Banning the Box
Deciding whether or not to ask job candidates on an application form if they have been convicted of a crime typically has been an easy call for employers.
By using that little job-application checkbox, the thinking was that employers are helping to protect existing employees from potential harm (and avoiding litigation if workplace violence does occur) and, at the same time, reducing enterprisewide risk (mainly in some form of theft).
Until recently, that decision was fairly easy because in every state except Hawaii the checkbox was perfectly legal (Hawaii passed a law banning it in 1998). In recent years, that has been changing.
As of now, 18 states have adopted “ban-the-box” policies for public sector jobs.
Seven of those states have made private employers and government contractors remove the conviction history question on job applications as well.
The National Employment Law Project (NELP), a major advocate for making the change, also reports that currently there are more than 100 cities and counties that have adopted ban-the-box laws and 25 municipalities that have extended the ban to the private sector.
In NELP’s view, ban-the-box initiatives provide applicants a fair chance by delaying the background check inquiry until later in the hiring process. There are opponents, primarily some U.S. business and industry groups.
For example, the National Federation of Independent Businesses (NFIB), which counts mainly small employers among its 350,000 members, says on its website that ban-the-box laws would “unduly suppress relevant criminal record information” about prospective employees.
The NFIB added that without having that information, employers can’t protect their business from loss or secure the safety of their employees, vendors and the general public when making hiring decisions.
Opponents could be swimming against the tide. Apple, for instance, recently changed a policy that prohibited construction workers with felony convictions from working on its new campus construction in Cupertino, Calif.
Construction workers who lost their jobs because of felony convictions within the past seven years will now be evaluated on a case-by-case basis.
Wal-Mart, the nation’s largest employer, took the checkbox off its job applications in 2010. Target Corp. and Bed Bath & Beyond are other national retailers that stopped asking about an applicant’s conviction record during the hiring processes’ initial phase.
Laura Kerekes, chief knowledge officer at ThinkHR Corp., in Pleasanton, Calif., said the momentum for adopting ban-the-box legislation is increasing. Removing the box from the application allows organizations to focus on an applicant’s qualifications in the early stages of the hiring process.
It gives the applicant a fair chance to showcase his or her talents early and put the criminal infraction in perspective with the applicant’s potential to be a great employee.
“Not all of these laws apply to every employer,” Kerekes said.
“Most apply to public employers and government contractors receiving public funds, while some also apply to private employers.”
“Not all of these laws apply to every employer.” — Laura Kerekes, chief knowledge officer, ThinkHR Corp
She added that some of the laws are based on employer size, so small employers (10 employees or less) usually are exempt from these rules.
However, most ban-the-box laws today, though different from state to state and city to city, share features that either prohibit employers from asking job applicants about prior convictions or conducting criminal background checks on applicants prior to either a first live interview or a conditional offer of employment.
They also force employers to consider the amount of time that has elapsed since the conviction and what the applicant has done since, as well as consider only the conviction information that is directly relevant to the job being considered — such as credit or tax issues for positions in finance and accounting or offenses against children for teaching or child care positions.
Talent Shortage Plays a Part
“This issue has become a hot topic for our customers in some industries or regions, particularly in the financial services, hospitality and other services industries,” she said, adding that the job market is heating up, making the demand for key talent much harder to source and hire.
In addition to the hiring challenges they face, employers are focused on ensuring compliance with a myriad of regulatory rules, including negligent hiring and ban-the-box laws.
Sheryl Jaffee Halpern, a principal and chair of the labor and employment group at Much Shelist in Chicago, advises clients to eliminate the criminal question checkbox.
Instead, she said, job applications should include a statement that indicates the candidate consents to a background check as a condition of employment.
“It’s really accomplishing the same thing, which is finding out if there is a criminal history,” she said.
“But you are going about it in a way that doesn’t dismiss a job candidate for just admitting to having been convicted of a crime.”
Jaffee Halpern said the key is to tackle the issue candidate-by-candidate, conviction-by-conviction. For example, a 52-year-old job candidate could have shoplifted at 18, which means the information is pretty much irrelevant.
“If it’s a more recent, violent crime, that’s a different conversation,” she said.
Basically, she said, employers — both risk managers and HR leaders — must set a policy that determines if the decision to disqualify is “job-related and consistent with business necessity.”
“Just because an employer gets rid of the checkbox doesn’t mean they can’t do background checks and due diligence,” she said, adding that many times the decision to hire or not comes down to an instinctual comfort level.
