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Risk Insider: Mike Rozembajgier

Recall Mitigation Relies on Risk Managers

By: | July 18, 2014 • 2 min read
Mike Rozembajgier is vice president at Stericycle, where he has held multiple management positions. Prior to joining Stericycle, Mike held various management positions at Guidant Corp. (now Boston Scientific) and at Deloitte in their Strategic Consulting practice. He can be reached at mrozembajgier@STERICYCLE.com.

This is turning out to be a record year for auto-related recalls and, with the astronomical costs associated with them, insurance companies that offer accidental contamination or malicious product tampering policies are on alert.

This type of insurance is primarily used by food manufacturers, distributors, retailers and auto parts suppliers to cover business expenses related to a recall. And in light of recent events, you can be sure that parts suppliers are working closely with their insurers to see what losses are covered and what the damage will be to their bottom line.

Those with insurance are the lucky ones, as the costs associated with a recall can be significant, but even for those organizations, the results of the recall and subsequent insurance coverage rely heavily on the assessments of risk managers.

One of the key concerns for risk managers is cost containment.

Typically, an insurance company becomes engaged with the manufacturer when the recall is about to happen or has just happened. To get started on remediation, the insurer must determine the total loss of product and what services are needed.

Then, the insurer will pull impacted lots and have them tested by an independent company to confirm that a full recall is necessary. Risk managers must ensure that lot sizes and distribution channels are optimized to minimize the impact on the bottom line depending on the likelihood of a recall.

Throughout a recall event, a lack of effective risk management can cause manufacturers to make missteps that cost millions of dollars and negatively impact insurers.

For example, if organizations don’t have the ability to identify and isolate contaminated products from safe ones, they may end up crediting a retailer for the full lot and not just the impacted products – resulting in a cash loss.

Also, manufacturers may incur compliance fines as they scramble to meet all of the regulatory requirements surrounding recalls. Lastly, the complex logistics involved in a recall may prolong the process and expose the brand to greater risk.

Here are some best practices for risk managers to consider when faced with a recall:

• Ensure access to good data and tracking on impacted products, including information on where it is located and what the value of lost product is.

• If the origin of the recall is known, contact the source to see what damages they will pay and determine if legal action is needed.

• Encourage the organization to be recall-ready with a designated recall team and plan, and an understanding of the supply chain partners’ recall protocol.

As the global supply chain continues to become more complex, risk managers need to be vigilant when preparing for internal and supplier issues.

And for companies of all sizes, product contamination is a loss exposure that cannot be ignored. It’s occurring with alarming frequency in the U.S. and globally catching many organizations by surprise.

Companies that fall victim to these incidents often incur staggering costs in damage control and significant lag time in restoration of profits and reputation.

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Professional Liability

Uptick in Severity of Claims

Conflicts of interest are the leading cause of legal malpractice claims.
By: | July 15, 2014 • 4 min read
LegalMalpractice

Law firm malpractice claims may be down, but the sting in them is spiking.

In its fourth annual survey of lawyers’ professional liability claims, insurance broker Ames & Gough found that the severity of claims has increased over the past year for eight of the insurers that provide such coverage.

Four insurers either paid or participated in paying a claim of $100 million or greater; two others had a payment between $50 million and $100 million. Moreover, six of the eight insurers surveyed reported having more claims with reserves of $500,000 or greater in 2013 than 2012.

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The carriers participating in the Ames & Gough survey were AIG/Lexington Insurance, AXIS Capital Holdings, BRIT Insurance, CNA Financial, Catlin Group, Ironshore, Markel Corp., and Swiss Re.

While the frequency of claims has begun to level off, the significant uptick in severity is due to the “double-whammy” of the longer development pattern of post-recession claims coupled with soaring defense costs, said Eileen Garczynski, partner and senior vice president of Ames & Gough in Washington, D.C.

On top of that, attorneys are switching firms now more than ever before, which has led to more conflict of interest claims, she said.

Six of the eight insurers surveyed cite conflicts of interest as the leading cause of malpractice claims. Such claims may arise when hiring firms don’t thoroughly determine if newly hired attorneys represented any client competitors or other adversarial parties of clients at their previous firms, Garczynski said.

