Report Examines Risk Manager Satisfaction
Risk professionals who focus on enterprise risk management (ERM) are less satisfied with their insurance partners than non-ERM risk professionals, according to new research.
The 2014 Commercial Insurance Report — Special Report Snapshot is the first annual customer satisfaction survey conducted by the Risk and Insurance Management Society (RIMS) and J.D. Power. The full report is due to be released in February.
Overall, risk professionals at large businesses were most satisfied with their brokers (854 on a 1,000-point scale), followed by satisfaction with property insurers at 821, auto at 811, and workers’ compensation at 746.
Risk professionals at small businesses ranked satisfaction with insurance at 783.
As for ERM versus non-ERM professionals, the survey found that risk professionals with ERM responsibility scored workers’ compensation the weakest at 541 on a 1,000-point scale. That was 238 points lower than their counterparts without ERM responsibility.
Risk professionals with ERM responsibilities also ranked brokers (at 828 points) 56 points lower than their counterparts without ERM responsibility.
Of the nearly 1,000 risk professionals who participated in the study, 40 percent have at least some ERM responsibilities.
That’s an unexpectedly high number, said Carol Fox, RIMS director of strategic and enterprise risk and the report’s co-author.
More Than Transactions
As senior leadership begins to accept the benefits of enterprise risk management, the relationship between the risk professional and the company’s brokers and insurers assumes more than a simple transactional role, she said.
“ERMs are charged with coming up with ideas and solutions for risks that may not be insurable,” she said. “This is where insurers and brokers can help.”
For example, she said, the World Economic Forum recognizes water shortage as a global risk. The insurance partner of a business that depends on a plentiful water supply, such as a pharmaceutical or beverage company, could provide scenarios and analytics to help risk professionals and their organizations understand the risks.
“If a water shortage is anticipated within the strategic horizon, maybe 10 to 15 years, the broker or an engineer on the insurer’s team could help the company’s risk professional make plans.”
In one case, she said, a pharmaceutical company located on a body of salt water built a desalination plant. “The broker can provide those analytics and make recommendations.”
The different findings from survey findings from risk professionals with and without ERM responsibilities suggest that insurers and brokers are not meeting the more strategic and complex responsibilities of ERM professionals, said Timothy Bebout, commercial insurance practice leader at J.D. Power, who also co-wrote the report.
“If the brokers or insurers aren’t involved in the strategic discussions about, say, new locations or staffing, they won’t have a holistic view of their customers’ needs,” he said.
Fox also noted that there was a “significant delta” in customer satisfaction between broker-only relationships and triangular relationships that also includes the insurer.
The survey found that overall satisfaction fell by 100 points when a property insurance representative, such as an engineer or underwriter, was not involved during both a service interaction or claims process.
“Large commercial buyers really want to get in front of the underwriter to build a trusting relationship,” Fox said. “They want to work directly with the insurer’s engineers and claims adjusters — and that takes face-to-face meetings.
Clients also want direct meetings with brokers, she said. Overall satisfaction declined by 73 points among clients that didn’t have at least two in-person interactions, the report found.
Bebout said that interaction between the risk professional and insurer was the second-rated factor driving overall customer satisfaction across coverage lines.
The highest rated factor driving satisfaction in property lines was program offerings, while claims drove satisfaction in the workers’ comp line. For auto, it was price that satisfied the most risk professionals.
The study measured separate satisfaction scores for insurers and brokers, which were then weighted by importance and aggregated into composite scores, said Colleen Cairns, manager, insurance industry analytics, J.D. Power.
Insurers were scored on five factors: interaction; program offerings; price; billing and payment; and claims.
Brokers were scored on four factors: ease of contacting; reasonableness of fees; advice and guidance in selecting program offerings; and timeliness of resolving contact.
Respondents were employed by companies with $100 million or more in annual revenue that purchased a commercial property, workers’ compensation, or auto policy with a profiled insurer or broker.
Green But Not Clean
The recycling industry is poised to continue growing as humans put greater stress on the planet, and technology allows more efficient extraction of useful materials from spent products.
Although recycling may be green, the process is not clean, and it carries many of the same risks as other heavy industries, plus some additional pollution exposures.
Even as environmental laws and regulations grow more restrictive, many recyclers still underinsure their operations for pollution.
Typically, the recycling industry’s claims look like the claims affecting any heavy industry’s. The risks to recyclers of a product are similar to the manufacturer of that product, experts said.
“When a pollution claim hits, it hits big,” said Daniel Curran, director of underwriting for several of Willis’ environmental programs, including RecycleGuard.
Many recycling companies underestimate their environmental liability exposure and take a pass on the insurance.
Even so, the market for pollution insurance is a “sizable” $1 billion — a rough estimate, since hard numbers don’t exist, said Mary Ann Susavidge, environmental chief underwriting officer at XL Insurance.
The law requires more regulated companies, such as landfills and hazardous waste recyclers, to buy environmental insurance, while others, including “R2 certified” electronic recyclers, are contractually obliged to buy it.
