7 Emerging Technology Risks
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Recall Mitigation Relies on Risk Managers
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.
A Modern Claims Philosophy: Proactive and Integrated
According to some experts, “The best claim is the one that never happens.”
But is that even remotely realistic?
Experienced risk professionals know that in the real world, claims and losses are inevitable. After all, it’s called Risk Management, not Risk Avoidance.
And while no one likes losses, there are rich lessons to be gleaned from the claims management process. Through careful tracking and analysis of losses, risk professionals spot gaps in their risk control programs and identify new or emerging risks.
Aspen Insurance embraces this philosophy by viewing the data and expertise of their claims operation as a valuable asset. Unlike more traditional carriers, Aspen Insurance integrates their claims professionals into all of their client work – from the initial risk assessment and underwriting process through ongoing risk management consulting and loss control.
This proactive and integrated approach results in meaningful reductions to the frequency and severity of client losses. But when the inevitable does happen, Aspen Insurance claims professionals utilize their established understanding of client risks and operations to produce some truly amazing solutions.
“I worked at several of the most well known and respected insurance companies in my many years as a claims executive. But few of them utilize an approach that is as innovative as Aspen Insurance,” said Stephen Perrella, senior vice president, casualty claims, at Aspen Insurance.
“We do a lot of trending and data analysis to provide as much information as possible to our clients. Our analytics can help clients improve upon their own risk management procedures.”
– Stephen Perrella, Senior Vice President, Casualty Claims, Aspen Insurance
Utilizing claims expertise to improve underwriting
Acting as adviser and advocate, Aspen integrates the entire process under a coverage coordinator who ensures that the underwriters, claims and insureds agree on consistent, clear definitions and protocols. With claims professionals involved in the initial account review and the development of form language, Aspen’s underwriters have a full sense of risks so they can provide more specific and meaningful coverage, and identify risks and exclusions that the underwriter might not consider during a routine underwriting process.
“Most insurers don’t ever want to talk about claims and underwriting in the same sentence,” said Perrella. “That archaic view can potentially hurt the insurance company as well as their business partners.”
Aspen Insurance considered a company working on a large bridge refurbishment project on the West Coast as a potential insured, posing the array of generally anticipated construction-related risks. During underwriting, its claims managers discovered there was a large oil storage facility underneath the bridge. If a worker didn’t properly tether his or her tools, or a piece of steel fell onto a tank and fractured it, the consequences would be severe. Shutting down a widely used waterway channel for an oil cleanup would be devastating. The business interruption claims alone would be astronomical.
“We narrowed the opportunity for possible claims that the underwriter was unaware existed at the outset,” said Perrella.
Risk management improved
Claims professionals help Aspen Insurance’s clients with their risk management programs. When data analysis reveals high numbers of claims in a particular area, Aspen readily shares that information with the client. The Aspen team then works with the client to determine if there are better ways to handle certain processes.
“We do a lot of trending and data analysis to provide as much information as possible to our clients,” said Perrella. “Our analytics can help clients improve upon their own risk management procedures.”
For a large restaurant-and-entertainment group with locations in New York and Las Vegas, Aspen’s consultative approach has been critical. After meeting with risk managers and using analytics to study trends in the client’s portfolio, Aspen learned that the sheer size and volume of customers at each location led to disparate profiles of patron injuries.
Specifically, the organization had a high number of glass-related incidents across its multiple venues. So Aspen’s claims and underwriting professionals helped the organization implement new reporting protocols and risk-prevention strategies that led to a significant drop in glass-related claims over the following two years. Where one location would experience a disproportionate level of security assault or slip & fall claims, the possible genesis for those claims was discussed with the insured and corrective steps explored in response. Aspen’s proactive management of the account and working relationship with its principals led the organization to make changes that not only lowered the company’s exposures, but also kept patrons safer.
World-class claims management
Despite expert planning and careful prevention, losses and claims are inevitable. With Aspen’s claims department involved from the earliest stages of risk assessment, the department has developed world-class claims-processing capability.
“When a claim does arrive, everyone knows exactly how to operate,” said Perrella. “By understanding the perspectives of both the underwriters and the actuaries, our claims folks have grown to be better business people.
“We have dramatically reduced the potential for any problematic communication breakdown between our claims team, broker and the client,” said Perrella.
A fire ripped through an office building rendering it unusable by its seven tenants. An investigation revealed that an employee of the client intentionally set the fire. The client had not purchased business interruption insurance, and instead only had coverage for the physical damage to the building.
The Aspen claims team researched a way to assist the client in filing a third-party claim through secondary insurance that covered the business interruption portion of the loss. The attention, knowledge and creativity of the claims team saved the client from possible insurmountable losses.
Modernize your carrier relationship
Aspen Insurance’s claims philosophy is a great example of how this carrier’s innovative perspective is redefining the underwriter-client relationship. Learn more about how Aspen Insurance can benefit your risk management program at http://www.aspen.co/insurance/.
Stephen Perrella, Senior Vice President, Casualty, can be reached at Stephen.email@example.com.