What Is Employment Practices Liability Insurance (EPLI)?

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June, 2010 - Insurance Information Institute

EPLI covers businesses against claims by workers that their legal rights as employees of the company have been violated.

The number of lawsuits filed by employees against their employers has been rising. While most suits are filed against large corporations, no company is immune to such lawsuits. Recognizing that smaller companies now need this kind of protection, some insurers provide this coverage as an endorsement to their Businessowners Policy (BOP). An endorsement changes the terms and conditions of the policy. Other companies offer EPLI as a stand-alone coverage.

EPLI provides protection against many kinds of employee lawsuits, including claims of:

• Sexual harassment
• Discrimination
• Wrongful termination
• Breach of employment contract
• Negligent evaluation
• Failure to employ or promote
• Wrongful discipline
• Deprivation of career opportunity
• Wrongful infliction of emotional distress
• Mismanagement of employee benefit plans

The cost of EPLI coverage depends on your type of business, the number of employees you have and various risk factors such as whether your company has been sued over employment practices in the past. The policies will reimburse your company against the costs of defending a lawsuit in court and for judgments and settlements. The policy covers legal costs, whether your company wins or loses the suit. Policies also typically do not pay for punitive damages or civil or criminal fines. Liabilities covered by other insurance policies such as workers compensation are excluded from EPLI policies.

To prevent employee lawsuits, educate your managers and employees so that you minimize problems in the first place:

• Create effective hiring and screening programs to avoid discrimination in hiring.
• Post corporate policies throughout the workplace and place them in employee handbooks so policies are clear to everyone.
• Show employees what steps to take if they are the object of sexual harassment or discrimination by a supervisor. Make sure supervisors know where the company stands on what behaviors are not permissible.
• Document everything that occurs and the steps your company is taking to prevent and solve employee disputes.

Nation's Flood Insurance Program Remains in Limbo

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Insurance Journal

June 16, 2010

The Senate today voted against legislation that included a provision to reauthorize the National Flood Insurance Program (NFIP).

Along with short term extensions for numerous other federal programs, the NFIP extension was passed by the House just prior to the Memorial Day recess. It was voted down by the Senate today amid concerns that other, unrelated provisions in the bill would add to the federal budget deficit. Should the Senate approve an amended version, the legislation would have to go back to the House for another vote in that chamber.

The Senate vote drew criticism from the National Association of Mutual Insurance Companies (NAMIC).

"It's been over two weeks since the National Flood Insurance Program was allowed to expire, and the program is still being held up because of unrelated issues," said Jimi Grande, NAMIC senior vice president of federal and political affairs. "This lack of action by Congress is unacceptable, particularly when we're in the first few weeks of the 2010 hurricane season."

The Atlantic storm season began June 1 and the National Oceanic and Atmospheric Administration has forecasted that 2010 will be among the most active seasons ever. The NOAA predicts that 2010 will see 14 to 23 named storms, with eight to 14 of those developing into hurricanes. Of those, the NOAA has said that three to seven may develop into Category 3 or above hurricanes with winds of over 110 miles per hour.

"We cannot afford to have political disagreements get in the way of protecting millions of Americans from flood losses," Grande said.

Source: NAMIC

Source: Insurance Journal

Has Your Business Been Affected by Severe Winter Weather?

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Business owners who are affected by power outages may also look to their property insurance or boiler and machinery insurance policies to recover losses. Coverage for the personal effects of officers, partners, employees and others will also be covered, up to the policy limit, which is usually about $2,500.
Business income (also known as business interruption) insurance will come into play if there is physical damage done to the structure.

"Hopefully business owners have sufficient policy limits to cover the company for more than a few days," said Loretta Worters, vice president with the I.I.I. "After a major disaster, it can take more time than many people anticipate to get a business back on track. There is generally a 48-hour waiting period before business interruption coverage kicks in," she added. "Too many business owners fail to think about how they would manage if a disaster damaged their business premises so that it was temporarily unusable."
If a business has extra income coverage, the policy will reimburse the sum of money the business spends, over and above normal operating expenses, in order to avoid having to shut down during the restoration period.