There are also larger companies that see environmental insurance as true asset protection even if they are not required to purchase it.
Then, there are some less regulated companies, including paper and scrap recyclers, that tend to have operations of $5 million or less. Those companies often regard pollution coverage as a discretionary expense, experts said.
“Fifty percent of the accounts I look at gamble on their general liability covering an environmental spill, fire or contamination and they don’t protect their assets,” said Matt Gartner, assistant vice president of underwriting at XL Insurance.
“They don’t expect an incident, but bad things happen to good people,” he said.
Stacy Brown, president and managing partner of Freberg Environmental Insurance, recalled a small business with a large above-ground storage tank that dislodged during one of the increasingly frequent major floods on the East Coast.
“Fifty percent of the accounts I look at gamble on their general liability covering an environmental spill, fire or contamination and they don’t protect their assets.” — Matt Gartner, assistant vice president of underwriting, XL Insurance
The tank floated downstream, struck a tree and spilled five thousand gallons of oil into a river. Fortunately, the company had pollution insurance, which covered the million-dollar-plus remediation that would otherwise have forced it into bankruptcy.
Many insurance companies request an environmental audit to limit their losses to catastrophic “acts of God.”
When Brown underwrites a facility, he looks for the company’s degree of compliance with federal, state and local environmental laws. Even before he walks in the door, he looks at publicly available records, compliance histories, permits, and Google Earth, which shows the physical plant, stacks of recovered materials and above-ground storage tanks.
Regulations guide the underwriting process. If the company handles hazardous materials, are they stored in the proper tanks? Does it have a storm-water management plan? Where does it store used oil?
“I look at cleanliness. Housekeeping tells a lot about how a company is run,” Brown said. He looks at records, since companies may accumulate certain waste materials for only a certain time, and whether they’re filed neatly or jumbled in a desk drawer.
He interviews management to understand how tightly they run the facility and line workers to understand how they do their jobs. Are they draining fluids the right way?
The consultation with compliance experts is collaborative, not confrontational, he said.
Noncompliant companies eventually get shut down and expose themselves to expensive engineering remedies. They also suffer reputational loss, which can be as crippling as the cost of corrective action.
“It’s cheaper to stay in compliance,” Brown said.
And it’s cheaper to do business with compliant recyclers. Under Superfund Section 107, said Bill McElroy, senior vice president at Liberty International Underwriters, the chain of liability extends from material producers, through transporters, waste brokers, recyclers, and the people who buy the recovered materials.
For example, 255 defendants — mostly upstream industrial producers — were named in United States vs. Chemetco Inc. et al., in which a now-bankrupt recycler of copper-bearing scrap and manufacturing residue pleaded guilty in 2001 to violating the Clean Water Act by secretly installing a pipe that illegally dumped metal-filled wastewater into a creek for a decade.
The plaintiffs were fined $3.8 million, and the property is now a Superfund site.
Not only do upstream producers have liability under the Resource Conservation and Recovery Act (RCRA) for the misdeeds of the rare recycling “bad actor,” said Kim Ferraro, a senior staff attorney with the Hoosier Environmental Council, an Indiana environmental advocacy group, but so do responsible buyers of a site contaminated by previous owners.
Ferraro represented the plaintiffs in Adkins et al. vs. VIM Recycling, which couldn’t keep up with the volume of waste — engineered woods, plastics, steel, padding, drywall, etc. — from nearby recreational vehicle manufacturers in Elkhart, Ind.
The waste accumulated in 100-foot-high piles, Ferraro said, and rotted noxiously when exposed to the elements, sickening neighbors with its smell and dust emissions, and contaminating the groundwater.
When a spark ignited in a dirty grinder, the plant went up in flames, killing one worker and injuring another. VIM did not have the permits to do business legally, let alone pollution insurance, Ferraro said.
The RV producers whose waste VIM putatively recycled may have had liability under RCRA, which establishes responsibility for solid waste that creates endangerment. Ferraro considered naming them in the case, but finally did not.
The neighbors cheered when the court reached a default judgment against VIM, which failed to defend itself in court and went out of business.
The assets of the operation were purchased by Soil Solutions, which makes animal bedding and landscape mulch from recycled wood chips.
Although it obtained the proper permits and set up a responsible shop, said its attorney, Ed Sullivan, a partner with the international law firm of Faegre Baker Daniels, the company found itself hobbled by the hostility of the community, as well as lingering problems from VIM’s many failures to satisfy state standards.
Soil Solutions was added as a defendant to an existing class-action lawsuit claiming the operations were a nuisance and health hazard. As part of an out-of-court settlement, it agreed to process and remove many of VIM’s contaminants.
The settlement halts the litigation, and allows Soil Solutions to operate on the site for up to five years.
Lessons learned? Beyond complying with regulations, Ferraro said, it’s important to have cordial relations with the community. Legitimately listen and address the concerns of neighbors.
And second, she said, don’t buy a business that is being sued.
