products to the test. Paul Langford, head of the chemicals business unit at Hilti,
A nEtWoRK FoR EARthquAKE Study
University of california, san diego is one of the more active participants in the George e. Brown Jr. network for earthquake engineering simulation (nees), set up by the national science Foundation (nsF) to arm researchers with the tools they need to better understand how earthquakes and tsu-namis impact the buildings, bridges, utility systems and other critical compo-nents of today’s society. nees consists of a network of 15 large-scale, experimental sites equipped with tools, such as the giant shake table in san diego, as well as centrifuges that simulate earthquake effects, a tsunami wave basin and field-testing apparatus. the key to the network is that all the sites are part of a centralized data pool and share simulation software. high speed data links support collaboration across all the sites and help engineers and students to pursue experiments that have the potential to save lives and reduce property damage in the future. With these tools, engineers and students from all parts of the country can collaborate on multi-site experi-ments using simulators that generate earthquake effects strong enough to bring down full-sized buildings. the network is named in memory of George e. Brown Jr., a former chair-man of the U.s. house of Representa-tives science committee who authored legislation creating the interagency national earthquake hazards Reduction Program in 1977.
“ it lets us create unique data sets that can then be used by us and by many other researchers all over the world who want to test and validate their [earthquake] predictive analytical models.”
dr. Joel P. conte, PRoFessoR UniveRsity oF caliFoRnia, san dieGo
DOWNlOAD THE RIsK EssENTAls APP IN ITUNEs to see detailed video of the full-scale seismic tests
issUe 1 : 2013 [ Reason ] 31
Research [ theSCienCe ]
said his company wanted to supplement what they could learn in their own lab with a realistic, large-scale experiment. Based in the european principality of Lichtenstein, Langford said the com-pany was especially interested in testing its anchoring products, but ended up gaining insight on other products, too. Although lab tests are useful, Langford said it is always helpful to compare physical evidence from live testing to what happens in the labora-tory, “to make sure the lab results are rel-evant.”
Langford said the electrical and mechanical services in the San diego struc-ture were equipped with two types of Hilti fire-stopping material where they penetrated walls—a traditional style design using caulk and a newer design using engineered mate-rial. the post-quake fire tests on the building showed that, in general, the engineered ver-sion worked very well, noted Langford. Hilti also tested its direct Fastenings fixings in the suspended ceiling system and various designs of support systems that braced the mechanical and electrical sys-tems, Langford explained. Langford said the tests yielded an abun-dance of data. “We are working with the uni-versity and with others to analyze all that data, but we have early indications that, for nonstructural fasteners, the current indus-try design rules in some areas don’t go far enough in terms of the amount of movement they allow for,” Langford explained. “We may have to change those design rules.” Another big implication from the test
came on the fire-stop side. even though the engineered products weren’t originally designed with seismic resistance in mind, according to Langford, they proved more resistant to damage and continued to work better than anticipated, containing fire and smoke in the post-quake fire test.
Earth-shattering conclusionsto make sure that as much data as possible could be gathered from the project, UCSd planned out a series of simulations, corre-sponding approximately to the character-
istics of actual earthquakes, of increasing severity. task one was to simulate the all-too-familiar northridge (Calif., USA) earth-quake of 1994, which measured 6.7 on the Richter scale. the large outdoor shake table shook the test specimen attached to it by reproducing two actual ground motions recorded during the historical northridge earthquake. For that test, and even tougher tests—a simulation of the 2002, 7.9-magnitude earthquake that took place in denali, Alaska, USA, and the 2010 8.8-magnitude Chile earthquake—the 700-ton (635-metric ton) building was supported initially on rubber isolators, which had the capacity to signifi-cantly dampen movement and shock to the building itself. the full-scale test of a building isola-tion system on a shake table was also a first, at least within the United States. Spectacularly, the isolators kept dam-age from both tests to a minimum—just
some cracking of partition walls and some displacement of unattached items within the building. But the structure as a whole remained largely intact and safe for occu-pancy. Overall there was minimal damage to computer equipment, power systems and medical equipment. In other words, simi-larly constructed buildings, similarly iso-lated, would have a very good chance of surviving most earthquakes and remaining functional afterward. that in itself is a story. Base isolation, as it is called, in which huge rubber cylin-ders are interposed between the building and the ground, has become relatively common in Japan and has been retrofitted to some buildings in California, as well as being included in new structures. But it remains a new technology. those conclusions, preliminary and nonexhaustive, came from visual inspec-tions and the common-sense fact that sys-tems were able to keep working. However, to ensure the maximum value from the tests, engineers equipped the reinforced concrete structure with hundreds of sensors and about 70 cameras to monitor motion and record damage. In addition to FM Global and Hilti, other participants included San diego State University (San diego, Calif., USA), Worcester Polytechnic Institute (Worces-ter, Mass., USA), and Howard University (Washington, d.C., USA). the major funders included the national Science Foundation (nSF), the network for earthquake engineering Simu-lation (neeS), the California Seismic Safety Commission, the Charles Pankow Founda-tion and the englekirk Advisory Board. the department of Structural engi-neering at UCSd is renowned for the research it does in earthquake engineer-ing science—both experimentally using its shake tables, and analytically by developing physics-based computer models of struc-tures using newtonian principles and laws of deformation of materials. “Using those basic principles, we built a finite element
“ We have early indications that, for non-structural fasteners, the current industry design rules in some areas don’t go far enough in terms of the amount of movement they allow for.”
