Look high, look low, then say a prayer

You can take all the care but natural disasters are unpredictable. Just ask Japan's carmakers

PUBLISHED : Tuesday, 13 November, 2012, 12:00am
UPDATED : Tuesday, 13 November, 2012, 3:53am

While many companies are shifting to countries with cheaper rents or lower wages, they had better check with the weather bureau and their insurers.

Why? Ask the Japanese carmakers and they will tell you their sad stories.

The carmakers first received a blow in March last year when the earthquake and tsunami hit their manufacturing base in Japan.

They were forced to shift some of their operations overseas to "safer" areas away from the earthquake zone. As many of them had production plants in Thailand where earthquakes were not a concern, it sounded like a good idea to increase production there.

Well, as the Chinese saying goes: Luck comes alone, while unfortunate incidents come in pairs. Thailand had the worst floods in decades in October last year.

The poor Japanese carmarkers were forced to suspend operations for an indefinite period until the floodwaters cleared, seriously disrupting their supply chain.

Luckily, many of them had insurance. Total insurance losses for the Japanese earthquake was about US$40 billion while in Thailand it was about US$20 billion.

The losses in Japan and Thailand, plus those from the earthquake in New Zealand and floods in Australia, made last year the worst ever year for insurers.

Industry watchers said all natural catastrophe-related insurance compensations stood at US$105 billion, surpassing the previous record of US$101 billion in 2005 when Hurricane Katrina struck the US.

German insurer Allianz Global Corporate & Specialty's regional chief executive, Lutz Fullgraf, said his firm alone paid US$334 million for losses related to the Japanese earthquake and Thailand flooding. "The striking fact was more than half of our insurance losses were caused by business interruptions or contingent business interruption," he said.

The lesson we learnt from the experience of the Japanese carmakers is that when you look for a new location to put your operations, check if it is prone to natural catastrophes.

Fullgraf said interruptions in the manufacturing process could have a devastating effect on supply chains and hurt the reputation of the company when it was unable to deliver the products on time.

Many Japanese carmakers have reviewed their manufacturing processes to prevent interruption.

Some had opted for different locations and based some factories in higher areas to avoid floods, Fullgraf said.

But there is no easy solution as natural disasters are difficult to predict. Allianz research shows that there was an eightfold increase since 1970 in weather-related insurance losses, and Thailand is a wakeup call for many - both insurers and businesses. The country had limited flooding before and yet the extent of damage and interruption from last year's inundation came as a shock.

New York has had few storms but Hurricane Sandy, brought the city to a standstill, which may well hit the pockets of insurers hard.

With natural catastrophes, you never can tell.