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RISKS MANAGEMENT FORUM: RISKS TO PROPERTY, SAFETY HIGH IN ASIA

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SEATTLE-Just days after Whirlpool Corp. bought a manufacturing facility in India, a warehouse full of paints and chemicals burned as fire fighters stood by, smoking cigarettes.

"There was nothing else they could do. There was no water to extinguish the fire. But that is not unusual for some of these situations," said J. Kevin Witt, director of corporate risk management for Whirlpool in Benton Harbor, Mich.

As more U.S. manufacturing companies turn to emerging economies to capitalize on Asia's growing consumer markets, risk managers are likely to face property and employee safety issues not encountered in the United States since the 1920s, Mr. Witt told 200 risk managers attending Liberty Mutual Group's 6th Annual Risk Management Forum last week in Seattle.

In an interview after his presentation, Mr. Witt also discussed the need to evaluate political risk coverage and risk managers' role in preventing their company's management teams from waking up to unpleasant surprises.

International relationships that are fine today could change tomorrow because of diplomatic and political issues beyond a company's control, he said.

"Political risk is an issue of rapid change," Mr. Witt said. "It's not like other risk management issues where you have time to look at it and assess it and it stays somewhat stable."

An evaluation may not lead a company to buy political risk insurance, but factors to consider include: coverage for expropriation or nationalization of facilities; currency and convertibility problems should the country's money become worthless; contract frustration, because there may not be a legal mechanism for redress or enforcement should misunderstandings arise; and civil unrest, which could become a factor as developing countries gain access to Western media and citizens become frustrated over their inability to enjoy the freedoms or consumer goods they see portrayed.

"Those are assessments that risk managers should make and take some measurement as to exactly what is our exposure, how much do we have exposed, how much do we have invested in this facility, how much could we lose and under what circumstances could we lose it," Mr. Witt said. "It ought to be looked at, and I recommend that risk managers who don't have a lot of background in that area align themselves with somebody who does, whether it's another risk manager or broker."

Whirlpool buys a global political risk program, with coverage led by London market companies and several other insurers, Mr. Witt said in the interview.

During his presentation, he said Whirlpool's political risk insurance costs are driven mostly by its operations in Brazil, with other countries, such as China, added on nearly for free.

While operating in Asia has its rewards and well-educated local managers are eager to introduce safety concepts, there are still rudimentary risk issues to consider.

For example, in some regions of India, electricity demand exceeds supply by 20%. Daily brownouts can cause more than just a temporary halt to production. They also can burn up electrical motors as their lubrication processes malfunction, Mr. Witt said.

To overcome the problem, Whirlpool installed its own back-up power supply system for peak demand times. But the brownouts also raise contingent business interruption issues, because local suppliers Whirlpool seeks to contract with face the same problem. The issue is crucial to companies that rely on single-source or "just-in-time" inventory methods.

Consider what time of day electrical failures most frequently happen and what products are produced during that time, Mr. Witt advised.

"Those lines might not be ones you want to be dealing with just-in-time inventory," he said. "You might want to have a back-up inventory to cover those periods of time each day."

To prevent a recurrence of the water shortage problem in India that left fire fighters helpless when the warehouse burned, Whirlpool installed its own water tanks and hydrant system.

But Asia has other unique issues. Plants in China, for example, often have multistory buildings with fire hazards where the workers and their families live. "That may be your greatest exposure," Mr. Witt said.

Manufacturing plants also lack safety standards because safety has not been ingrained in management culture and education. Meanwhile, U.S. parent companies face a dearth of loss control and safety training services in Asian languages that they can supply to their foreign units.

"There is a market need for it," Mr. Witt said. "American companies like Whirlpool and others would pay to have somebody supply it, but we just can't find the resources. That is a niche we are looking for."

Whirlpool values employee safety, and in the past three years, the company tripled safety quality in its Asian plants, Mr. Witt said. Success comes fast, partly because the region is so far behind Western standards and area managers are eager to implement safety programs.