Paul Willis cheMicals BUsiness Unit, hilti
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[ thescience ]
model of a structure (e.g., building, bridge) with the objective to predict what will hap-pen to it when subjected to different types of earthquakes,” said dr. Joel P. Conte, a pro-fessor in the department who worked on the test. As Conte noted, the simulations are never exact, but, over time—especially when they can be fairly compared with real-world test results—they can be made more and more accurate. “there is continuous progress—the gap between what we predict and reality narrows progressively,” he explained. While the shake table cannot reproduce exactly every detail of a recorded earthquake ground motion, it is “pretty close” in Conte’s view. “It lets us create unique data sets that can then be used by us and by many other researchers all over the world who want to test and validate their predictive analytical models.” And, he noted, reinforced concrete can be particularly difficult to model. that’s why it is so helpful to continue to do test-ing under realistic conditions. “We don’t perform shake table tests on small-scaled models of structures because there are many failure mechanisms that do not scale down very well; so, with the large shake table, we can apply realistic earthquake motions as measured in past earthquakes, to well-doc-umented and densely instrumented struc-tures,” he noted. “In the first phase, with the building resting on four laminated rubber bearings (base isolators), one at each corner, the pre-dictions that we made turned out to be pretty good, and the structure remained largely undamaged,” he explained. However, in the later series of tests, when the base isolators were removed, the building sustained some damage. And, admitted Conte, it proved more difficult to accurately predict the fur-ther process of building degradation. Isola-tion technology was a definite winner, dra-matically reducing damage to the buildings. While the seismic tests were continu-ing, researchers from Worcester Polytechnic
Institute periodically inspected “passive” fire safety components, such as walls and the fire-stops provided by Hilti. they also assessed damage to active systems, such as fire sprinklers. In a later round of tests, the Worcester Polytechnic Institute team ignited a series of fires on the building’s third floor using pans of heptane, a liquid fuel that burns hot enough to simulate full burning within a compartment. Using temperature and smoke movement sensors, the researchers
attempted to determine how quake damage would affect the ability of the active and pas-sive fire protection systems to contain fires and prevent the spread of smoke. At present, according to Ali, pre-liminary results of all the tests have been released, but a full report is still in the works. “After we get further into the data, I’m confident we will find even more useful insights,” Langford said. “It is all very encouraging, but we look forward to doing more tests,” added Conte.
thE EARthquAKE Motion SiMuLAtion tABLE
FM Global’s natural hazards lab at its Research campus in West Glocester, R.i., Usa, is equipped with its own shake table, formally known as the earthquake motion simulation table. to provide stability for the gyrations of its 10-square-foot (0.9-square-meter) surface, the table is built on a 34-foot-by-36-foot (10-meter-by-11-meter) concrete foundation—which is 13 feet (4 meters) deep and weighs 1,000 tons (907 metric tons). the assembly can support loads of up to five tons (4.5 met-ric tons). Most critically, noted harold Magistrale, technical team leader for geologi-cal sciences, the table can provide full three-dimensional “six-degrees-of-freedom” motion, allowing even greater fidelity to actual earthquake conditions than the Ucsd site. Magistrale said the smaller size of the table makes it ideal for detailed studies of nonstructural building components and equipment that might need to be made more earthquake resistant.
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[ thescience ]
securitymaximum
well-protected
property
qualitiesof a
On this primer for property protection, risk executives and insurance pros reinforce the value of a stringent commitment to best-in-class loss prevention practices
no company can afford the loss of property and produc-tivity from destruction caused by fire, natural hazards or equipment outage. equipment damaged in minutes can take months to repair or replace. if there is business interruption, revenue, stock price, and shareholder confi-dence all take a major hit. Market position may be lost. inflation and material shortage may make rebuilding dif-ficult and costly. of course, insurance helps alleviates some of the cost associated with property damage. But insurance isn’t the only answer, especially when considering intan-gibles like customers, productivity, good will and staff. What follows are 10 basic but critical qualities of well-protected industrial, commercial and institutional properties. these qualities come annotated with com-ments from the risk management community, which we feel provide real-world validation for their importance.