Worters noted that those businesses that were not physically affected by the winter storm, but whose suppliers or customers were affected, will be protected if they have contingent business interruption insurance. "Companies today are heavily dependent on raw materials from key suppliers to make the products they sell. If the supplier suffered a loss and could not deliver the product, their contingent business interruption insurance will help."
Automobile accidents resulting from slippery weather are covered under a commercial auto insurance policy. Damage to vehicles from falling branches or other debris is covered under the optional comprehensive portion of the policy.

Flooding is not covered under standard business owners policies. It is, however, available from the federal government's National Flood Insurance Program and a few private insurance companies.
"Business owners who have suffered losses need to contact their insurance company or agent as soon as possible to start the claims filing process," urged Worters.

-Insurance Information Institute

Is Your Business Properly Insured? Find out by Asking Your Insurer the Four Most Important Questions

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Running a successful business in today’s economy is no easy feat. In addition to typical risks such as theft and fire, there are a host of other risks that are unique to each particular type of business. So it is essential that businessowners, now more than ever, make sure they buy the right type and amount of insurance and update their policies annually to include improvements, major purchases and increased rebuilding costs as well as any liability risks, according to the Insurance Information Institute (I.I.I.).

“One of the biggest mistakes business owners make is that they don't buy the right type of insurance and often have gaps in their coverage,” said Loretta Worters, vice president, I.I.I. “Businessowners should contact their insurance agent or company representative annually to make sure that their insurance is adequate.”

A Businessowners Policy (BOP) is recommended for most small businesses (usually 100 employees or less), as it is often the most affordable way to obtain broad coverage. BOPs are sort of “off the shelf” policies combining many of the basic coverages needed by a typical small business into a standard package at a premium that is generally less than would be required to purchase these coverages separately. Combining both property and liability insurance, a BOP will cover your business in the event of property damage, suspended operations, lawsuits resulting from bodily injury or property damage to others, etc.

BOPs do NOT cover professional liability, auto insurance, workers compensation or health and disability insurance. You will need separate insurance policies to cover professional services, vehicles and your employees.

For medium-sized and larger businesses, there are more comprehensive commercial policies. To properly insure your business, the I.I.I. suggests that you ask your agent or company representative these four important questions to determine the right type of policy and amount of coverage:

1. Do I have enough insurance to rebuild my business property and replace all of my merchandise and possessions?

A Building and Personal Property coverage (BPP) policy is commonly used to cover any combination of the following three broad categories: the building, your business personal property and the personal property of others. Usually the covered building is owned by the insured. However, a lessee might insure a leased building when required to do so by the terms of the lease.

Your Business Personal Property coverage includes seven specific categories:

1. Furniture and fixtures
2. Machinery and equipment
3. Stock (i.e., merchandise held in storage, including raw materials, work in-progress and finished goods)
4. All other personal property owned by you and used in your business
5. Labor, materials or services furnished or arranged by you on the personal property of others
6. If a tenant, the improvements or betterments you have made
7. Leased personal property which you have a contractual responsibility to insure

It is vital that the value of your property be accurately reported and updated annually to reflect inflation and other increases in cost.

• Business income coverage - Compensates you for lost income if your company has to vacate its premises due to disaster-related damage that is covered under your property insurance policy. Business income insurance covers the profits you would have earned, based on your financial records, had the disaster not occurred. The policy also covers operating expenses, such as electricity, that continue even though business activities have come to a temporary halt.
  
  Review your annual financial records with your accountant to determine your annual net profit (total revenue minus total expenses). You should also have an approximate idea of how much profit you make (and would therefore lose) during a typical year. Purchase enough business income coverage to protect at least this amount of revenue.)


• Extra income coverage - Reimburses your company for a reasonable sum of money that it spends, over and above normal operating expenses, to avoid having to shut down during the restoration period.
  
  In order to calculate how much extra expense coverage you will need, an appraisal of your office building or any other operating locations should be made as well as a detailed inventory, not only of your product stock but also of your existing office equipment.


• Contingent business interruption insurance - Protects a business owner's earnings following physical loss or damage to the property of the insured's suppliers or customers, as opposed to its own property. Companies today are heavily dependent on raw materials from key suppliers to make the products they sell. What happens if the supplier suffers a loss and cannot continue to deliver the product?

