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  The Making It! Business Blog
by Nelson Davis

Wednesday, October 25, 2007
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THIS EDITION: RISK MANAGEMENT

Today at high noon, I was gazing from my office window at the world famous Hollywood sign, its cool white color tinted brown from the wildfire smoke haze between Sunset Boulevard and the sign. By this time, wherever you are in the world, you know that southern California is enduring the worst conflagration of brush fires in recent memory. Crises can bring people together; so many individual tragedies and acts of kindness are being knitted into a much larger story.

Risk management is a term most often used in business conversations, but this unfortunate event is a major lesson on the subject. Of the many risks involved the first that comes to mind is that of building up a dense population of people and houses in hilly desert terrain. Fires like this  have occurred for hundreds of years before modern times with lightning strikes likely being the trigger rather than downed power lines or mentally unbalanced arsonists. Of course in those days, there were millions fewer people here and a fraction of the media outlets to track the event.

The biggest financial risks are being borne by insurance companies and the public treasuries. The insurance industry has rooms full of numbers crunchers who coldly and cleverly asses risk for them. Their singular goal is to minimize exposure to anything greater than very low on the old risk meter.

 

Among insurance companies, Lloyd's of London and non- traditional insurers may have higher costs from the wildfires than companies that protect most homes in the state, including Allstate Corp., according to Goldman Sachs Group Inc. ``Most of the traditional (insurance) writers have explicitly avoided'' areas of the state prone to wildfires, said analyst Thomas Cholnoky in a note to investors. ``The one exception may be fires around the San Diego area, which appear to have jumped from brush areas to non-brush areas.''

The fires have burned (as of Tuesday morning) more than 283,000 acres (115,000 hectares) and destroyed about 700 homes and 100 businesses, making them among the worst in the state's history, said Steve Turner, a spokesman for the State Joint Information Center. The average home in the areas struck by the fires costs $500,000, Cholnoky said, meaning that for every 100 homes lost, the insurance industry would pay about $50 million.

I had a conversation with one of the TV news reporters covering the Los Angeles area fires for KTLA-TV, and what she said was interesting. “People were near rioting in some areas because they hadn’t had any aircraft dropping water or fire retardant near their homes” she said. “Don’t they realize that building a home in a forest is risky?” she asked. Yes, big picture and risk management thinking are not just a necessary business concept.

I believe in the entrepreneurial spirit and capitalism, two of the greatest building blocks of all first world cultures. But, I must ask about the motives and fundamental morality of developers who build in risky areas, gladly accept the money, disclose nothing about the hazards and move on to the next opportunity. Also, I’d like to know what the new California homeowners think while reclining on Barco-loungers, gazing beyond their swimming pool at a dry hillside covered with Chaparral plants. They’d be wise to learn that Chaparral grows with the rain and when dry becomes some the fastest and hottest burning natural material you can strike a match to.  

Yes, there are business opportunities everywhere, especially in the aftermath of disaster and they too carry a degree of risk. We saw the crowds of opportunists who flocked to New Orleans after hurricane Katrina. When the smoke finally disappears over southern California, everyone from attorneys to plant nurseries to building supply houses will see an uptick in business. The entrepreneurially minded will be creating web sites and other temporary businesses to help those displaced by the fires, and we can all see that this is the ideal time to sell thousands of disaster preparedness kits. If it is helpful and honest, I say it is good business. Business thrives on change, even in the most painful dislocations, and quite often it is the hungry and nimble upstart that sees the opportunity first.

When I arrived home, the moon was smiling down on me as it was on millions of others whether we were bedding down in a tent or a mansion. It appeared tinted by the smoke being blown westward and I sighed while thinking of those folks who had lost their homes. That heavenly light reminded me that nature does always prevail, and that there is very little risk in believing that.

If you have a story involving a business owner during this disaster, please share them with us at: info@MakingItTV.com

 

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