Commitment to Property Loss PreventionFrom the outset, management genuinely com-mits to property loss prevention. Concerned management, wishing to endorse an effective property loss prevention and control program, demonstrates its support by putting the objec-tives, procedures, responsibilities and account-abilities of such a program on paper. A formal policy statement conveys the company’s com-mitment to property loss prevention and encour-ages employee involvement and enforcement of property loss prevention measures. After endorsing the program, manage-ment ensures it is implemented. the goal is for all employees to be able to react effectively to emergencies and any hazardous conditions they may encounter. Motivated employees who understand and support property loss prevention and control principles are key to building a con-tinually improving program aimed at reducing the frequency and severity of loss. employees know that property loss prevention and control is a permanent aspect of their jobs. they also understand that the actions they take benefit everyone: property loss prevention and control measures protect not only the company, but their jobs as well.
issUe 1 : 2013 [ Reason ] 37
This is the essential basis of a property loss prevention program.
At Cobham, we have adopted this principle by engaging with
senior management and explaining our objectives and the busi-
ness benefits of establishing a sustainable approach to loss prevention. In
doing so, we have obtained top-down support, beginning with our board
of directors, which authorized significant investment in new projects and
existing facilities to help protect assets and revenue. We ensure the involve-
ment of all relevant employees through training, regular site visits and
communication to emphasize the aims and objectives of our risk manage-
ment program. This is helping to further develop a risk management culture
throughout the group.
richard ealey, group insurance and risk manager, Cobham plC
We have a very strong commitment to loss prevention. This is
basically why I was brought to Covidien, to look after all the facil-
ities and to manage all aspects of the property loss prevention
program. It is my job to ensure that our facilities are safe for our employees
and that they remain safe for our processes, our buildings and our assets.
We work closely with FM Global’s field engineers and account engineers in
this mission. Whenever we are building new facilities or modifying exist-
ing ones, our FM Global field engineer is brought in early in the game for
input on fire protection, building construction features, earthquake design,
explosion protection and more. FM Global is a trusted business partner.
They provide us with good advice to help us keep our business running. If
we have a loss, it would be a large disruption, and it would cost us a lot of
money. Together, we’d rather not have that happen.
John l. KanaKry, ARM, AIC, CBCP senior manager, loss control/business continuity, Covidien plC
From the top down, Fidelity is
committed to property loss
prevention and clearly sees
the value in partnering with FM Global
to minimize risk. We know how impor-
tant it is to be able to react effectively to
emergencies and equipment outages.
steVe raymond, facility manager, Fidelity investments
The best claim is the one that doesn’t happen” is a phrase often
used to encourage prevention. But losses are not prevented by
accident—and certainly not by any single risk manager. The dif-
ference is really made when the entire institution commits to loss preven-
tion. When top leadership communicates that commitment to all employ-
ees and supports them in their efforts, every person is on the front line to
identify hazardous situations before they become losses. It is a positive
sign that the benefits of loss prevention are increasingly being recognized
by all employees.
yVonne marie Keafer, director, risk management, University oF pittsbUrgh
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Covidien risk management
works closely with our cor-
porate real estate department.
When looking at new construction, we
advise them about locations and suit-
able building material. If it is an existing
facility, we prefer to be either the sole
occupant or the lead occupant, so we
can maintain control of the aspects of
the building, like fire protection systems.
John l. KanaKry, Covidien plC
Continuity of operations is
essential for Fidelity; down-
time is not an option. Site
assessments and risk analysis conducted
by FM Global help us to manage our
operations 24/7.
steVe raymond, Fidelity investments
Suitable Construction A building’s inherent construction type plays a major role in determining the extent of fire exposure it can withstand. the proposed content of a building is another important factor in determining the building design and choosing construction material. When a building contains highly hazardous processes or is several stories high, fire-resistant material, such as reinforced concrete or a protected steel frame, are utilized. the possi-bility of property loss is reduced by subdividing large areas of a building with fire walls. Ignitable liquid, combustible dust and other material presenting an explosion haz-ard are stored in detached buildings if possible. If these items must be kept in main build-ings, they are enclosed with a combination of pressure-resistant and pressure-relieving construction. Roofs are designed to withstand loading from snow, ice and rainfall. Also, main roofs and their coverings are designed to resist wind uplift. Buildings are designed to adhere to seismic details found in local building codes if buildings are located in an earthquake area. Appropriate building material to resist deterioration where processes can produce a corrosive atmosphere is utilized. And structures are designed to resist exposures at nearby facilities that may house highly combustible occupancies. As the cost of fuel for processes and area heating continues to increase, buildings and processes are designed to conserve energy. Insulation material that does not intro-duce fire hazards is used. When combustible insulation must be used, it is protected with noncombustible barriers and automatic sprinklers. Construction planning gives prefer-ence to a site that has an ample and reliable public water supply, is located near the public fire service, and considers the site’s flood, earthquake and windstorm history as well.