“The obvious example of a conflict is when someone represents Exxon but also Greenpeace, but conflicts can be more complicated than that,” she said.

For example, an attorney could have represented a subsidiary of a pharmaceutical company and is now representing a competitor of the parent company, Garczynski said. The parent could sue the new firm, claiming the attorney is now divulging product secrets to its competitor.

There are many “gray areas” of representation that can lead to conflicts of interest, said Todd Hampton, vice president of claims for both Monitor Liability Managers and Berkley Select in Chicago.

For example, when a deal sours, the two parties involved in the relationship may become adversarial, Hampton said. If a law firm is representing both parties at the outset of the deal, it would be prudent to get them to sign a conflict of interest waiver.

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“Or just get out altogether,” he said.

Michael Furlong, vice president, underwriting at CNA Insurance in Kansas City, Mo., said that most small law firms do not adequately protect themselves.

In the majority of malpractice claims, CNA found that most small law firms did not use “engagement letters” to spell out the limits of representation or thought that a letter explaining their fee structure to clients would suffice, Furlong said.

“Not so,” he said. “A well-documented letter is very important when trying to defend the claim.”

Engagement letters should include the identity of the client, the scope of representations and limits to that scope, fees and billing statements, expenses and file retention procedures. Clients should sign the letter, agreeing to such terms, at the outset of representation, as well as when any documented changes occur in the scope of the work, he said.

Law firms should also take extra precautions when agreeing to represent unknown new clients, particularly for commercial transactions, Furlong said.

If those clients have engaged in illegal or fraudulent activities, their attorneys could be sued for malpractice. A glaring red flag would be if the potential client has switched law firms multiple times within a short span of time.

Law firms also need to establish a “risk management culture” that includes letting the attorneys on the front lines know that they won’t get into trouble if they spot signs of trouble and immediately communicate it to the supervising partners, general counsel or other risk management staff, said Uri Gutfreund, a professional liability broker at Singer Nelson Charlmers in New York.

If they are faced with a malpractice claim, law firms should thoroughly document what happened and what they’ve subsequently done to minimize such occurrences in the future, including any risk management procedures they’ve since put in place, Gutfreund said. Such documentation can help law firms avoid being severely penalized during their subsequent renewals.

Law firms should also report to their carriers any claims they pay, even well before they exceed their retentions, he said.

“Even if they think that they may be able to make a claim go away for less than their retention, it’s really important to report it, so if the claim blows up, they won’t be fighting for coverage later with the carrier,” Gutfreund said.

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As severity of claims rise, so do insurance premiums, Garczynski said.

“In order to keep premiums low, firms have to conduct appropriate due diligence to make sure they have the right risk management steps in place,” she said.

Katie Kuehner-Hebert is a freelance writer based in California. She has more than two decades of journalism experience and expertise in financial writing. She can be reached at riskletters@lrp.com.
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Sponsored Content by AIG

Global Program Premium Allocation: Why It Matters More Than You Think

Addressing the key challenges of global premium allocation is critical for all parties.
By: | June 2, 2014 • 5 min read

SponsoredContent_AIG
Ten years after starting her medium-sized Greek yogurt manufacturing and distribution business in Chicago, Nancy is looking to open new facilities in Frankfurt, Germany and Seoul, South Korea. She has determined the company needs to have separate insurance policies for each location. Enter “premium allocation,” the process through which insurance premiums, fees and other charges are properly allocated among participants and geographies.

Experts say that the ideal premium allocation strategy is about balance. On one hand, it needs to appropriately reflect the risk being insured. On the other, it must satisfy the client’s objectives, as well as those of regulators, local subsidiaries, insurers and brokers., Ensuring that premium allocation is done appropriately and on a timely basis can make a multinational program run much smoother for everyone.

At first blush, premium allocation for a global insurance program is hardly buzzworthy. But as with our expanding hypothetical company, accurate, equitable premium allocation is a critical starting point. All parties have a vested interest in seeing that the allocation is done correctly and efficiently.

