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ARC: HOW INSURERS, BROKERS AND RISK MANAGERS CAN BE BETTER PREPARED FOR A NATURAL DISASTER

Q&A: Shivan Subramaniam, FM Global

Shivan S. Subramaniam has been FM Global's chairman since 2002 and CEO of the Johnston, R.I.-based property insurer since 1999. He recently spoke with Business Insurance Senior Editor Mark A. Hofmann about how Superstorm Sandy affected the property insurance market and the practice of loss control. Edited excerpts follow.

Q: What effect has Superstorm Sandy had on the commercial property insurance market?

A: From a client perspective, they can feel very good because the commercial insurance companies all had very strong balance sheets and could very comfortably meet all of their obligations. Even though it was one of the largest events in our history, it has not had a balance sheet effect. From my point of view, that spoke well of the balance sheet and the capitalization of insurers.

These particular areas were known to be flood-prone and known to be wind-prone. We knew that these properties were below sea level in some cases or could be flooded significantly because of their geographic location. Despite that, everybody knew what the issue was. The issue really, for the reinsurers, was a question of aggregation. The aggregation to some extent seemed to surprise people, but there the reinsurers did very well and managed all of that well. There will be more questions about aggregation. How you aggregate the modeling capabilities will start to take on more importance. There will be a bigger focus on the aggregation from flood. In the past, there's been a lot of time spent on the aggregation from wind, but not as much on flood.

Q: What were the major property loss-control lessons from Sandy?

A: Lots. One of the few natural disasters that you can truly prepare for is a flood, because you know when it's going to occur. You're forewarned. So a flood emergency response plan is something you can put into place and do very well with. If you had a flood emergency plan in place, you worked at it. You tested it. You put it into place. It worked.

If you know you're exposed, you can prepare for it; and if you prepare for it, you're resilient. You're going to find that the companies that were resilient through this process were the ones that prepared for the flood.

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Q: Do you think the experience with Sandy will make private companies and public entities in the Northeast more aware of the exposures they face from storms like this?

A: Most commercial enterprises, for the most part, always know what their flood exposures are; the insurance companies have pointed it out to them. But the human experience is always, “It won't happen to me; it will happen to everybody else, but it won't happen to me.” From a commercial insurer point of view, what it will do is make them develop even more sophisticated models and more precise models about the flood exposures.

The way the insurance industry has dealt with flood exposures is to essentially limit capacity that they offer, but they haven't spent much time on the aggregation, and I think this is going to be getting everybody to focus more on the aggregation.

Q: Where do you see the next major advances in loss control?

A: Many different places. Any kind of commercial industry, whether it be in manufacturing or services, they are all becoming global, where they have many vendors and suppliers all down the line. So the whole issue about supply chains has now become significantly more important than before.

The Thailand flooding was a great example. A lot of clients had a lot of insured losses not because they had a location in Thailand, but because they had a supplier or client in Thailand. One of the loss control advances that's happening today is coming up with better ways to help clients manage the supply chain exposure. I think that will be one area in which a significant amount work will be done.

A second area is fire-protection systems. Better and better designs are coming out where it's becoming less expensive to install fire-protection systems.

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A third thing is all about smart systems. When you think about what the computer did to the automobile industry, it made cars so much more efficient by using those small computers that are in our cars today. I think similar will be happening soon in the whole process of protection of equipment and maintenance of equipment.

Q: Where do you see FM Global five years from now?

A: We'll still be the same boring company we've always been. We'll be doing the same things we've been doing for the last 178 years. The only difference is we'll be doing it even more on a global scale. We're now in about 120 countries, and we're hoping our footprints in those countries will get bigger and our footprints will be in many new territories.

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