At the University of Pittsburgh, successful property loss preven-
tion begins with project pre-planning. It is essential to review
construction plans and align them with best practices—not only
with prevailing minimum building codes. FM Global’s project planning
service connects FM Global engineers with our project managers early on
so that the University can make decisions to maximize protection at a point
in the project when changes and costs are not yet finalized. This partner-
ship has helped the University to stay out in front of trends, such as energy
conservation and the increasing frequency of disruptive weather patterns.
We’ve experienced few problems with our new buildings, including those
with innovative LEED-certified “green” construction.
yVonne marie Keafer, University oF pittsbUrgh
issUe 1 : 2013 [ Reason ] 39
In North America, it’s become commonplace to have sprinklers
where they are needed. In our North American portfolio, we are
90-95 percent there with sprinklers. For retrofit projects in existing
properties, we are very successful in getting sprinkler projects started.
John l. KanaKry, Covidien plC
Because FM Global provides the education and proper training,
we can take advantage of the changing technology in the fire
suppression industry.
steVe raymond, Fidelity investments
From the beginning of Cobham’s relationship with FM Global
fire was identified as a major hazard to our facilities, with certain
processes requiring particular attention. It was decided by senior
management that we needed to focus in the first instance on our major sites
and it was agreed these will be fully protected by sprinkler systems as soon
as possible. In smaller facilities, where it was not possible to implement full
sprinkler protection, we have fitted spot protection over certain hazards to
provide as much mitigation as possible. All this work has been completed
with considerable support from FM Global. This has resulted in much greater
certainty in the outcome of serious fire events at our most critical facilities.
richard ealey, CobhamSprinklers Where NeededAppropriate automatic sprinklers are installed wherever there is combustible construction, material or processes related to the type of occupancy. Sprinkler systems are properly inspected and maintained, initiate and trans-mit to an alarm-monitoring system; and have adequate water supply. every area where there is material or processes that could start a fire, contribute fuel to a fire, help the spread of fire, or be damaged by fire are considered for auto-matic sprinkler protection.
We recognize that automatic sprinklers remain the most
reliable method to prevent loss of property—and loss of life—
by fire. Sprinkler protection became deeply personal for
universities following the Seton Hall University residence hall fire in
January 2000 when three freshmen died after two students set a fire as a
prank. Many schools, including the University of Pittsburgh, pushed forward
to complete full sprinkler protection in residence halls. We all share the same
interest—preventing another tragedy.
yVonne marie Keafer, University oF pittsbUrgh
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Special Hazards Protection is EnsuredWell-protected facilities isolate ignitable liquid by distance or construction, often in a detached location, or at least in a carefully located and designated cutoff area within a main building. Ignitable liquid is confined with curbs or dikes to avoid contact with any igni-tion sources. Appropriate passive physical controls, such as safety cans, grounding straps, safety bungs or interlocks are used. Adequate natural or forced mechanical ventilation in confined areas involving ignitable liquid are used to eliminate concentrations of flammable vapor. employees are provided with procedural training on ignitable liquid hazards, and safe-handling awareness is fostered with strict reinforcement of procedures. Additionally, an adequate spill response program is often in place. Ignition sources, such as open flames, smoking, static, electrical sparks and hot surfaces are eliminated, and specially designed electrical equipment is used. dust-producing processes are reviewed and dust is confined within well-designed pro-cess and transfer equipment to minimize leakage. dust is not allowed to accumulate, and process and storage areas are cleaned periodically. Flammable gas storage and confinement is isolated to properly designed process and storage equipment to prevent leakage. Physical damage, overheating and overpressure of flammable gas are avoided. And, sprinklers and/or water spray protection or fire-resistive insulation for many tank installations are utilized. emergency shutoff valves are used and easily accessible.
Cobham has significant amounts of ignitable liquid that it utilizes
in its operations. With the help of FM Global, we have been able to
identify many of these particular hazards and agreed to improved
storage, containment and protection of such liquid. This undoubtedly has
reduced the possibility of ignition and spread of fire involving such liquid.
