Retail Risks

Complications With Compliance

New ACA reporting demands and controversies over the minimum wage are adding regulatory risk to the retail industry. 
By: | October 1, 2015 • 8 min read

Wage-and-hour lawsuits are the bane of employers, and few industry sectors are as challenged by the Fair Labor Standards Act as retailers, with their multitude of part-time, minimum-wage workers and the potential for misclassifying employees who might be due overtime pay.


The difficulties will only increase as demands for a higher minimum wage grow at the federal level and in various states and cities throughout the country.

But retail risk managers have more on their plates than complying with the FLSA — or struggling to model how potential wage hikes will impact the organization. An even more cumbersome and complicated entree is new Affordable Care Act reporting rules, which are kicking in this year.

These two items are not only adding to retailer regulatory risks, but they also have the potential to increase costs for workers’ compensation and general liability policies. Not to mention the possible multimillion-dollar wage-and-hour lawsuit settlements, which are not uncommon for large employers.

New Reporting Regulations

“The [ACA] reporting is a challenge, partially because it’s new but also because of the timing in the way it was rolled out — the expectations and overall complexity of what employers have to do,” said Jay M. Kirschbaum, practice leader, national legal and research group, Willis Human Capital Practice.

Edward Fensholt, senior vice president, director of compliance services, Lockton

Edward Fensholt, senior vice president, director of compliance services, Lockton

“We might call it the spiked tail on the beast they have been grappling with for a number of years,” said Edward Fensholt, senior vice president, director of compliance services, Lockton.

According to a 2015 PricewaterhouseCoopers survey, only 10 percent of employers have an ACA reporting solution in place, and 16 percent have not even considered a solution yet.

Nearly two-thirds (65 percent) said the quality of the data they will use to determine health care eligibility is a concern.

Beginning in January 2016, employers subject to the ACA reporting requirement must file with the IRS a Form 1094-C and, for at least each full-time employee, a Form 1095-C detailing data on employees and, in some cases, their dependents related to health care eligibility and affordability in 2015 under the ACA’s employer mandate. Employees also must be notified.

“We might call [ACA reporting rules] the spiked tail on the beast they have been grappling with for a number of years.” — Edward Fensholt, senior vice president, director of compliance services, Lockton

Employers face a $250 fine for each form that is not filed, up to a $3 million maximum, said Fensholt, although he noted the IRS has indicated a willingness to allow slight filing extensions and to excuse some errors or failures if the employer made a good faith effort to comply.

For retailers, the issue is made more problematic by high turnover in the industry; the preponderance of hourly employees, many of whom may fluctuate between full-time and part-time employment; multiple locations; new coding requirements; monthly reporting rules; and for large employers, mandatory electronic filing.

Jay M. Kirschbaum, practice leader, national legal and research group, Willis Human Capital Practice

Jay M. Kirschbaum, practice leader, national legal and research group, Willis Human Capital Practice

“They are all scrambling to figure out what they are going to do,” Kirschbaum said. “The payroll industry has not covered itself in glory in getting packages together, but in their defense, I don’t think they had much advance warning.”

And for those employers that did not proactively begin planning and lining up key partners — and many employers postponed action until after the Supreme Court ruled on the constitutionality of health care subsidies in June — some are now finding themselves left to their own devices.

“The demand for that service is so high,” Fensholt said, “that many of these payroll and other vendors said this summer that they are not taking any new customers. They are at maximum capacity.”

In addition, because many employees in the retail industry have variable hours or are part-timers, some companies may be challenged to respond to notices from health care exchanges about subsidized insurance. When employees apply for subsidies, employers must validate or challenge the subsidy. Failure to respond on a timely basis could trigger penalties, according to PwC.

“Particularly for multi-state employers with many worksites, responding to the exchange notices on a timely basis could be very challenging since state exchanges may vary in their notices and response procedures,” according to PwC.

Wage-and-Hour Concerns

With ACA compliance added atop the possible flux in the minimum wage, it’s clear why regulatory concerns are considered a top risk for retailers, according to the 2015 “BDO Retail RiskFactor Report.”

“Federal, state and/or local regulations” tied as the No. 1 risk with “general economic conditions” and “competition and consolidation” in BDO’s most recent report. It was No. 2 in both 2014 and 2013, and No. 4 in 2012.