Make sure to determine how much revenue would be lost if you were unable to receive your product from your main supplier or if your main customers were unable to buy from you.

4. Do I have enough insurance to protect my assets from a lawsuit?

The only way to protect your assets is to carry adequate business liability insurance. A Commercial General Liability (CGL) insurance policy is the first line of defense against many common claims. CGL policies cover claims in four basic categories of business liability:

• Bodily injury
• Property damage
• Personal injury (including slander or libel)
• Advertising injury (damage from slander or false advertising)

In addition to covering the claims listed above, CGL policies also cover the cost of defending or settling claims. General liability insurance policies always state a maximum amount that the insurer will pay during the policy period. There are two major forms of liability insurance policies that can be purchased: occurrence and claims paid.

• An occurrence policy covers you for a specific dollar amount for each individual year. For example, if you carry an occurrence policy for $100,000/$300,000* in 1999 and a claim is made against you in 2010 when you have a $1 million/$3 million policy, the insurance company is liable for no more than a $100,000 for that particular claim. So, if you are successfully sued for $250,000, you will be personally responsible for the $150,000 beyond your coverage. Despite inflation, rising jury awards and the increasing amount of money being asked for in lawsuits, the insurance company is still only responsible for the limits you carried at the time the injury occurred, not when the claim was made.

• A claims-made policy covers you for the policy amount you have when the claim is made. This is an advantage because every time you increase your policy limits, you are now covered for the higher limits for every year you have carried the claims-made policy. This increased coverage keeps pace with inflation and rising awards.

-Insurance Information Institute 

Workers Compensation and the Americans with Disabilities Act

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The first point to make about the ADA and workers compensation is that neither entity mentions the other; the second point is that, regardless of this mutual snub, there is a connection between the two. This connection, however, is based more on the effect that the ADA has on the WC system rather than on the WC policy. In fact, to better understand the impact of the ADA on workers compensation, the WC system has to be, at least theoretically, looked upon as a separate creature from the WC policy.

The current workers compensation system is the cumulative result of decades-long confrontation and compromise between employers and employees; an employee injured on the job relinquishes his or her right to sue the employer in return for a statutorily imposed system that provides specific scheduled benefits. The WC system is designed to assure the injured worker that he or she will receive certain benefits due to the injury (such as cash payments and rehabilitation services) and to assure the employer that he or she will not face time and money consuming lawsuits based on the injury to the worker. Now, the ADA comes along and modifies that system.

The ADA certainly does not abolish the workers compensation system and certainly does not dictate the amount of benefits scheduled to be paid to an injured worker; there is no such direct assault. There is, however, a more subtle, a more indirect effect that the ADA has on the WC system.

To be sure, the injured worker still is entitled to the state-mandated workers compensation benefits. However, the injured worker, under the ADA, may now be considered a "qualified individual with a disability". And it is in this area that the ADA can modify the workers compensation system. Now, the employer can be sued by an injured worker, not directly because of the injury, but because, as a "qualified individual with a disability", the employee can seek accommodations to allow him or her to return to work. If the employer unreasonably refuses to accommodate the injured worker, the ADA would allow a discrimination lawsuit by the employee against the employer. Thus, the employee may end up getting the proverbial "two bites of the apple" - workers compensation benefits and monetary damages based on discrimination, both awards basically arising out of the same injury.

This is not an absolute pronouncement since ADA claims will be decided on a case-by-case basis; however, it has to be noted that the exclusive remedy of the WC system does not act as an automatic and absolute bar to a lawsuit or claim made by an injured employee against the employer.

The ADA also affects the workers compensation system indirectly by having individuals with disabilities at the workplace. For example, if an individual with a disability is working at ABC manufacturing company, the chances of that individual being injured on the job (or causing other employees to be injured) may be higher than if that same person did not have a disability. Therefore, the employer, by complying with the ADA, may be increasing the number and the severity of the workers compensation claims due to the increased chances of an employee (with a disability or not) being injured while at work. This increase in the number and the severity of workers compensation claims has to have an impact on the WC system, whether that impact is in the form of higher WC rates or decreasing ability to buy WC insurance.