It is recognized within the business as a major area of risk management and
we maintain a control standard in the Cobham Loss Prevention Standard.
richard ealey, Cobham
In conjunction with
their risk analysis,
FM Global also offers
Fidelity an online training program
that addresses fire suppression,
natural disasters and special hazards,
such as ignitable liquid. Currently, all
of our maintenance staff is enrolled.
steVe raymond, Fidelity investments
A university might not
come to mind when talk-
ing about special hazards
protection and prevention—but
most do have significant exposure.
Teaching laboratories and research
operations are just two of the areas
where University of Pittsburgh fac-
ulty and staff educate in awareness
and prevention. When students and
researchers are using flammable and
hazardous material in close confines,
both injury and building protection
are at stake.
yVonne marie Keafer, University oF pittsbUrgh
issUe 1 : 2013 [ Reason ] 41
Adequate Water SupplySprinklers are supplied by water adequate both in volume and pressure from sources such as public water mains, a gravity tank, fire pump and suction tank, a natural body of water, or a suitable combination. Pumper connections are utilized, allowing the public fire service to reinforce the system further. Facility management is mindful of how occupancy changes, new buildings or extensions, and the introduction of more hazardous processes or storage arrangements in existing buildings may increase water supply requirements, and of how any new neighboring facilities in the area may increase demand on the public water supply.
This is one area we truly focus on. This speaks to the human
element program at our facilities. Being a medical-device
manufacturer, we need to ensure our facilities are in tip-top
shape, including robust housekeeping and self-inspection programs.
We frequently inspect sprinkler valves, water-flow alarms and extinguishing
systems. They all get reviewed and tested at our facilities. For hot work opera-
tions, we use FM Global’s hot work permit system. We know hot work is the
leading cause of fire, so we pay very close attention to this.
John l. KanaKry, Covidien plC
The University of Pittsburgh’s urban campus, with large water
mains on a public system, can still present water supply challenges.
Maintaining an adequate water supply is an ongoing effort by
Environmental, Health and Safety (EH&S) and Facilities Management staff who
make sure fire pumps are tested and confirm adequate water pressure
for new projects. Recently, the University constructed new residence halls
at the highest elevation on campus. The need to ensure an adequate water
supply for automatic sprinklers was discussed early in the FM Global plan
review stage. Thanks to pre-planning, the student residences have adequate
fire protection water—and a great view from the hill.
yVonne marie Keafer, University oF pittsbUrgh
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Ongoing Fire Prevention ProgramsRegular, recorded inspections of fire protec-tion equipment are ensured, including physi-cally trying locked or sealed valves. Inspections include housekeeping, ignitable liquid handling and control of smoking. Basic ignitable liquid safeguards, such as ventilation, diking and containment, are in place. Smoking material is confined and contained. And, the facility is protected against arsonists. during inspections, the condition of extinguishers, fire hoses, hydrants, sprinkler alarms, fire pumps, water supply tanks and fire doors are checked regularly. Sprinkler system control valves are closed for repair or maintenance only under watchful eye, and authorization from the fire-safety supervisor is obtained before closing a sprinkler system control valve. Hot work operations are conducted using FM Global’s Hot Work Permit sys-tem. employees and outside contractors use proper procedures and observe appropriate precautions. Hot work areas are continuously monitored for up to four hours following hot work. Also, employees take responsibility for requiring outside contractors to conform to policies. And, the emergency response team (eRt) is made aware of and instructed in the company’s hot work procedures.
Such human element procedural controls are essential and an
integral part of the risk management program. These controls are
very often common sense and a low-cost/no-cost way of preventing
loss, and they are encouraged as a best practice/business-as-usual approach
to risk within facilities. Inspections help maintain a heightened awareness of
risk and help embed a consistent attitude in all employees identifying risk and
wherever possible eliminating it there and then. Checking sprinkler systems
regularly helps ensure we are getting full value from the investment and
ensuring it will work when it needs to. Equally we need to be vigilant when
third parties come to the site that could cause a loss because of lack of control.
