Assessing Third Party Risk
The financial services industry is in “high gear” to reassess third-party risk management practices in response to regulatory guidance.
Institutions are investing in technology to improve reporting and analytics, so that third-party risks are appropriately assessed and that controls are effective, according to the Third Party/Vendor Risk Management Survey, recently released by the Risk Management Association and sponsored by MetricStream.
It’s not just about assessing the risks from vendors and their subcontractors, but also affiliates, debt buyers, agents, channel partners, and correspondent banks, to name just a few third parties that banks and credit unions work with, said Edward DeMarco, RMA’s general counsel and director of operational risk/regulatory relations/communications.
Best practices are in “an evolutionary state,” DeMarco said.
“Prudent third-party risk management requires that the third party be risk-assessed in connection with the enterprise and not simply any one individual business line.” — Edward DeMarco, general counsel, Risk Management Association
“Multiple business lines and functional units within an institution might have their own special relationship with the same third party,” he said. “Prudent third-party risk management requires that the third party be risk-assessed in connection with the enterprise and not simply any one individual business line.”
Institutions are also increasingly putting pressure on to make sure third parties assess the risks of their own contractors, DeMarco said.
“For example, a bank might hire XYZ appraisal company, and that company might sub out to appraisal companies 1, 2, 3 and 4,” he said. “While the bank won’t require a report because they are not in control of those relationships, the banking company does expect its third party to assess their risks.”
Other survey findings include:
• Nearly 50 percent of the respondents said their institution’s risk management functions were responsible for oversight of vendor risk.
• More than 50 percent said their institutions send questionnaires to vendors for risk management purposes.
• Roughly one-third said they have more than 25 “enterprise critical” suppliers that have the potential to affect their entire organization in the event of a failure.
• More than 75 percent have in place a supplier code of conduct that suppliers must acknowledge.
Negotiations with third parties and vendors can be time consuming — and cyber insurance coverage is “an integral part” of those conversations. –Michael O’Connell, managing director and financial Institutions practice leader, Aon Risk Solutions.
Peter Foster, executive vice president and one of the leaders of the cyber risk group at Willis, said that many of his financial institution clients require their vendors to complete a Statement on Standards for Attestation Engagements (SSAE) No. 16, which is a guidance from the American Institute of Certified Public Accountants.
“But this is the minimal of what a vendor should be doing to demonstrate how they are protecting their systems,” Foster said.
“That report really doesn’t get deep into the weeds whether or not the security around the data or around operational applications is really secure.
“Financial institutions should take a step further with a set of questions or a physical audit of a vendor, particularly if the application is more critical to operations or contains customers’ personally identifiable information.”
Institutions should also require third parties to have a technology errors and omissions policy with cyber insurance built into the one policy, he said.
An institution should require third parties to name it as an “additional insured” and provide it with certificates of insurance to cover any disruptions, including liability to cover unauthorized access or unauthorized use of data.
An institution should also have coverage for vicarious liability and direct liability under its own cyber policy, which would cover a data breach resulting from outsourcing, Foster said. That way, the institution will be covered if its third party doesn’t have a policy or its policy doesn’t provide such coverage.
Such is often the case with cloud computing firms, he said.
“We recommend [third parties provide coverage] because it should be the first line of dense — the vendor who causes the breach should be paying for the breach,” Foster said. “But we’re also cognizant of the fact that many vendors will not provide that coverage and that the bank needs to use that vendor.”
Negotiations with third parties and vendors can be time consuming — and cyber insurance coverage is “an integral part” of those conversations, said Michael O’Connell, managing director and financial Institutions practice leader at Aon Risk Solutions.
“Also, a critical part of these discussions centers around who is liable for what part and how much of the loss, especially when there is a breach of confidential data,” he said.
From a risk management perspective, he recommended that vendor risk assessments include answers to these questions:
• Does the insurance fully cover the liability of the insured due to an incident caused by third-party providers?
• Are regulatory investigations, fines and penalties addressed?
• Are first-party business interruption and crisis management included within the cyber policies and are there full limits or sublimits?
“Additionally, the contingent business interruption component must include increased attention to the number and complexity of third-party relationships,” O’Connell said.
Firms must have a complete plan for loss mitigation, restitution, and a response to the potential reputational damage that may be caused, he said.
6 Costly Causes of Data Breaches
Six Best Practices For Effective WC Management
It’s no secret that the professionals responsible for managing workers compensation programs need to be constantly vigilant.
Rising health care costs, complex state regulation, opioid-based prescription drug use and other scary trends tend to keep workers comp managers awake at night.
“Risk managers can never be comfortable because it’s the nature of the beast,” said Debbie Michel, president of Helmsman Management Services LLC, a third-party claims administrator (and a subsidiary of Liberty Mutual Insurance). “To manage comp requires a laser-like, constant focus on following best practices across the continuum.”
Michel pointed to two notable industry trends — rises in loss severity and overall medical spending — that will combine to drive comp costs higher. For example, loss severity is predicted to increase in 2014-2015, mainly due to those rising medical costs.
Debbie discusses the top workers’ comp challenge facing buyers and brokers.