“Just because an employer gets rid of the checkbox doesn’t mean that can’t do background checks and due diligence.” — Sheryl Jaffee Halpern, principal and chair, labor and employment group, Much Shelist
Bob Tice, an attorney in employment law at Collins Einhorn in Southfield, Mich., noted that along with ban-the-box laws there is an ongoing legislative trend to reintegrate ex-offenders into the workforce.
Nonetheless, Tice said criminal history questions can legitimately influence employment decisions, notwithstanding the Equal Employment Opportunity Commission’s efforts to rein in what it sees as discriminatory hiring patterns against black and Hispanic job applicants by the use of criminal background checks.
In 2012, the EEOC issued new rules around arrest and conviction records in employment decisions under Title VII of the Civil Rights Act of 1964.
Soon thereafter, it sued both BMW and Dollar General, saying both had discriminated against minority job candidates through criminal background checks, a broader scenario than just a checkbox.
IP and Cyber Security Risks
Both cases are pending, but the EEOC has suffered some setbacks in court — mainly one involving PeopleMark Inc., a staffing agency — in which the EEOC had to pay $750,000 in legal fees and other court costs to PeopleMark.
There are legitimate nondiscriminatory business reasons that employers have questions about honesty of employees, Tice said.
“It’s not just about stealing cash or materials, but today it’s also intellectual property, digital materials, cyber security, that type of thing.”
Tice’s ongoing recommendation is to take the box off applications and don’t automatically exclude someone. Then after the first interview, depending on the job, there may be a valid reason to exclude someone.
“One of the best things about that approach is you are only dealing with that one person,” he said.
James Reid, a shareholder at Maddin Hauser, also recommended doing interviews before any background checks.
“It is time for the checkbox to go,” he said.
He also advises employers to stay far away from social media to eliminate any possible bias until an interview is conducted.
“Anyone can get a misdemeanor charge and employers can be losing a huge talent pool. A person could have been in the wrong place at the wrong time.”
He noted that with the majority of the ban-the-box laws, employers are allowed to ask applicants about criminal records after the first interview.
That way, once they discover a person has a criminal record, they can find out what the crime was and the specific circumstances, and may end up hiring them anyway.
“It’s a good idea to use more than the checkbox before you throw their application on the junk pile,” he said.
ThinkHR’s Kerekes said the first step for organizations is to determine whether the ban-the-box laws apply to the organization.
Next, employers must consider each statute if it operates in multiple locations and determine whether to follow location-specific regulations or to consolidate the regulations into one “super policy” to be followed by the entire company.
In the latter case, the employer will need to follow the rules most favorable to the applicant. After all, she said, there is no real reason to wait for legal mandates to make the change and ban the box.
Once the strategy is defined, the regulations reviewed and rules developed, there are other critical steps for organizations to take, including:
- Revise employment applications and all other employment materials to ensure that they comply with the law and company policies.
- Review jobs within the organization to determine which positions require a criminal background check (those that require unsupervised access to sensitive work areas, handle sensitive or financial information, or work with children or the elderly, etc.) and how far back in the applicant’s job history to probe.
- Review and revise the background checking policy and practices to reflect the company strategy.
- Develop a process for notifying those applying for positions requiring criminal records check (both before the check and afterward, especially if the applicant will be rejected from the position).
- Determine when and who will ask the relevant questions about criminal backgrounds.
- Train all managers and those involved in the hiring process regarding employment and discrimination law and the process and timing for asking about criminal backgrounds.
- Conduct a thorough review and assessment of each applicant, based on objective criteria.
“Not all employers legally must ban the box,” Kerekes said.
“But every employer should follow the trend because it is gaining momentum, and also tighten up hiring processes to comply with legal requirements while creating a great user experience for all applicants.”
Cyber Risk Models Remain Elusive
In a perfect world, the ability to model for catastrophic cyber losses would be welcomed with open arms by carriers, brokers and most of all, risk managers.
After all, modeling has been used effectively to identify and quantify patterns and trends that can be used to predict other types of future catastrophic claim outcomes and set pricing standards in coverage areas.
Whether it is estimating wind damage in the Midwest or flooding along the coasts, predictive modeling has given the P&C business an excellent analytics-driven tool.
When it comes to modeling for catastrophic cyber losses in the commercial insurance business, however, experts say that reality won’t be happening any time soon.
“The current state of cyber modeling is like trying to use the count of arrests for a crime to figure out the dollar losses from theft,” said Mark Clancy, chief information security officer for The Depository Trust & Clearing Corp. (DTCC), a New York City-based post-trade market infrastructure for the global financial services industry. “They are related, but not in all the ways you want right now.”