If the ADA has an indirect impact on the workers compensation system, its impact on the actual workers compensation policy is just about nil.

Look at the standard workers compensation policy. The policy makes the promise to "pay promptly when due the benefits required of you by the workers compensation law". The workers compensation law is the law of each state named on the information page of the policy. The coverage under the policy applies to bodily injury by accident that occurs during the policy period and to bodily injury by disease that is caused by or aggravated by the conditions of employment. The other paragraphs of the workers compensation part of the policy discuss the duty to defend against WC claims or suits, supplementary payments, other insurance and statutory provisions. The point is that nothing in the policy conflicts with the ADA, nothing enhances the ADA, and nothing even mentions the ADA. If an employee is injured on the job, the WC policy will pay the benefits required by state law, regardless of the existence of the Americans with Disabilities Act.

As noted above, the WC policy may have to pay out more benefits because an employee with a disability may be injured more often, but the ADA itself does not include or exclude the benefits prescribed by a state's workers compensation law and covered by the WC policy. Even if the state law required accommodations in order to get the employee back to work and the WC policy paid for these accommodations, it is the state workers compensation law requiring such payment and not the ADA.

There is another part, of course, to the WC policy, namely, employer's liability insurance. This insurance applies to bodily injury by accident or by disease arising out of and in the course of the injured employee's employment; it applies to all sums the employer legally must pay as damages (where permitted by law and as described in the policy) because of bodily injury to the employee.

The ADA is not mentioned in the employers liability insurance part of the WC policy and it is not relevant to that part. It is not relevant for, at least, two reasons. One, employers liability insurance is based on legal liability for bodily injury suffered by on-the-job employees; the ADA bases any claims for recovery on discrimination and violation of a civil right. Two, employers liability coverage is specifically excluded for damages arising out of demotion, reassignment, harassment, humiliation, discrimination against or termination of any employee, or any personnel practices, policies, acts, or omissions - all items that could be encompassed by a claim under the ADA.

So, regardless of which coverage part of the WC policy is examined, the ADA has no immediate impact. There is no need to be concerned about the ADA superseding - expanding or contracting - the scope of the workers compensation policy.

There are several differences between the ADA and workers compensation that can be noted. Among these differences are the following.

First, many work-related injuries covered by workers compensation are minor and only temporarily disabling; the WC payments are meant to cover the medical expenses associated with the injury and get the injured employee back to work as soon as possible. The ADA applies to employees who have substantial, permanent disabilities. A "disability" is defined in the ADA, and the 2008 amendment of the ADA did not alter the definition, only clarified it. Note that a temporary or slight disability would not make an employee a "qualified individual with a disability" under the provisions of the ADA since the disability has to substantially limit one or more of the major life activities of the individual. So, permanent and total disability due to a work-related injury can be handled as a WC payment, but, temporary and slight disability due to a work-related injury will not be handled under the ADA.

Second, the purpose of the WC system is to help employees who suffer job-related bodily injuries; the ADA's purpose is to protect individuals (employees as well as potential employees) from discrimination based on disability.

Third, workers compensation applies to injuries arising out of or in the course of employment; the ADA can apply even if the disabling injury did not arise out of employment. The employee has to be on the job for his or her company if workers compensation is to pay for any injury. Under the ADA, the individual not only does not have to be injured on the job, he or she (as implied above) does not even have to be employed by the company in order for the ADA to come into play since the ADA is meant to prohibit discrimination against not only disabled employees but also disabled job applicants. In short, workers compensation protects employees injured on the job; the ADA protects employees and non-employees and the phrase "arising out of and in the course of employment" is not relevant.

Fourth, workers compensation applies to bodily injury while the ADA encompasses bodily or mental impairment. It is true that some courts today consider mental anguish to be bodily injury, but that is not the majority rule. As an example, a mental or psychological disorder, such as emotional or mental illness or a specific learning disability, can qualify an individual as disabled, and thus, protected under the ADA. That same mental disorder, however, is not considered bodily injury as covered by workers compensation; purely non-physical or emotional harm or disorder (unaccompanied by a physical injury) is not bodily injury and not covered under workers compensation in most states.