The nation’s annual medical spending, for its part, is expected to grow 6.1 percent in 2014 and 6.2 percent on average from 2015 through 2022, according to the Federal Government’s Centers for Medicare and Medicaid Services. This increase is expected to be driven partially by increased medical services demand among the nation’s aging population – many of whom are baby boomers who have remained in the workplace longer.
Other emerging trends also can have a potential negative impact on comp costs. For example, the recent classification of obesity as a disease (and the corresponding rise of obesity in the U.S.) may increase both workers comp claim frequency and severity.
“The true goal here is to think about injured employees. Everyone needs to focus on helping them get well, back to work and functioning at their best. At the same time, following a best practices approach can reduce overall comp costs, and help risk managers get a much better night’s sleep.”
– Debbie Michel, President, Helmsman Management Services LLC (a subsidiary of Liberty Mutual)
“These are just some factors affecting the workers compensation loss dollar,” she added. “Risk managers, working with their TPAs and carriers, must focus on constant improvement. The good news is there are proven best practices to make it happen.”
Michel outlined some of those best practices risk managers can take to ensure they get the most value from their workers comp spending and help their employees receive the best possible medical outcomes:
1. Workplace Partnering
Risk managers should look to partner with workplace wellness/health programs. While typically managed by different departments, there is an obvious need for risk management and health and wellness programs to be aligned in understanding workforce demographics, health patterns and other claim red flags. These are the factors that often drive claims or impede recovery.
“A workforce might have a higher percentage of smokers or diabetics than the norm, something you can learn from health and wellness programs. Comp managers can collaborate with health and wellness programs to help mitigate the potential impact,” Michel said, adding that there needs to be a direct line between the workers compensation goals and overall employee health and wellness goals.
Debbie discusses the second biggest challenge facing buyers and brokers.
2. Financing Alternatives
Risk managers must constantly re-evaluate how they finance workers compensation insurance programs. For example, there could be an opportunity to reduce costs by moving to higher retention or deductible levels, or creating a captive. Taking on a larger financial, more direct stake in a workers comp program can drive positive changes in safety and related areas.
“We saw this trend grow in 2012-2013 during comp rate increases,” Michel said. “When you have something to lose, you naturally are more focused on safety and other pre-loss issues.”
3. TPA Training, Tenure and Resources
Businesses need to look for a tailored relationship with their TPA or carrier, where they work together to identify and build positive, strategic workers compensation programs. Also, they must exercise due diligence when choosing a TPA by taking a hard look at its training, experience and tools, which ultimately drive program performance.
For instance, Michel said, does the TPA hold regular monthly or quarterly meetings with clients and brokers to gauge progress or address issues? Or, does the TPA help create specific initiatives in a quest to take the workers compensation program to a higher level?
4. Analytics to Drive Positive Outcomes, Lower Loss Costs
Michel explained that best practices for an effective comp claims management process involve taking advantage of today’s powerful analytics tools, especially sophisticated predictive modeling. When woven into an overall claims management strategy, analytics can pinpoint where to focus resources on a high-cost claim, or they can capture the best data to be used for future safety and accident prevention efforts.
“Big data and advanced analytics drive a better understanding of the claims process to bring down the total cost of risk,” Michel added.
5. Provider Network Reach, Collaboration
Risk managers must pay close attention to provider networks and specifically work with outcome-based networks – in those states that allow employers to direct the care of injured workers. Such providers understand workers compensation and how to achieve optimal outcomes.
Risk managers should also understand if and how the TPA interacts with treating physicians. For example, Helmsman offers a peer-to-peer process with its 10 regional medical directors (one in each claims office). While the medical directors work closely with claims case professionals, they also interact directly, “peer-to-peer,” with treatment providers to create effective care paths or considerations.
“We have seen a lot of value here for our clients,” Michel said. “It’s a true differentiator.”
6. Strategic Outlook
Most of all, Michel said, it’s important for risk managers, brokers and TPAs to think strategically – from pre-loss and prevention to a claims process that delivers the best possible outcome for injured workers.
Debbie explains the value of working with Helmsman Management Services.
Helmsman, which provides claims management, managed care and risk control solutions for businesses with 50 employees or more, offers clients what it calls the Account Management Stewardship Program. The program coordinates the “right” resources within an organization and brings together all critical players – risk manager, safety and claims professionals, broker, account manager, etc. The program also frequently utilizes subject matter experts (pharma, networks, nurses, etc.) to help increase knowledge levels for risk and safety managers.
“The true goal here is to think about injured employees,” Michel said. “Everyone needs to focus on helping them get well, back to work and functioning at their best.
“At the same time, following a best practices approach can reduce overall comp costs, and help risk managers get a much better night’s sleep,” she said.
To learn more about how a third-party administrator like Helmsman Management Services LLC (a subsidiary of Liberty Mutual) can help manage your workers compensation costs, contact your broker.
Debbie discusses how Helmsman drives outcomes for risk managers.
Debbie explains how to manage medical outcomes.
Debbie discusses considerations when selecting a TPA.
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Helmsman Management Services. The editorial staff of Risk & Insurance had no role in its preparation.