Clancy, who also serves as CEO of Soltra, DTCC’s cyber security information sharing platform, was among the CEOs of leading technology, financial services, utility, health care and cyber security companies, as well as representatives from government and law enforcement agencies, at the White House Summit on Cybersecurity and Consumer Protection at Stanford University in early March. During the event, President Barack Obama unveiled his new executive order on improving information sharing between government and the private sector.
Loren Nickel, regional director and actuary with Aon Global Risk Consulting in San Francisco, said that while there are minor examples of modeling happening for cyber risks, there is not a useful data set with the depth of information the industry would need for a CAT model.
“Cyber risks are a very different risk scenario than a property CAT risk, which is very easy to define and identify, and is basically only a single coverage,” he said. “When you are talking about cyber and data risks, there are many more issues and complexities.”
For example, Nickel explained, you can have two different but similar companies in size and scope and they could have a completely different IT infrastructure, so gauging the exposure is the tough part when trying to create a model that would work for both.
“Cyber risk is the same, there is no history of similar events and so many events are not comparable. Part of the problem is you are trying to model a non-linear system.” — Mark Clancy, chief information security officer for The Depository Trust & Clearing Corp.
John Farley, vice president and cyber risk practice leader at global brokerage HUB International, in Campbell Hall, N.Y., agreed that cyber claims data is very hard to come by, unlike other lines of coverage, because information is not readily shared, making cyber claims difficult to underwrite.
“A large sampling of claims data for cyber claims is not happening right now,” he said. “There no doubt is a reluctance to share because many companies are not willing to advertise that they have been breached and what it has cost them. That’s the first challenge.”
Public-Private Sharing on the Radar
Aon’s Nickel said that even when with dealing with a single client, they are very reticent to share breach data. And even if you get the data, how to define a breach is much more complex than with a destroyed home or office building. In fact, he added, a breach can go undetected for extended periods and may not even cause any damage.
“Verizon has reported that half of breaches go undetected for months, and if someone doesn’t steal or damage anything, is it a breach?” he asked.
New York City-based Robert Rosenzweig, assistant vice president at insurance brokerage DeWitt Stern, said the idea of a public-private partnership sharing information on potential data breach issues makes sense, as it would allow insurers to build a more accurate model for pricing and the coverage being offered under their policies.
Also, with more accurate models it would be fair to assume that the insurers currently offering some modicum of cyber liability coverage would have more balanced portfolios that would be more sustainable in the long run, Rosenzweig said.
“This would create more market stability,” he said, “as insurers would be more likely to offer this product for the long-term if they can underwrite it profitably and it would likely increase the take-up rate on businesses buying cyber liability coverage by making the coverage more accessible.”
Rosenzweig said that while most of the large carriers are trying to use modeling for cyber risks, the question becomes how accurate are their models.
Modeling is limited because data is not being shared.– Robert Rosenzweig, assistant vice president, DeWitt Stern
“This is a product in its infancy,” he said. “Market penetration is not that high and it’s mainly only within the Fortune 1000.” As a result, carriers don’t know the exposure to small and medium U.S. businesses.
Rosenzweig said that some carriers have a better sense of what they are doing in the marketplace, with access to more actuarial data, but without a public-private partnership, modeling is limited because data is not being shared.
“For example, the industry is not privy to losses that might have occurred with businesses that are uninsured.”
Also, the insurers doing the early modeling might enjoy a competitive advantage, so they may be reluctant to share that information.
“They are thinking ‘Why give up our edge?’ ” he said. “The federal government wants this to happen and there are obvious reasons why. The more businesses that are buying this type of coverage, the less impact CAT losses in the middle and small markets would have on the global economy.”
HUB International’s Farley pointed out that cyber risks know no borders, making them much different and complex than data used in the traditional property underwriting process.
“We know earthquakes in Japan will not cause a hurricane in Florida, but cyber claims are much different,” he said. “Something that can start in one corner of the world in a matter of seconds can affect thousands of networks at once. Imagine if what happened to Sony also simultaneously happened to thousands of companies around the world.”
DTCC’s Clancy said the risk domain for cyber is non-linear, meaning that a small or large event can occur and there is no way to tell the difference between the two.
He offered the analogy of taking all the fans at any NFL stadium and lining them up by height. You would get a uniform distribution without huge outliers. If you did the same thing using their net worth and Bill Gates was at the game, that single outlier can impact the outcome.
“Cyber risk is the same, there is no history of similar events and so many events are not comparable,” he said. “Part of the problem is you are trying to model a non-linear system.”
Also, non-cyber perils are fairly static — it’s not like there’s a lot of new weather rapidly being invented. And you typically aren’t faced with situations where there’s a version two of a particular peril and it looks nothing like version one. But that’s exactly what people have to confront in the cyber world, Clancy said.