Many of the employee recordkeeping challenges retailers face in complying with ACA regulations are also challenges for wage and hour issues, but the growing demand for a $15 an hour minimum wage (already adopted in Seattle, San Francisco and Los Angeles and for fast-food workers in New York), plus a proposed minimum wage hike at the federal level — from $7.25 an hour to $10.10 an hour — add more complexity.

When Walmart recently hiked its minimum wage for new workers to $9 an hour — to increase employee engagement and customer service — grumbles arose among longer-term employees who received no raise and felt their experience and commitment were being undervalued.

Part of the modeling some companies are doing looks at not only the increase to minimum wage but also increases in wages for others in the organization, said Brandi Boles, vice president, Lockton.

“It’s a true domino effect,” she said.

In addition, the U.S. Department of Labor has proposed raising the salary threshold used to determine whether employees are eligible for overtime pay from $455 per week to $970 per week.

That may require employers to reclassify part-time managers or administrative employees who are on a salary basis, as hourly, nonexempt employees.

Adeola Adele, executive vice president and EPL product leader, Willis FINEX practice

Adeola Adele, executive vice president and EPL product leader, Willis FINEX practice

“That could create some challenges for companies,” said Adeola Adele, executive vice president and EPL product leader, Willis FINEX practice. “It’s not just about adjusting the salary, it’s about the actual responsibilities the employee has.

“Ultimately, the challenge is one of classification [of workers as exempt or nonexempt],” she said. “Retailers have to stay even more vigilant in the way in which they attempt to comply.”

A final rule is expected to take effect in 2016. If so, it “would impact 5-10 million workers, many of whom are concentrated in the retail and hospitality industries,” according to Alex Passantino, leader of the wage and hour litigation practice group at Seyfarth Shaw. “Some other estimates believe the number of impacted employees is more likely to be in the range of 15 million.”

The National Retail Federation puts the number of affected retail and restaurant workers at 2.2 million, and estimated it would cost $745 million to comply with new federal regulations.

The cost of federal wage-and-hour lawsuits is already astronomical. The number of FLSA lawsuits filed against employers has increased by more than 300 percent since 2000, from 1,854 claims in 2000 to 8,126 cases in 2014, according to Seyfarth Shaw, which tracks such litigation.


The proposed FLSA rules are “definitely going to create challenges,” Boles said. “It’s already creating challenges.

“There’s a lot of time and effort running a lot of modeling, looking at different angles. What has to happen, what needs to happen if these changes were to occur,” she said.

If labor costs increase due to a wage hike, retailers, already battling thin margins, may be forced to increase product prices. And that could impact insurance premiums.

Insurance Implications

Because workers’ compensation insurance is based on employer payroll, companies would undoubtedly see carriers asking for increased premium costs should the minimum wage be hiked, according to Lockton.

Brandi Boles, vice president, Lockton

Brandi Boles, vice president, Lockton

“I am looking at ways to be able to offset and/or credit policy audits as a result of the pure minimum wage impact,” Boles said. “We are working with individual carriers to create strategies to acknowledge the fact that individual company exposure has not changed, and it’s just due to a minimum wage increase.”

Thus far, carriers have been receptive, she said.

But because retailers may opt to increase product prices to offset the potential labor costs, they also would likely see their general liability policy premiums increase, since they are based on revenue.

“I am looking at ways to be able to offset and/or credit [workers’ comp] policy audits as a result of the pure minimum wage impact.” — Brandi Boles, vice president, Lockton

Wage-and-hour lawsuits generally fall within the scope of employment practices liability insurance, but most policies exclude coverage for violations of the FLSA or similar state or local laws, according to attorneys at Dickstein Shapiro.

The attorneys noted, however, that even if indemnity coverage is ultimately excluded, the carrier may have a duty to defend the employer if the complaint includes the possibility that one of the claims is potentially covered by the policy.

Adele noted that the Bermuda market within the last two years has developed a stand-alone wage-and-hour insurance policy to respond to such allegations, covering defense and indemnity costs.

Contrary to some brokers’ expectations, though, the coverage has not seen significant take-up, she said, partly because the premium is still relatively high and the minimum retention is $1 million.


“Not every company is willing to take that kind of retention,” Adele said. “I think over time, as more competition is introduced, there will be more interest in wage-and-hour insurance and the policies will probably become broader to address some of the emerging wage-and-hour risks.”

However, she said, with the current volatility, “I think insurance carriers are treading very carefully to make sure they are insuring a loss that would still be profitable for them.”

Profitability, of course, will also continue to be the major factor underlying the struggle of retailers as they attempt to meet these complex regulatory demands.