Sullivan agreed on the importance of good community relations. “My client tried to do that,” he said, “but the plaintiffs decided early that Soil Solutions was just like VIM.”
Any kind of environmental operation that creates odor, such as composting yard and waste processing, creates third-party liability and is fertile ground for plaintiffs’ attorneys — even if the operator does everything correctly and has all its permits, said Ken Cornell, executive vice president, chief environmental lines underwriter with Aspen Insurance
Plaintiffs’ attorneys may comb through regulatory databases and inspections for violations, even administrative errors such as posting the right notice in the right place.
“Good relations with your neighbors, and make darn sure your record is clean,” he advised. “Have a methodology for dealing with complaints up-front before the neighbors get attorneys.”
Filling the E-Waste Insurance Gap
The technology industry cultivates a popular impression of itself as “clean,” with products packaged in spotless white boxes, but the manufacture — and ultimate disposal — of these products is far from clean and carries considerable risk.
For example, older circuit boards contain lead, tin, cadmium and mercury, which are regulated as hazardous waste and can cause contamination when released, said Bill McElroy, senior vice president, Liberty International Underwriters. Such contamination is difficult and expensive to remediate.
“We insure our clients against the risk that they make their neighbors sick or contaminate the environment,” he said.
Most e-waste recycling is about getting valuable rare earth minerals out of electronics for reuse in new products.
Less-valuable plastic components and metals are also recovered and recycled, but the unusable waste is landfilled or incinerated, a process that may release gasses into the air or toxins into groundwater.
E-waste recyclers often believe their general liability policies cover any accidental releases, only to find out too late that their total pollution exclusion leaves them liable — and pollution claims tend to be very high-ticket incidents.
“I wouldn’t recommend anyone in the waste management business not have pollution insurance,” McElroy said.
Elizabeth Bannister, managing director, Marsh, suggested that electronics recyclers look hard at the language in their general liability coverage. The standard coverage is likely to include a pollution exclusion that includes “materials to be recycled, reconditioned or reclaimed.”
If that is the situation, she said, such recyclers should consider filling the gap with affirmative coverage for pollution liability.
Recyclers may not understand that insurers define their products as “pollutants” or “hazardous materials,” since the EPA and other regulatory bodies use different definitions, said Ross Fields, manager of the e-waste insurance program, Leavitt Group.
But since recyclers’ business is the waste stream, nearly everything they touch is a “pollutant,” and the insurance industry considers their “product” to be a pollutant until it reaches its final point of destruction or reuse, he said.
These semantic nuances have big implications for potential liability.
The provision in a general liability policy covering “products and completed operations” would not cover bodily injury or property damage arising out of their product: pollution. To address this risk, experts said, a company in electronics recycling needs products pollution liability.
It’s also important for producers of materials to make sure their downstream e-waste recyclers have environmental liability coverage, said Matthew Pateidl, vice president, environmental risk, Lockton.
“Vet your vendors,” he said, noting that he audited an e-waste recycler before recommending it as a partner to his client, an electronics producer.
“If I were a plaintiff in an environmental suit,” he said, “I’d go after the producer. They have deeper pockets than the recycler.”
E-waste recyclers assume some risks that other recyclers don’t, including first- and third-person liability from the contents of computer hard drives.
Many general liability policies have exclusions for intellectual property. This applies to both licensed software, such as Microsoft Office, and to account and customer information.
A lot of big manufacturers, such as Hewlett Packard and Apple, are paying more attention to the end uses of their products and their disposal, said Garick Zillgitt, senior vice president, primary casualty & surety, environmental, Rockhill Insurance.
For example, a recycler can’t resell computers to the public still loaded with ongoing licensed software products or operating systems without risking sanctions from the owners of the intellectual property.
Producers and recyclers also face first- and third-party liability risks for data that ends up in the wrong hands.
“Is it your data? Do you want your competitors to see it?” asked Matt Gartner, assistant vice president of underwriting, XL Insurance.
And if a company fails to destroy customer information such as credit card numbers from a computer sent to a recycler, it is liable even if the recycler is contractually obliged to destroy data.
This is a particular concern to producers, since up to 70 percent to 80 percent of putatively recycled e-waste is actually sent intact to developing countries, according to the Basel Action Network (BAN). The licensed software still loaded on these computers can be used illegally and confidential data mined and exploited.
Gartner advises companies that recycle computers to make sure their recycling vendor provides data destruction or do it themselves. A lot of bigger companies that are more aware of data theft send someone to the recycler’s site to observe shredding of hard drives, he said.
“They ship hard drives separately, sometimes in armored vehicles, and security stands there and watches them be destroyed. Shredding hard drives is an important part of the recycling industry.”
The two certification programs specific to electronics recyclers, the Environmental Protection Agency’s R2/RIOS (Responsible Recycling/Recycling Industry Operating Standard) and the Basel Action Network’s (BAN) e-Stewards, both include procedures to protect data.
Recyclers that earn the certificates use those assurances as a marketing tool to differentiate themselves from other recyclers.