Actuarily speaking, global warming is a very real catastrophe

Whatever your views on the politics of global warming, well, they have to take a back seat to this business reality: The people who get paid to assess risk — the actuaries at insurance companies — are mighty worried. They don’t care about Al Gore or environmentalists or right-wing or left-wing politics. They do care about events that cost them billions of dollars. These are people who take an unemotional, ruthless, mathematical look at risk, and they don’t like what they’re seeing, according to this Op-Ed column in The Washington Post (27 September 2007):

Ten years ago, Peter Levene, chairman of Lloyds of London, was skeptical about global warming theories, but no longer. He believes carbon emissions caused by human activity are warming the Earth and causing severe weather-related events. “At Lloyds, we feel the effects of extreme weather more than most,” he said in a March speech. “We don’t just live with risk — we have to pick up the pieces afterwards.” Lloyds predicts that the United States will be hit by a hurricane causing $100 billion worth of damage, more than double that of Katrina. Industry analysts estimate that such an event would bankrupt as many as 40 insurers.

The insurance industry cites hard evidence:

  • Wildfires have increased four-fold since the 1980s, and they are bigger and harder to contain because of earlier-arriving springs and hotter, bone-dry summers.
  • Storms grow ever more intense: Since the 1970s, the number intensifying to Category 4 or 5 hurricanes has almost doubled, costing insurers tens of billions of dollars.
  • Increasingly destructive weather — including heat waves, hurricanes, typhoons, tornadoes, floods, wildfires, hailstorms and drought — accounted for 88% of all property losses paid by insurers from 1980 through 2005. Seven of the 10 most expensive catastrophes for the U.S. property and casualty industry happened between 2001 and 2005.

Continue reading “Actuarily speaking, global warming is a very real catastrophe”

CFOs predict: The top business risks through 2009

Top five business risks through 2009:

  1. Competition
  2. Pricing and currency
  3. Economy
  4. Supply chain
  5. Property*

* Fire/explosion, mechanical/electrical breakdown, natural disaster

Note: 62% of financial executives expect risk from competition to increase through 2009, while only 4% expect it to decrease.

Top five emerging business risks through 2009:

  1. Change in competition
  2. Government/regulation
  3. Pricing volatility
  4. Variable client demand
  5. Political threat

Note: Terrorism, and pandemic, ranked very low.

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Base: Survey of 500 financial executives in North America and Europe (including CFOs and treasurers) who work for companies with at least US$500 million or more in annual revenue.

Source: “Managing Business Risk Through 2009 and Beyond,” FM Global, a property and casualty insurer, Johnston, R.I., May 2007

Related: What CFOs worry about

CEOs need a “sensor network” to anticipate disruptive competition

Competition can pop up in many unexpected places, including college dorms, startups, Asian outposts and various disruptive technologies. A new study of the intensifying competition in high-tech industries finds that companies are OK at identifying market-altering changes but aren’t as good at anticipating such changes or acting on their observations.

My personal view: Companies need forward-looking staffers — some combination of futurists, competitive intelligence professionals and strategic planners — to help them anticipate their future business environment and get them to think beyond their traditional competitors and core markets.

The joint study by Deloitte Consulting LP and the Business Performance Management (BPM) Forum includes a survey of 181 company strategists (e.g., chief marketing officers, top strategic planners) in the high-tech industries (semiconductors, electronics, telecom, IT and Internet). The summary is here, and the downloadable report (.pdf) is here.

When asked which tools and processes they use to identify and analyze course-altering market changes, 95% of respondents indicated that they participate in industry forums and associations (i.e., they focus on their traditional competitors).  “A large majority also participates in an annual strategic planning process that incorporates competitive benchmarking and competitive intelligence reviews. However, these activities are not providing the forward-looking market view necessary to anticipate market-altering change,” the report says.

In an interview, John Ciacchella, a principal with Deloitte Consulting and leader of its technology industry group, told me that companies need a “sensor network” that helps the CEO discover new market entrants and new market opportunities.

The study also identifies the roadblocks to actually doing something about new market forces.

What issues prevent you from executing course-correcting actions?

  1. Management focus on near-term profitability
  2. Inadequate size of opportunity in the near term
  3. Management focus on established businesses and customers
  4. Metrics (e.g., lack of easily quantifiable business case)
  5. Risk-averse culture
  6. Entrenched interests
  7. Management hubris or arrogance

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Base: 181 strategic executives at high-tech companies
Source: “Competition at the Crossroads,” Deloitte Consulting LP and BPM Forum, June 2007

What resource issues prevent you from executing course-correcting actions?

  1. People (e.g., insufficient strategic planning talent)
  2. Cash (e.g., insufficient funding to identify changes and assess options)
  3. Information (e.g., insufficient market data, insufficient competitive intelligence)
  4. Technology (e.g., rigid or insufficient IT systems)

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Base: 181 strategic executives at high-tech companies
Source: “Competition at the Crossroads,” Deloitte Consulting LP and BPM Forum, June 2007

Taken together, you can see that myopia — management focus on the short term, and insufficient strategic planning talent — are big concerns.

The study concludes by saying companies should ask themselves the following questions:

  • Do you have the right strategic planning resources in place, in terms of people, processes and technology, to drive effective decision-making and better anticipate the changing landscape?
  • Are your indicators forward-looking?
  • What is your risk profile? How are new investments and growth opportunities assessed versus traditional models and business lines?
  • Is your corporate culture ready for change? Does it support exploration and identification of new models and business opportunities?
  • Are the processes in place, across your organization, to adequately react to change?
  • How much are you willing to bet, and is your strategic-planning process designed to consider risks and opportunities at a corporate level, outside of current product lines, customer markets and technologies?

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Related: New CIO role: Spot disruptive technologies and help develop new products