Fifth, workers compensation claims are usually handled by the state workers compensation fund (monopolistic states) or the workers compensation insurer; the ADA is administered by the Equal Employment Opportunity Commission (EEOC). Incidentally, for a brochure on EEOC guidelines on the ADA, call 1-800-669-3362.

These differences are not necessarily all-inclusive, but are offered to distinguish the scope and intent between the Americans with Disabilities Act and workers compensation.

The ADA does have an impact on workers compensation, but that impact is mainly of an indirect nature. The WC policy itself - with its insuring agreements, exclusions, and conditions - is not modified by the ADA and those employers who are insured under the standard workers compensation policy will not find the coverage impaired by the ADA.

FC&S

The 80% Solution: Broadening Supply-Chain Risk Management as Practical Enterprise Risk Management

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Supply chain is generally viewed as a subset of ERM. We agree with that opinion, but view the two as also linked somewhat differently.

Effective enterprise risk management requires the risk manager to interact closely with most - if not all - operational units of an organization. And if those contacts are mapped, one will find that they most often reside in the supply chain.

Accordingly, our premise is that effective ERM is achieved by managing risk for the vital components and processes in the supply chain. In virtually all enterprises, expanding the application of risk management to as many supply-chain operations as possible may offer the most practical method of implementing ERM's major components. These components can include modification of an organization's internal atmosphere to look at the "big picture," potential event identification, assessment of risk and response thereto, and ERM monitoring.

Our view is that, for most organizations, expanding risk management to assess and mitigate risk within the supply chain may be the most prominent ERM endeavor, encompassing 80 percent of ERM efforts.

Moving ERM from Academia to Reality

Much of the ERM literature remains couched in relatively academic terminology verging on the theoretical. The theoretical tone in which ERM is often discussed makes it difficult to apply in organizations where business benefits must be measured and known in order to justify devoting scarce resources to a project. Ambiguities and difficulties in expressing the value of ERM will tend to cause management to isolate ERM to the point that only its practitioners may appreciate the work being done.

However, if we keep in mind that "the business of the business" is what every activity within risk management needs to serve first, and if we apply the basic tenets of ERM, we find that it is in the management of the organization's supply chain that ERM can add practical and measurable value. Thus, narrowing the overall focus of ERM to a comprehensive risk management approach in the supply chain is an important step in moving enterprise risk management out of an isolated silo and into the mainstream of operational practices. Said another way, comprehensive supply-chain risk management is 80 percent of the ERM solution for most organizations.

ERM and Supply-Chain Fundamentals

Comparison of ERM with supply-chain fundamentals is enlightening. The terms dealing with supply chain tend to be concrete, open to measurement, and readily understood. Such clarity facilitates the risk manager's ability to collaborate within each area of the supply chain and to embed risk management awareness into an important constituency. By building risk management into well-recognized supply-chain processes, many of the practical benefits of ERM can be obtained and leveraged.

The increasing degree to which supply-chain risk management (SCRM) is being recognized as a key risk-management endeavor is worth noting. The results of a survey conducted by AMR Research in 2007 included the following.

• Forty-six percent of companies intended to evaluate and/or implement SCRM technology in the upcoming 12 to 24 months.

• Supplier failure/continuity of supply was named as the number one risk factor for 28 percent of the companies surveyed.

• The top areas to which spending would be applied for SCRM were sales and operations planning, inventory optimization, supply-chain analytics, and event management.1

Additionally, we see the following supply-chain trends:

• offshore manufacturing;

• various outsourcing activities;

• lean manufacturing and just-in-time inventory;

• global lean sourcing;

• consolidated facilities;

• growing complexity of the supply chain and ever-greater reliance on automation;

The risks generally identified as those posing the greatest threats are:

• damage to brand or reputation;

• failure of product safety;

• supplier failure;

• information technology breakdowns;

• regulatory changes;

• logistics failure;

• adverse geopolitical event; and

• natural disaster.

The survey results underline the fact that supply-chain risk management is viewed as essential to the practice of modern organizational administration. With its emphasis on efficiencies, SCRM represents a significant strategy factor, encompasses a wide variety of issues and exposures, involves critical parts of the organization, and requires development of a common approach toward solving the complex issues noted.