Anne Freedman is managing editor of Risk & Insurance. She can be reached at [email protected]
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Nutritional Supplements

A Bitter Pill

A probe of the nutritional supplement industry may be costly for insurers as well as brand reputations.
By: | August 31, 2015 • 7 min read
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In February, New York Attorney General Eric T. Schneiderman asked GNC, Target, Walmart, and Walgreens to stop selling a variety of store-brand nutritional supplements after DNA tests indicated that only 21 percent of the products contained the plant species listed on the labels, and more than a third contained plant species not on the labels.


Now, a multistate coalition of attorneys general pursuing an expanded probe of the nutritional supplement industry is asking Congress to launch a comprehensive inquiry and to consider a more robust oversight role for the Food and Drug Administration (FDA).

The Council for Responsible Nutrition (CRN), a supplement industry trade group, is questioning the validity of the New York attorney general’s DNA tests.

CRN says the tests have been “roundly criticized by botanical scientists who question whether DNA barcoding technology is an appropriate or validated test for determining the presence of herbal ingredients in finished botanical products.”

According to CRN, DNA can be damaged or removed during the manufacturing process. And since DNA barcoding does not indicate the amounts of ingredients found in the products, any contaminants found may be within “well-established legal thresholds that allow for trace amounts of some ingredients.”

VIDEO: CBS reports on the claims by the New York attorney general that some store brand supplements could “significantly endanger” consumers.

Jim Walters, managing director of Aon’s life sciences industry practice group, said the controversy is “a lot to do about nothing.”

But more than a dozen lawsuits have already been filed in connection with Schneiderman’s findings.

The most immediate exposure could be product liability if there is evidence of bodily harm — for instance, an allergic reaction to one of the unlabeled ingredients.

Phil Walls, chief clinical and compliance officer at myMatrixx, thinks such liability would be relatively narrow and potentially hard to prove.

“The repercussions would be proportional to the harm done. So if the product caused death, that’s going to be severe. But if it simply didn’t do what it was supposed to do, then I would think that the class action would be much smaller,” Walls said.

Walters agreed that any litigation would likely focus on bodily injury.

“In order for their product liability carriers to have a claim, there needs to be bodily injury, there needs to be a problem that’s not just something like they wouldn’t have bought it if they had known this and they seek reimbursement. That’s outside the scope of insurance,” Walters said.

“Think of the billions of dollars a year spent on supplements for people trying to drive better health results.” — Mark Ware, senior vice president and managing director, technology and life sciences industry practice, IMA Financial Group

Others, including Mark Ware, senior vice president and managing director of the technology and life sciences industry practice at IMA Financial Group, said allegations of harm could focus on health benefits denied to consumers who took a product that was missing the labeled active ingredient.

“Think of the billions of dollars a year spent on supplements for people trying to drive better health results.

“If they’re not driving those health results and they feel they’ve been injured, there’s going to be people banging on the door claiming all types of bodily injury because they haven’t been getting the benefits of the … supplements that have been touted as a benefit to them,” Ware said.

Ware sees broader liability issues, as well.

“This is going to trigger more than just potential product liability claims,” he said.

Companies that are publicly traded could see shareholder values impacted, potentially affecting directors and officers coverage, he said. There could also be allegations of false advertisement that could impact general liability policies.

“There are a lot of ways these claims could come about,” Ware said.


The manufacturers would likely be primary targets, but retailers may be exposed as well.

According to Ware, retailers are generally contractually indemnified and held harmless in the event of any claim or litigation due to a fault in a product.

But he pointed out, “As a retailer selling that product in your store, you will still have defense costs and could incur indemnification if [these manufacturers] don’t have the wherewithal to withstand the kind of class action suits that are coming their way.”

If the manufacturers are overseas, that may also make the retailers more attractive to plaintiff’s attorneys.

Insurers Pay

Either way, the party ultimately on the hook may be the manufacturer’s or retailer’s insurer. If the labeling discrepancies were due to outright fraud, as opposed to human error or equipment failure, that would trigger exclusions to coverage.

But such fraud may not be easy to prove.

“A court of law would have to judge that there was truly a fraudulent act and that they did it intentionally,” said Ware.

“Until fraud is proven, I don’t think these carriers are going to be able to walk away from it.”

Jim Walters, managing director, Aon life sciences industry practice group

Jim Walters, managing director, Aon life sciences industry practice group

Walters agreed.