A crucial first step for U.S. risk managers, however, is to build relationships with Asian managers and other risk management sources. "Relationships are very important," he said. "When you go to these countries, it's not like the United States. You can't plan to go in there on a Monday and catch a red-eye out on Wednesday night. You must leave a lot of time. They expect it."Annual Risk Management Forum last week in Seattle.

In an interview after his presentation, Mr. Witt also dis

cussed the need to evaluate political risk coverage and risk managers' role in preventing their company's management teams from waking up to unpleasant surprises.

International relationships that are fine today could change tomorrow because of diplomatic and political issues beyond a company's control, he said.

"Political risk is an issue of rapid change," Mr. Witt said. "It's not like other risk management issues where you have time to look at it and assess it and it stays somewhat stable."

An evaluation may not lead a company to buy political risk insurance, but factors to consider include: coverage for expropriation or nationalization of facilities; currency and convertibility problems should the country's money become worthless; contract frustration, because there may not be a legal mechanism for redress or enforcement should misunderstandings arise; and civil unrest, which could become a factor as developing countries gain access to Western media and citizens become frustrated over their inability to enjoy the freedoms or consumer goods they see portrayed.

"Those are assessments that risk managers should make and take some measurement as to exactly what is our exposure, how much do we have exposed, how much do we have invested in this facility, how much could we lose and under what circumstances could we lose it," Mr. Witt said. "It ought to be looked at, and I recommend that a risk manager who doesn't have a lot of background in that area align themselves with somebody who does, whether it's another risk manager or broker."

Whirlpool buys a global political risk program, with coverage led by London market companies and several other insurers, Mr. Witt said in the interview.

During his presentation, he said Whirlpool's political risk insurance costs are driven mostly by its operations in Brazil, with other countries, such as China, added on nearly for free.

While operating in Asia has its rewards and well-educated local managers are eager to introduce safety concepts, there are still rudimentary risk issues to consider.

For example, in some regions of India, electricity demand exceeds supply by 20%. Daily brownouts can cause more than just a temporary halt to production. They also can burn up electrical motors as their lubrication processes malfunction, Mr. Witt said.

To overcome the problem, Whirlpool installed its own back-up power supply system for peak demand times. But the brownouts also raise contingent business interruption issues, because local suppliers Whirlpool seeks to contract with face the same problem. The issue is crucial to companies that rely on single-source or "just-in-time" inventory methods.

Consider what time of day electrical failures most frequently happen and what products are produced during that time, Mr. Witt advised.

"Those lines might not be ones you want to be dealing with just-in-time inventory," he said. "You might want to have a back-up inventory to cover those periods of time each day."

To prevent a recurrence of the water shortage problem in India that left firefighters helpless when the warehouse burned, Whirlpool installed its own water tanks and hydrant system.

But Asia has other unique issues. Plants in China, for example, often have multistory buildings with fire hazards where the workers and their families live. "That may be your greatest exposure," Mr. Witt said.

Manufacturing plants also lack safety standards because safety has not been ingrained in management culture and education. Meanwhile, U.S. parent companies face a dearth of loss control and safety training services in Asian languages that they can supply to their foreign units.

"There is a market need for it," Mr. Witt said. "American companies like Whirlpool and others would pay to have somebody supply it, but we just can't find the resources. That is a niche we are looking for."

Whirlpool values employee safety, and in the past three years, the company tripled safety quality in its Asian plants, Mr. Witt said. Success comes fast, partly because the region is so far behind Western standards and area managers are eager to implement safety programs.

A crucial first step for U.S. risk managers, however, is to build relationships with Asian managers and other risk management sources. "Relationships are very important," he said. "When you go to these countries, it's not like the United States. You can't plan to go in there on a Monday and catch a red-eye out on Wednesday night. You must leave a lot of time. They expect it."