The retail business isn't what it used to be.
Today, its larger enterprises are almost uniformly global, not only in their brick-and-mortar operations but, through the Internet, in their sales strategies as well. These intertwined developments have created new and unique exposures.
Back home, the retail industry's more traditional risk management concerns have also taken on added complexity: the availability and affordability of property insurance, especially in coastal areas, as a prime example, and the skyrocketing costs of workers' compensation and health insurance for retailers large and small for another.
The risk management challenges for retailers regarding their non-U.S. exposures depends on the nature of the operation, says Clyde Ebanks, managing director, mid-America region of Aon Global Units.
"Clients aren't just setting up boxes or stores outside the United States. They're looking at things like sourcing," he says.
Along with traditional property/casualty exposures, he says, other questions arise: Who's responsible if something goes wrong? What if a foreign country goes after a retailer because it doesn't know who the supplying company is and the claimant has no grounds outside the United States? Will the policy respond in the United States? If a retailer is global, will the policy respond globally? Are the limits adequate for a U.S.-style loss?
Ebanks says risk managers should tailor their traditional U.S. thought processes to international exposures. "It's one thing to get a certificate from a supplier in Hong Kong, another to get one that affirms the policy will respond in the jurisdictions where you're most likely to be sued. You need to hold suppliers accountable, just like you would in the United States," he says.
Internet activity invites further questions: Can the retailer be held accountable by a court in Hungary? Without bricks and mortar, what's the likelihood of a claim arising? If it's material, how can a retailer address it? And if it doesn't, what are the consequences?
Insurance markets today can cover products going anywhere, says Ebanks. "You don't necessarily have to have assets on the ground to get a policy (or a risk transfer of the exposure), but the minute you put bricks and mortar down, that policy may not be adequate, because then you become subject to that country's insurance laws."
To fellow broker Joseph Vineis, senior vice president at Hilb Rogal & Hobbs, by far the biggest issue for retailers is the crunch in the property market, where he sees a "fundamental shift," rising costs and a shortage of capacity.
Brokers at Marsh, too, see a multiplex of issues. Gary Bull, managing director of the firm's retail practice, and Bob Parisi, a senior vice president for technology and communications, say the list is topped by property concerns in coastal areas and earthquake-prone locations, followed closely by emerging risks associated with sourcing overseas and selling over the Internet.
Ace USA's International and Specialty Group "lives and dies on the retail market," according to Andrew MacKinnon, its executive vice president, who says 90 percent of his business written in the foreign casualty operation is retail-based.
"One trend we've seen explode over the past 18 months is privacy," says MacKinnon, "because retailers, whether they're brick and mortar or online, or brick-click hybrids like Land's End or L.L. Bean, operating in the physical world as well as the online business, collect and maintain a large amount of information about their customers."
Recent regulatory changes, notably in California, require companies that lose customer information to notify them about their increased risk of identity theft.
"The plaintiff bar is getting wise, and class-action lawsuits are being filed," he says. "Liability is becoming a much larger issue, and it's come out of nowhere to become a major concern in a very short time." The biggest issue for the underwriter is being able to properly manage retail distribution channels. Ideally, he says, that's a three-way partnership among the retailer, the intermediary and the insurer. That job has become more complex in a globalized marketplace.
"Ten years ago," he says, "the insurance marketplace was devoted 90 percent to what was going on here in the U.S. Now the marketplace has gotten a lot bigger, and if companies are going to compete, they have to deal with globalization."
The marketplace has gone beyond 50 states and their various regulations to 50 or 60 outside jurisdictions with their own rules and regulations.
Brad Gow, vice president of Ace USA Professional Risk, sees a lot of retailers moving from brick-and-mortar to online shops in jurisdictions where they've never been before.
"They put up a Web site in Peoria and find themselves getting orders from Germany and Singapore," he says. "From a casualty point of view, there are new liability exposures involved with sending your product to markets outside the United States." Retailers doing business with Europeans, for example, are held to a much higher standard of care in terms of privacy than they are here. "Globalization has hit in a lot of different areas and in a lot of unexpected ways," he says.
MacKinnon further warns that Europe, Southeast Asia and Australia, as examples, are quickly catching up to the litigiousness of the United States, and retail risk managers need to take notice. "They'll expose their corporate balance sheets to some catastrophic losses if they're not careful."
THOMAS SLATTERY, a veteran editor and writer on industry affairs for more than 40 years, is also the managing director of Slattery-Esterkamp Communications, Baldwin, N.Y.
August 1, 2006
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