“People have been trying to steal money from the financial infrastructure for a long time, but today people are attacking because they are mad at someone for stopping payments to WikiLeaks,” he said. “We still don’t know what ‘normal’ looks like.”
Rich DePiero, head of cyber North America for Swiss Re Corporate Solutions in New York City, said many markets have trouble figuring out how cyber risk affects an industry because there are so many causes that can lead to different types of losses.
“The industry is behind the curve on that aspect of cyber,” he said. “For example, if an IT system that everyone uses as a service goes down and leads to a loss, how will it trickle through the industry?”
The most progress Swiss Re sees going on among clients is with the federal government openly encouraging data sharing among peers within specific industry segments.
“Financial institutions and airlines have been doing it, and manufacturers are doing it more,” he said. “With some of the breaches last year in retail space, the information was spread among peers within a week or so. That has to happen more.”
Ryan Gibney, assistant vice president at brokerage firm Lockton Cos. in Washington, D.C., noted that the data breach at health care insurer Anthem represents a very scary cyber risk scenario for the insurance industry because the event was an aggregate loss with multiple insureds.
Cyber Complexity Presents Another Hurdle
In the Anthem case, hackers gained access to the personal information of as many as 80 million Americans, mainly current and former members of Anthem health plans.
“That breach affected every organization whose employees have or had health care through Anthem,” he said. “Thousands of companies would potentially have a legal reporting obligation, but Anthem stepped up and notified all those affected.”
Plus, as more and more data shifts to the cloud, the concept of a large provider platform being breached could mean hundreds of thousands of smaller companies also could be breached.
Those organizations would be unable to transact normal business activities and any such event could shock the insurance industry, Gibney said.
“In one day you could have 500 cyber claims come in the door from a single event,” he said.
For CAT modeling, that’s a serious hurdle, he said. The industry does not enjoy 50-75 years of actuarial data with which to model, and there have not been a lot of widely publicized breaches until the last six months to a year.
“Many carriers are pushing modeling, as are markets like Lloyd’s of London, but there just is not enough actuarial data to do it accurately yet,” he said. “It’s easy to see why storms are so much more predictable than cyber events.”
On the upside, Gibney noted, the growth of cyber insurance is driving increased awareness of cyber security at all sizes and types of organizations. In fact, insurance applications and underwriters are asking for better cyber and data security controls.
Dewitt Stern’s Rosenzweig said the growing number of cyber criminals and data attacks, whether the result of a political group, state-sponsored activity or the usual criminal element, mean that effective modeling, while still distant, is necessary.
“The main reason we have data security regulations in place is that for the most part we really like the benefits and creature comforts we get by giving our data to businesses, so there is no turning back,” he said. “It’s just very early in the process.”
Risk Managers Struggle With Cyber Security
Cyber attacks have become an almost daily event affecting all sizes and types of businesses — and many businesses still struggle with information security deficiencies and common security weaknesses that can elevate their risk for data breaches.
In its “2014 State of Risk Report,” which surveyed 476 information technology and security professionals located in more than 50 countries, Trustwave found that one of five (21 percent) businesses do not have data breach incident-response procedures in place and about the same amount (20 percent) do not have a process that enables reporting of security incidents.
It also found that more than three in five (63 percent) businesses do not have sophisticated methods to control and track sensitive data and that less than half (49 percent) fully encrypt stored sensitive data.
“Businesses must look at security as an imperative,” said Michael Aminzade, vice president of global compliance and risk services at Trustwave, in Reston, Va.
“Understanding their risk level is the first step. By identifying their largest security shortfalls and rectifying them, businesses can stay ahead of the criminals and decrease their risk of getting breached.”
As for the insurance industry, A.M. Best identified cyber security as one of the most serious emerging risks facing insurers in its report titled “Cyber Security Presents Challenging Landscape for Insurers and Insureds.”
“These discussions will get increasingly more robust in 2015 as the insurance industry continues to ‘peel the onion’ on this evolving issue,” said Fred Eslami, a senior financial analyst at A.M. Best in Washington, D.C.
He added that it involves not only identifying general underwriting processes, the number of policies, types of coverage, policy forms, and limits and exclusions, but also how insurers manage and mitigate the many cyber risks and the ever-increasing threats of cyber-attacks on their own companies.
A.M. Best found that just 10 percent of respondents said they had a dedicated cyber security policy, while another 10 percent said they bundled such coverage with errors and omissions, property/business interruption and general liability policies.
Nearly three in 20 (13 percent) respondents admitted that their companies had been targets of data breaches or cyber attacks.