“In any major litigation, carriers will point to exclusions to reserve their rights. So could you envision a situation where someone is reserving their right based on that? Yes. But I think that’s a stretch and I think they would have a hard time upholding that exclusion.”

And litigation could be quite costly.

“There’s a lot of ways these claims could come about, but I think in order to prove this, it’s going to take a little bit of time and a lot of litigation costs,” Ware said.

“I would imagine that the number of expert witnesses that are going be called in to testify for both sides would be lengthy, and it is simply a matter of who has the best experts. It’s just not an easy question to answer,” said myMatrixx’s Walls.

Ironically, if it comes down to a battle of expert testimony, the extensive resources that make the retail chains attractive targets for litigation would make them particularly formidable legal opponents as well.

Reputational Risk

The largest impact of the controversy could have to do with consumer perceptions of individual brands and the industry as a whole.

Walls, a former retail pharmacist, noted that, “If the company has a good reputation, you stock their products. If they don’t, you avoid them.

“People would always ask me the same question: ‘Which brand of supplements should I buy?’ And it always came down to nothing more than trust,” Walls said.

Even if retailers find different manufacturers for their store brands, any loss of consumer trust would likely be directed at the store-brand name on the front of the bottle rather than the manufacturer listed on the back.

GNC has already moved to mitigate any loss of trust by agreeing to implement a new national testing regimen that exceeds current FDA requirements — and uses some of the same testing methods criticized by CRN.

“People would always ask me the same question: ‘Which brand of supplements should I buy?’ And it always came down to nothing more than trust.” — Phil Walls, chief clinical and compliance officer, myMatrixx

Its agreement with the New York attorney general’s office stipulates that “GNC will perform DNA barcoding on the ‘active’ plant ingredients used in its products [and] implement testing for contamination with allergens.”

“It puts them in a better defensive position,” Ware said, “unless they don’t follow through with their own guidelines.”

Without that follow-through, the move could be a double edged sword.

“If they had had [a testing regimen] in place and this had still happened, I would think that would increase liability,” said Walls.

The controversy may also affect the supplement industry’s regulatory framework, largely defined by the Dietary Supplement Health and Education Act of 1994 and Good Manufacturing Practices established by the FDA in 2007.

Some, like Walls, think current oversight is too lax.

“With supplements, there are no regulations at the manufacturer level, no regulations at the distributor level, no regulations at the retail level.

“Only at the point of the consumer do the regulations come into play. … The only restriction on supplement manufacturers is that they cannot make false claims, and no one knows if they have made false claims until that product hits the market,” he said.

And while “false claims” might refer to claims of benefit or efficacy, they “could also refer to what the products actually are, and could trigger the FDA’s involvement.”


Walters disagreed.

“The regulatory oversight is, I think, stronger than what common knowledge in the consumer world knows. FDA is strongly regulating.”

But, he added, most supplement manufacturers “believe very strongly in their reputations and their quality of manufacturing and ingredients, so to some degree I think many would welcome additional oversight.”

As for any negative impact on those insuring the supplement industry, Walters is unconcerned.

“We believe adamantly that this should not affect rates, pricing or availability of coverage.

“This is something that should not be a big issue for the insurance underwriting community that underwrites this sort of business.”

Jon McGoran is a novelist and magazine editor based outside of Philadelphia. He can be reached at [email protected]
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Sponsored Content by ACE Group

6 Truths about Predictive Analytics

ACE's predictive analytics tool provides a new way to capture, analyze and leverage structured and unstructured claims data.
By: | October 1, 2015 • 6 min read

Predictive data analytics is coming out of the shadows to change the course of claims management.

But along with the real benefits of this new technology comes a lot of hype and misinformation.

A new approach, ACE 4D, provides the tools and expertise to capture, analyze and leverage both structured and unstructured claims data. The former is what the industry is used to – the traditional line-item views of claims as they progress. The latter, comprises the vital information that does not fit neatly into the rows and columns of a traditional spreadsheet or database, such as claim adjuster notes.

ACE’s recently published whitepaper, “ACE 4D: Power of Predictive Analytics” provides an in-depth perspective on how to leverage predictive analytics to improve claims outcomes.

Below are 6 key insights that are highlighted in the paper:

1) Why is predictive analytics important to claims management?

ACE_SponsoredContentBecause it finds relationships in data that achieve a more complete picture of a claim, guiding better decisions around its management.

