Risk Management Mentors
Small is beautiful in terms of locally produced food. It is also big business, and grocery-store chains are making their supply chain and risk management process more flexible and innovative as they compete against street-corner markets and local retailers.
A report from the Food Marketing Institute indicates that between 2012 and 2013, three-quarters (76 percent) of all supermarkets added more locally supplied items. Interestingly, for independent grocers an even greater percentage, 92 percent, said they did so.
It was several years ago, said Rod Parker, general manager for E.A. Parker & Sons in Oak Grove, Va., that big grocery chains began “the push” to have local produce in their stores. Parker Farms processes, inspects and ships fresh-grown produce to major retail and wholesale outlets.
At that time, he said, “there was a big question about who would be able to play and who would not among growers. We decided early that we wanted to play, so we did what we had to [related to insurance and risk management programs]. It was expensive and difficult, but we did it.
“Our liability insurance has gone up from $2 million to $5 million to $10 million,” he said, noting that the organization did not need much help in attaining the insurance it needed.
“Grocery stores and the big-box retailers, especially those with a house brand, want to push the recall exposure down as far as possible.” — Florian Beerli, senior vice president of product recall, ACE Westchester
Citing competitive reasons, Safeway — widely considered a pioneer in this area — declined to talk about its local supply initiatives or the risk management programs behind them.
So, too, have other large grocery companies.
Industry experts said that Publix and Kroger have also made strides in this area, but both companies did not respond to inquiries. Whole Foods, another heavy promoter of local supply, has a policy of not talking to the trade press.
Walmart, in contrast, is considered a laggard in local-supplier outreach. That company made reference to an in-store merchandise-tracking device, but refused to discuss its supply or risk management.
The irony of the official reticence is that supply-chain and risk managers at several of those chains are reportedly exceedingly proud of how their companies have retooled after their initial efforts met mixed results.
“When we and other groups first wanted to stock local products, the supply-chain methodology at the time led us to say ‘no’ a lot,” said a food industry risk manager who asked to remain anonymous.
“Now, our methodology and those of a few others is to find a way to say ‘yes.’ ”
Sam Lefore Fruit Farms, a family owned farm in Milton-Freewater, Oregon, has been supplying tree fruit to Safeway grocery stores for more than half a century.
Over the past few years, Safeway has formalized its insurance and safety practice requirements, he said. “They got very serious and very organized. We pay for the auditors that they send, and meet with them annually and go over the score sheet.”
Safeway’s website provides some details about its local produce initiative as well as some supplier profiles.
In April, the company released its “Supplier Sustainability Guidelines and Expectations For Safeway Consumer Branded Items.” Those guidelines require, in part, that suppliers will:
• Favor domestic/local production where feasible;
• Implement measures to secure the supply chain;
• Comply with all applicable environmental regulations and laws in the areas they operate;
• Practice humane treatment of animals;
• Strive for “grass-fed,” “cage-free,” “no antibiotics administered,” certifications; and
• Focus on environmental health and safety internally and externally.
Initially, experts said, most big chains demanded the same high levels of insurance coverage and third-party auditing that they did for their major suppliers. Few local suppliers had the time, money, or staff to comply, and were shut out.
At the other extreme, some chains took local suppliers at face value, and accepted any liability as their own.
Neither situation made anyone happy, so a new collaborative approach evolved.
“Some products are inherently safer than others,” said the risk manager. “Salsa is one thing, spinach is entirely another. We first determine what is the inherent risk, then see what insurance and risk management the supplier already has. Sometimes, they are good and sometimes they are short.
“Next, we see what would it take to bring the supplier up to the proper levels, and if it is worth our while to work for that. If so, we consult on their processes, and may even recommend them to a broker to place additional coverage. It’s all very individualized,” the risk manager said.
“We are starting to see more of a thought-out approval process that includes insurance minimums, in which we have been helping the suppliers or co-packers,” said Florian Beerli, senior vice president of product recall at ACE Westchester, the company’s U.S.-based wholesale business.
While he couldn’t discuss specific grocery-chain referrals of suppliers, he said that product recall was a big emphasis and that “business in the recall market [is] being more and more contractually driven.”
“Grocery stores and the big-box retailers, especially those with a house brand, want to push the recall exposure down as far as possible,” but he noted there are practical limits to such an approach.
“There are various solutions. The most common recall limit is $5 million, although some stores do require $10 million regardless of the size of the supply contract. Some of the well-known brands buy their own coverage and require their co-packers to buy coverage to the self-insured retention (SIR).