SponsoredContent_AIG“This rather prosaic topic affects everyone … brokers, clients and carriers. Many risk managers with global experience understand how critical it is to get the premium allocation right. But for those new to foreign markets, they may not understand the intricacies of why it matters.”

– Marty Scherzer, President of Global Risk Solutions, AIG

Basic goals of key players include:

  • Buyer – corporate office: Wants to ensure that the organization is adequately covered while engineering an optimal financial structure. The optimized structure is dependent on balancing local regulatory, tax and market conditions while providing for the appropriate premium to cover the risk.
  • Buyer – local offices: Needs to have justification that the internal allocations of the premium expense fairly represent the local office’s risk exposure.
  • Broker: The resources that are assigned to manage the program in a local country need to be appropriately compensated. Their compensation is often determined by the premium allocated to their country. A premium allocation that does not effectively correlate to the needs of the local office has the potential to under- or over-compensate these resources.
  • Insurer: Needs to satisfy regulators that oversee the insurer’s local insurance operations that the premiums are fair, reasonable and commensurate with the risks being covered.

According to Marty Scherzer, President of Global Risk Solutions at AIG, as globalization continues to drive U.S. companies of varying sizes to expand their markets beyond domestic borders, premium allocation “needs to be done appropriately and timely; delay or get it wrong and it could prove costly.”

“This rather prosaic topic affects everyone … brokers, clients and carriers,” Scherzer says. “Many risk managers with global experience understand how critical it is to get the premium allocation right. But for those new to foreign markets, they may not understand the intricacies of why it matters.”

SponsoredContent_AIGThere are four critical challenges that need to be balanced if an allocation is to satisfy all parties, he says:

Tax considerations

Across the globe, tax rates for insurance premiums vary widely. While a company will want to structure allocations to attain its financial objectives, the methodology employed needs to be reasonable and appropriate in the eyes of the carrier, broker, insured and regulator. Similarly, and in conjunction with tax and transfer pricing considerations, companies need to make sure that their premiums properly reflect the risk in each country. Even companies with the best intentions to allocate premiums appropriately are facing greater scrutiny. To properly address this issue, Scherzer recommends that companies maintain a well documented and justifiable rationale for their premium allocation in the event of a regulatory inquiry.

Prudent premiums

Insurance regulators worldwide seek to ensure that the carriers in their countries have both the capital and the ability to pay losses. Accordingly, they don’t want a premium being allocated to their country to be too low relative to the corresponding level of risk.

Data accuracy

Without accurate data, premium allocation can be difficult, at best. Choosing to allocate premium based on sales in a given country or in a given time period, for example, can work. But if you don’t have that data for every subsidiary in a given country, the allocation will not be accurate. The key to appropriately allocating premium is to gather the required data well in advance of the program’s inception and scrub it for accuracy.

Critical timing

When creating an optimal multinational insurance program, premium allocation needs to be done quickly, but accurately. Without careful attention and planning, the process can easily become derailed.

Scherzer compares it to getting a little bit off course at the beginning of a long journey. A small deviation at the outset will have a magnified effect later on, landing you even farther away from your intended destination.

Figuring it all out

AIG has created the award-winning Multinational Program Design Tool to help companies decide whether (and where) to place local policies. The tool uses information that covers more than 200 countries, and provides results after answers to a few basic questions.

SponsoredContent_AIG

This interactive tool — iPad and PC-ready — requires just 10-15 minutes to complete in one of four languages (English, Spanish, Chinese and Japanese). The tool evaluates user feedback on exposures, geographies, risk sensitivities, preferences and needs against AIG’s knowledge of local regulatory, business and market factors and trends to produce a detailed report that can be used in the next level of discussion with brokers and AIG on a global insurance strategy, including premium allocation.

“The hope is that decision-makers partner with their broker and carrier to get premium allocation done early, accurately and right the first time,” Scherzer says.

For more information about AIG and its award-winning application, visit aig.com/multinational.

This article was produced by AIG and not the Risk & Insurance® editorial team.
SponsoredContent_AIG


AIG is a leading international insurance organization serving customers in more than 130 countries.
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