The typical workers’ compensation claim involves an enormous volume of disparate data that accumulates as the claim progresses. Making sense of it all for decision-making purposes can be extremely challenging, given the sheer complexity of the data that includes incident descriptions, doctor visits, medications, personal information, medical records, etc.

Predictive analytics alters this paradigm, offering the means to distill and assess all the aforementioned claims information. Such analytical tools can, for instance, identify previously unrecognized potential claims severity and the relevant contributing factors. Having this information in hand early in the claims process, a claims professional can take deliberate actions to more effectively manage the claim and potentially reduce or mitigate the claim exposures.

2) Unstructured data is vital

The industry has long relied on structured data to make business decisions. But, unstructured data like claim adjuster notes can be an equally important source of claims intelligence. The difficulty in the past has been the preparation and analysis of this fast-growing source of information.

Often buried within a claim adjuster’s notes are nuggets of information that can guide better treatment of the claimant or suggest actions that might lower associated claim costs. Adjusters routinely compile these notes from the initial investigation of the claim through subsequent medical reports, legal notifications, and conversations with the employer and claimant. This unstructured data, for example, may indicate that a claimant continually comments about a high level of pain.

With ACE 4D, the model determines the relationship between the number of times the word appears and the likely severity of the claim. Similarly, the notes may disclose a claimant’s diabetic condition (or other health-related issue), unknown at the time of the claim filing but voluntarily disclosed by the claimant in conversation with the adjuster. These insights are vital to evolving management strategies and improving a claim’s outcome.

3) Insights come from careful analysis

ACE_SponsoredContentPredictive analytics will help identify claim characteristics that drive exposure. These characteristics coupled with claims handling experience create the opportunity to change the course of a claim.

To test the efficacy of the actions implemented, a before-after impact assessment serves as a measurement tool. Otherwise, how else can program stakeholders be sure that the actions that were taken actually achieved the desired effects?

Say certain claim management interventions are proposed to reduce the duration of a particular claim. One way to test this hypothesis is to go back in time and evaluate the interventions against previous claim experience. In other words, how does the intervention group of claims compare to the claims that would have been intervened on in the past had the model been in place?

An analogy to this past-present analysis is the insight that a pharmaceutical trial captures through the use of a placebo and an actual drug, but instead of the two approaches running at the same time, the placebo group is based on historical experience.

4) Making data actionable

Information is everything in business. But, unless it is given to applicable decision-makers on a timely basis for purposeful actions, information becomes stale and of little utility. Even worse, it may direct bad decisions.

For claims data to have value as actionable information, it must be accessible to prompt dialogue among those involved in the claims process. Although a model may capture reams of structured and unstructured data, these intricate data sets must be distilled into a comprehensible collection of usable information.

To simplify client understanding, ACE 4D produces a model score illustrating the relative severity of a claim, a percentage chance of a claim breaching a certain financial threshold or retention level depending on the model and program. The tool then documents the top factors feeding into these scores.

5) Balancing action with metrics

ACE_SponsoredContentThe capacity to mine, process, and analyze both structured and unstructured data together enhances the predictability of a model. But, there is risk in not carefully weighing the value and import of each type of data. Overdependence on text, for instance, or undervaluing such structured information as the type of injury or the claimant’s age, can result in inferior deductions.

A major modeling pitfall is measurement as an afterthought. Frequently this is caused by a rush to implement the model, which results in a failure to record relevant data concerning the actions that were taken over time to affect outcomes.

For modeling to be effective, actions must be translated into metrics and then monitored to ensure their consistent application. Prior to implementing the model, insurers need to establish clear processes and metrics as part of planning. Otherwise, they are flying blind, hoping their deliberate actions achieve the desired outcomes.

6) The bottom line

While the science of data analytics continues to improve, predictive modeling is not a replacement for experience. Seasoned claims professionals and risk managers will always be relied upon to evaluate the mathematical conclusions produced by the models, and base their actions on this guidance and their seasoned knowledge.

The reason is – like people – predictive models cannot know everything. There will always be nuances, subtle shifts in direction, or data that has not been captured in the model requiring careful consideration and judgment. People must take the science of predictive data analytics and apply their intellect and imagination to make more informed decisions.

Please download the whitepaper, “ACE 4D: Power of Predictive Analytics” to learn more about how predictive analytics can help you reduce costs and increase efficiencies.


BrandStudioLogoThis article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with ACE Group. The editorial staff of Risk & Insurance had no role in its preparation.

With operations in 54 countries, ACE Group is one of the largest multiline property and casualty insurance companies in the world.
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