For its own part, ACE focuses on the first-time buyers, so it is at a good vantage point to see the quick evolution of this sector.
“We have adopted a tailor-made approach in which we have base wording in the contract, and then everything else is added by endorsement,” Beerli said.
That puts the onus on the carrier’s underwriters, but “holding hands with the first-time buyers” is what Beerli said his firm does.
It also enables the company to conduct the education that he believes is also necessary.
“There is still work to do about recall protection,” he said.
Balance is the word used most often by Thomas Pegg, deputy director of casualty risk control at the Willis Group.
“Grocery stores are attempting to work more closely with local suppliers,” he said.
“They have found they need a bit more flexibility on contractual risk transfer, but that is very product specific.”
The need for balance in risk management is not just external, based on what is feasible with small suppliers, it is also an internal challenge, he said.
“I know of no other area of concern to these companies above brand protection from reputational risk,” Pegg said. “They have very high standards.”
But consumer buying habits prove that they want knobby heirloom tomatoes and corn with clods of dirt still on the stalks.
More to the point, they are willing to pay more for local produce. Hence, the need for a nuanced approach.
Pegg said that some grocery-store clients have supported their local suppliers in Pennsylvania to achieve the food-handling certifications offered by the state department of agriculture for workers and suppliers.
He also noted two other factors that play into the local produce trend: “Some of this is being driven, literally, by transportation costs.” Less expensive logistics are important to businesses with razor-thin margins.
At the other end, more customer loyalty programs make it easier to track purchases, which greatly aids in recalls or at least tracing and isolating problems.
“That is a very important development,” said Pegg, “and a critical piece of the supply chain.”
Schooling the NFL in Reputation Management
Back in the dark ages before the Internet, players on the gridiron were expected to play brutally hard for fans who sat through sometimes equally brutal weather.
Advertisers targeted the demographic with beer and pickup trucks, and paid enough for the privilege to enrich television networks, team owners and the tax-exempt league organization.
Football was entertainment for many, and a religion for many more. Winning was everything — a cultural obsession that over time sustained a range of abusive practices.
In 2009, Eric Olson, senior vice president at BSR, a social responsibility consultancy, warned that “hyper-transparency” enabled by the Internet would change the boundaries used to assess a company’s scope of control, and its degree of accountability and responsibility.
Football’s first major media sensation along these lines was the 2011 Penn State football coach child sex abuse scandal. It was a warning shot for the professional league. In rapid succession, stakeholders have made it clear to the NFL that the intangibles of quality, safety, and ethics on and off the field must now be intrinsic to the sport.
Two years ago, after labor issues simmered all summer between the league and its referees, a Monday night game between Seattle and Green Bay was marred by a disputed touchdown call by substitute referees.
Fans were livid. Vikings punter Chris Kluwe wrote that the NFL’s reputation “is tarnishing faster than a sailor’s virtue in a two-dollar whorehouse.”
“These refs are not fit to stand in for the men you’ve locked out for what is increasingly looking like nothing more than simple greed—attempting to squeeze blood from a stone simply because you can,” Kluwe wrote to NFL Commissioner Roger Goodell in an open letter.
In rapid succession, stakeholders have made it clear to the NFL that the intangibles of quality, safety, and ethics on and off the field must now be intrinsic to the sport.
Last year, the NFL agreed to pay $765 million to settle hundreds of cases accusing it of hiding information about the dangers of concussions, naively hoping that fans would refocus on the players and the games that make the sport a national obsession.
But to the NFL’s stakeholders, the game no longer exists in a vacuum.
The current reputation scandal centers on domestic violence. Stories and videos of beatings are illustrating graphically the meaning of hyper-transparency. Hannah Storm, anchor of ESPN’s SportsCenter, closed her review of the weekend NFL games in September by questioning if the league she enjoys actually cares about female fans, families, or the issue of domestic violence.
“What exactly does the NFL stand for?” she asked rhetorically at the end of the Monday morning program.
Storm could have been channeling The Walt Disney Company, which owns ESPN. In the age of hyper-transparency, stakeholder expectations have never been higher, and tolerance for errors has never been lower – disappoint them and they will punish you.
In the entertainment business Disney know so well, managing reputation is a business imperative.
Global Program Premium Allocation: Why It Matters More Than You Think
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.
“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.”
There are four critical challenges that need to be balanced if an allocation is to satisfy all parties, he says:
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.
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.
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.
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.
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 the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with AIG. The editorial staff of Risk & Insurance had no role in its preparation.