Controls, such as hot work permits, exercise such control and limit risk to
the business.
richard ealey, Cobham
Continuous client education is one of FM Global’s goals and
the resources available are designed to provide the property
loss prevention information we need to help us protect our
business continuity.
steVe raymond, Fidelity investments
Fire prevention programs are integrated into the University’s
routine internal practices and flow smoothly as part of loss
prevention plans. The bigger challenge at a large university is to
ensure that our many vendors and contractors hold the same high standards
that we do. FM Global’s advice and Hot Work Permit System have proven an
effective partnership with our project management in requiring vendors to
treat protection systems with the same care that we would use. Ultimately, our
own employees take responsibility to ensure that the contractors have done
things the right way.
yVonne marie Keafer, University oF pittsbUrgh
issUe 1 : 2013 [ Reason ] 43
Good Housekeepingthe facility’s housekeeping program involves all employees and includes frequent cleaning, prompt waste disposal and proper material-handling practices—especially in large storage areas. Special care is taken to avoid the buildup of combustible waste and deposits—such as dust—from floors, ceilings, structural members, machinery and equipment. And, a formal system for employees to report potential problems is in place.
We make sure that our facilities are up to the highest level of
cleanliness for the space. For example, if it’s a clean room, it must
be up to a certain level of cleanliness. If it’s an office space or
warehouse—a space designed for occupancy—it’s very different. Our facilities
are top-notch as far as housekeeping standards go.
John l. KanaKry, Covidien plC
Maintenance of Buildings and EquipmentWell-protected facilities have implemented a regular preventive maintenance program for buildings and equipment that includes checking electrical connections for tightness and inspecting electrical equipment for signs of overheating; ensuring that electrical systems are adequately sized, properly maintained and protected, and appropriate to the occupancy; and that electrical equipment is kept clean, cool and dry. employees are trained to operate electri-cal equipment properly, especially in emergencies. Machinery is periodically or continuously monitored and, when distress is evident, repairs are promptly executed. In the case of boilers and pressure vessels, safety controls are installed, tested and maintained. Above all else, equipment is kept clean. In general, grease, oil or dust accumulations on all types of equipment and machinery are avoided.
Maintenance of machinery
and equipment is an area
where the University’s
partnership with FM Global makes
a big difference. Knowing that our
equipment is reliable and safe is
an essential part of taking respon-
sibility for a facility that is well-pro-
tected from risk.
yVonne marie Keafer, University oF pittsbUrgh
Good housekeeping must involve all staff, faculty and students.
Responsibilities in hazardous areas and for hazardous events are
well documented and enforced through EH&S safety procedures.
However, a culture of good housekeeping is just as important. Everyone needs
to take responsibility for keeping workspaces clear of hazards.
yVonne marie Keafer, University oF pittsbUrgh
44 [ Reason ] issUe 1 : 2013
Emergency Response Team and Public Fire ServiceIndividuals most familiar with the facility and its operations are trained as an emergency response team (eRt) to address emergencies ranging from fire, explosion, hazardous mate-rial spillage or a nuclear accident, to natural hazards such as hurricane, freeze, earthquake and flood. the eRt includes a person in charge, a notifier, a sprinkler control valve operator, a fire pump operator, a fire squad, a pipe fitter, an electrician, and a salvage squad. the person in charge develops and maintains a written plan, is familiar with all facilities and any inherent special hazards, knows the care and operation of all protection systems and has proper train-ing and experience in firefighting. When a fire emergency occurs, the person in charge directs all emergency actions until the public fire service arrives. the designated notifier reports a fire to the local fire service and provides preliminary information about the fire’s location. the sprinkler control valve operator knows where, when and how fire control equip-ment is to be handled to ensure it operates in a fire situation. Likewise, the fire pump operator verifies the fire pump is operating, and shuts it off when instructed to do so by the person in charge or the fire chief. the fire squad knows the location of, and is trained to use, fire extinguishers to control an incipient fire. the pipe fitter has access to external sources that can shut off gas, water and steam; the electrician has similar access related to electricity. Both of these eRt members also have 24-hour accessibility to those who may provide these services on a retainer basis. the salvage squad, which has access to decision-making management, can evaluate the need for salvage operations and establish contingency plans and a retainer schedule with the vendor, depending on the nature of the occupancy. eRt training is ongoing, especially for new members. employees who are not directly involved in the eRt play a role in property loss preven-tion and control by being trained to use portable fire extinguishers. Prefire planning with the public fire service is completed and reviewed at least annually.
Most, if not all of our facilities have very good emergency response
plans in place. We’ve developed crisis communications plans
to address disasters or emergencies, to communicate internally
and externally with our suppliers and senior management should we have
a natural disaster. We’ve developed business continuity plans at 12 facilities
so far. With our emergency response plans, we follow aspects of FM Global’s
recommendations, like notifying the fire department and showing them where
our systems are in case of an emergency. We partner with local fire depart-
ments annually to familiarize them with our plans, our hazards and our layouts.
