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Fonterra's risk assessment shaken by earthquake exposure

Fonterra's risk assessment shaken by earthquake exposure

The challenges facing John Pearce, general manager, policy and risk for Auckland, New Zealand-based Fonterra Co-operative Group Ltd., range from the managerial in the sense of continuing to build on the milk processing cooperative's enterprise risk management process (see related story) to the decidedly terrestrial risk presented by earthquakes.

And that exposure is of particular concern to Fonterra these days, he said.

Fonterra has had to deal with four serious earthquakes in the past couple of years, said Mr. Pearce. Two of the quakes were in New Zealand, one was in Chile and the other was in Japan.

Fonterra has focused on earthquakes and other natural catastrophes as a major risk, said Mr. Pearce. When the Tohoku earthquake struck Japan in March 2011, “we had very good business continuity strategies and were able to relocate the business operations to an area away from Tokyo to keep the business running,” he said. “It was traumatic, but it went really quite smoothly.”

Fonterra did a property risk review of its operations in Chile in December 2008, more than a year before the major 2010 earthquake, said Mr. Pearce. The review identified several actions to improve quake resilience, and almost all were implemented, minimizing damage when the quake occurred.

“I suppose the lesson learned from this was if you're in a potential earthquake zone, it really is important to focus on this as a risk and make sure you address all those things,” he said. “A lot of people think earthquakes happen so infrequently that they are reluctant to take the necessary measures. The other thing is having good business continuity plans, so when it does happen, you know what you're going to do about it.

“I think our operations in Chile were back up and operating within 48 hours of the 2010 earthquake,” said Mr. Pearce. “The problem was, we had difficulty supplying customers because the distribution channels, including road networks, were disrupted.”

The earthquake risk in New Zealand, highlighted by the quakes in 2011, has led some insurers to decline to participate in the insurance business in that country, said Mr. Pearce.

“Some tend to see the whole of New Zealand as an earthquake risk, whereas the earthquakes have been confined to one relatively small part of the country,” he said.

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    Fonterra Co-operative Group Ltd.'s philosophy of managing insurance is straightforward: None of the individual businesses within the Auckland, New Zealand-based milk processing company is allowed to buy its own insurance without approval from either the chief financial officer or John Pearce, general manager, policy and risk.