John l. KanaKry, Covidien plC
Adhering to FM Global’s
engineering standards has
certainly helped reduce
risk to the site and has been the key
to our excellent safety track record.
steVe raymond, Fidelity investments
The importance of emer-
gency response teams
at universities rose to
national concern in the aftermath
of the Virginia Tech tragedy in April
2007. The focus on the importance of
a robust, coordinated crisis response
and regular drills also benefits our
actions in a fire, flood or natural
disaster, as well. When tested in a
crisis, we’ve found that an effective
initial response leads to a smooth
and fast return to normal operations.
For example, following a fire in an
off-campus apartment residence,
we began damage mitigation work
immediately; students were quickly
set up in alternative living spaces
while our FM Global adjusters helped
coordinate restoration—all during
final exam week.
yVonne marie Keafer, University oF pittsbUrgh
issUe 1 : 2013 [ Reason ] 45
Protection against Exposure and Natural HazardsWell-protected facilities take into consideration hazards posed by conditions outside the facility, including exposure hazards created by nearby buildings. Buildings are designed and built to withstand windstorms normally expected in the geo-graphic area. this includes properly anchored roof framings and decks, adequate adhesion or fastening of roof coverings (particularly at corners and perimeters), and adequate fastening of perimeter flashing. Roof decking, covering and flashing are properly maintained. Safeguards against flood, especially in flood-prone regions, are implemented. Consid-erations include damage to equipment and storage from water and mud entering a building, floating debris that can batter walls and equipment, and rupturing pipelines that carry hazard-ous material. In high-risk areas, permanent flood protection, such as dikes, flood shields for doorways and special anchoring of tanks, is available. Unnecessary exterior openings are sealed. In areas susceptible to earthquakes, buildings are designed and constructed in accor-dance with seismic details specified in local building codes. Storage racks, boilers, trans-formers, tanks and other large equipment are braced and/or anchored to minimize the possi-bility of toppling and sliding. Special installation techniques to protect sprinkler and process piping are used. Roofs are designed to withstand excessive snow and ice loading, including drifted snow over a relatively small area. Snow is quickly removed from roofs to avoid loading and accu-mulation. A sufficient number of adequately sized and properly located drains are installed to prevent overloading from ponding water.
FM Global has led the
industry in addressing
global property risks and
in providing access to essential risk
management information to help
mitigate and plan for natural disasters.
steVe raymond, Fidelity investments
A large public university
campus in an urban set-
ting is similar to running
a small city. And, like a city, success
can depend on how well you get
along with your neighbors. As with all
qualities of a well-protected property,
good pre-planning, communication,
awareness and training can make a
difference in whether you recover
quickly from a disaster—or not.
yVonne marie Keafer, University oF pittsbUrgh
We pay a lot of attention to natural hazard exposures, particularly
as they relate to new facilities. We utilize FM Global’s resources to
properly protect our property from windstorm and earthquake;
it’s part of our fabric and what we do in risk management, to make sure the
roof stays on the building. So we work with FM Global on roof securement,
protection from all aspects of natural hazard exposure, with simple fixes like
seismic shutoff valves to minimize the risk for fire following earthquake at our
earthquake-prone facilities.
. John l. KanaKry, Covidien plC
Changing the Culture
With a history going back over 175 years, McKesson understands the business value of patience, pragmatism and perseverance. Thanks in part to that long-standing tradition, so does its risk management team.
issUe 1 : 2013 [ Reason ] 47
At the outset of the relationship with their insurer, which got underway in 1997, the McKesson risk management team had limited influence, and didn’t always enjoy a prominent seat at the decision-making table. this has since changed dramatically, and here’s how: When obtaining adequate capacity for a property insurance program became an acute problem after Sept. 11, 2001, Lanette Frostestad, senior director of risk manage-ment, saw the opportunity to have a discus-sion with her management team around risk improvement. She met with nick Loiacono, corporate treasurer, and then-recently retired San Francisco operations manager, Jim John-son. the appeal was on two fronts: resolving the insurance capacity issue and improving the management of risk. the response from Loiacono was that the approach made abso-lute sense for a number of reasons. “that time after 9/11 really was a turn-ing point at McKesson,” said Frostestad. “It was difficult for a lot of people to get insurance and we didn’t find it as easy as we expected to fill out our program. We had discussions with FM Global about what the concerns might be. We decided it was time to change our approach to risk management. the way to do that was to make sure the business units had the funding they needed to make the necessary changes. “We put together a group that included risk management, business units, FM Global and Marsh to meet on a periodic basis to talk about what projects should be done, to put it in the forefront of everybody’s minds. At that point people started taking risk manage-ment more seriously.” Most of its revenue is driven from a small number of facilities, including a national warehouse and a handful of regional distribution centers. Given the size of the property exposure, FM Global took a leader-ship role on a syndicated insurance program. “We started by focusing on our largest facilities,” Frostestad said. “Our real estate department put together a budget in terms of what it would cost to improve those facili-
a trusted provider of medical supplies and goods for
more than 175 years, McKesson has a long and
admired history in health care. today, McKesson is
the largest distributor of pharmaceuticals in north
america. they rank high on the Fortune 500 list of
companies, with annual revenue of Us$122 billion in
2012, and they employ 36,000 employees dedicated
to delivering the medicines, supplies and information
technologies that enable the health care industry to
provide patients better, safer care.
McKesson combines innovation, technology and
clinical knowledge to serve its customers and part-
ners. the company comprises many businesses, all
serving the health care industry, and all falling into
one of two groups: distribution and health care tech-
nology. Protecting such a vast organization is a chal-
lenge, one that took the company and its insurer a
great deal of perseverance to overcome.
48 [ Reason ] issUe 1 : 2013
ties. the next year we added a few more facilities to the list and the next year we added more. It didn’t take that long to estab-lish our new standards.” How was the risk improvement budget put together? On an annual basis, there is a collation and prioritization of the top rec-ommendations. Prioritization is based on where the largest exposures are. the recom-mendations are reviewed by a third-party consultant, which helps in bridging the gap between FM Global technical requirements and what it means for McKesson. the budget submissions are then reviewed and approved by real estate and facility man-agement. Finally, they are submitted to the treasurer who presents them to the senior management committee. the challenge for resiliency was no more apparent than when McKesson decided to construct a new national ware-house center. Both the FM Global client service team and the local field engineer got heavily involved and brought in engineering services to assist in site selection, facility design, and to provide guidance to the con-struction contractors. “By the time we got to that location, it was part of our culture to bring facilities up to standard, so we did not have go down that path. It was a foregone conclusion,” Frost-estad said. “From the very first meeting we included the engineer from FM Global, who had been going through all of the drawings, the proposals, making sure that everything was as it should be.” the largest challenge moving forward for McKesson and most organizations is managing change. A facility may be up to standard but new management may be brought in or operational procedures are changed, which can affect standards at the facility. McKesson and the FM Global team train the new management team on what it means to be up to standard. designated field engineers for the larger locations have been in place for a number of years and have established strong local facility rela-tionships and are also equipped to handle
these changes. “there are always changes at our facilities,” Frostestad said, “whether that means inputting new equipment, or adapting to some change in our business, there are always changes. the bigger issue right now is adapting that change to other business units. Our largest facilities are on board. But when you get to different busi-ness units you have to start the education all over again.” Frostestad’s advice for her peers is that risk improvement cannot be done over night. the key is to identify the key decision mak-ers and to get them on board; and the worst case scenario needs to be depicted, showing the potential hazard and consequences. “You can help them understand it by explaining the potential revenue exposure. It takes the
issue of the cost of recovery well beyond insurance. You ask the question to that criti-cal decision maker, ‘What would you do if you got that 3 a.m. phone call?’” “You have to have patience,” she con-tinued. “It takes time for business units to understand the value and then it’s about keeping them on board and making sure that all the business units are doing the same thing. Believe it or not, people do change in the business.”
“ We decided it was time
to change our approach
to risk management.
The way to do that
was to make sure the
business units had the
funding they needed
to make the necessary
changes.”
Lanette Frostestad senior direcTor of
risK ManageMenT
issUe 1 : 2013 [ Reason ] 49
u Find this exclusive video coverage on our magazine website, fmglobal.com/reason.
introducing … harold Magistraleone of FM Global’s esteemed earthquake experts, on his latest project, and how doing what he does keeps him inspired.
university of califor-nia at San diego hos-pital earthquake testPartly sponsored by FM Global, this amazing earthquake simulation shows the great lengths researchers will go to discover how best to mitigate property loss during this kind of natural event.
Know More Risk: Safety Bungcheck out this installment of FM Global’s acclaimed educational video series.
[ theDigiTal ]
Myth Destroyer on fire learn a few things about fire prevention by clicking “play” on this innovative myth entry.
Screenshot to come
Screenshot to come
Screenshot to come
there is theory, and there is practice … We believe in both.as part of FM Global’s center for Property Risk solutions, the simZone is a state-of-the-art training facility designed to assist engineers, clients and other specialists with identify-ing and managing risk through real-world scenarios. and, as a unique benefit for FM Global clients, our field engineers all receive training here, so when they visit your sites, it’s “been there, done that.”
Learn more at fmglobal.com/simzone
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ISSUE 1 : 2013