We see these as factors that supply-chain management shares with ERM. Therefore, we view them as providing a reasonable foundation for basing an approach to "practical ERM" in terms of comprehensive supply-chain risk management.

Risk Management's Applicability to Supply-Chain Management

Risk management has often brought a perspective to decision-making that facilitates risk mitigation by introducing a framework and a new sensitivity to dealing with risk and uncertainty. Its most practical application has always been to make all business managers into risk managers within their own disciplines, so that from first-line supervisors to hiring managers to department heads and above, deliberation in terms of impact on organizational risk is part of the job, whether it be to include the risk-management department in decision-making, ask for expert outside advice, or simply remain aware of how a decision could play out in terms of risk to the overall organization.

Risk-management techniques and awareness will shed new light on balancing what may often be competing priorities within the supply chain itself. For example, the drive for efficiencies creates a bias toward just-in-time inventory, while the principles of risk mitigation seek to build in redundancies in inventory. Lean sourcing versus alternate vendors with in-depth resources, low-cost suppliers versus quality vendors, and dedicated high-volume manufacturing and distribution resources versus multiple sources - each represents the trade-offs that modern supply-chain managers are routinely asked to make.

A risk manager takes large steps toward fulfilling the promises of ERM when the proper risk distinctions are made among supply-chain decisions, including risk-weighting of alternatives relevant within the firm's distinctive business competence. The risk manager who is able to embed risk-sensitive distinctions into supply-chain decision-making has already achieved a great deal in terms of ERM.

Inherent in making risk distinctions is the need to apply probability measures across a variety of alternatives that have an impact on cost and benefit to the supply chain. Once risk analytics are factored into individual decisions and overall supply-chain risk is optimized for the particular applications involved, the standard risk-management process can be utilized. This process helps to determine the most appropriate manner in which to deal with the aggregated supply-chain risk profile by utilizing the familiar methods of retention, avoidance, mitigation, and transfer.

From the Academician's Whiteboard to the Risk Manager's Desk

As mentioned, ERM tends to be defined in academic terms.

ERM Defined

The Committee of Sponsoring Organizations (COSO) Integrated Risk Management Framework defines ERM as "a process, affected by an entity's board of directors, management, and other personnel, applied in strategy-setting and across the enterprise, designed to identify potential events that may affect the entity, and manage risk to be within its risk appetite, to provide reasonable assurance regarding the achievement of entity objectives."2

Further, ERM is defined as a process ongoing throughout an entity and implemented at all levels of the organization. By aligning risk appetite and strategy, enhancing risk-response decisions, and taking an entity-level portfolio view of risk, ERM identifies and manages risk to achieve objectives within and across multiple areas.

A sampling of other ERM definitions reveals various opinions, but there are commonalities. Many have schematics that offer varying degrees of complexity. But, in our estimation, few would enlighten a logistics or purchasing manager, a process or industrial engineer, plant manager, product manager, marketing or sales director, IT director, or any of the myriad other key decision-makers vital to the management of a world-class supply chain.

Supply Chain Risk Management Defined

Contrast ERM definitions to the following definition of supply chain: "The network of retailers, distributors, transporters, storage facilities, and suppliers that participate in the sale, delivery, and production of a particular product."

The supply chain definition is succinct, identifying various operations in the process - each tangible and easily recognizable. Compared with the various definitions of ERM, the greater clarity of the supply-chain description makes it more likely that a risk manager and the organization's managers along the supply-chain continuum can gain a realistic and practical understanding of their relative position within a risk-management decision-making framework.

To the preceding definition of supply chain, we add that supply-chain risk management is an integrating function, with primary responsibility for linking major business functions and business processes within and across companies into a cohesive and high-performing business model. This is done through the maintenance of a reliable, organized response to the consequences of uncertainty.

Commonalities of ERM and Supply-Chain Risk Management

This addition does nothing to diminish the straightforward nature of the concept of supply-chain risk management. But it does move it closer to enterprise risk management. Within the ERM context, an implied criticism of "traditional" risk management is that it is focused only on tangible assets and related liabilities dealt with in a "traditional" manner - risk transfer relying heavily on insurance and related skills designed to work with insurable risk. This is measured against the inherently broader requirements of ERM - that risk management needs to be embedded enterprisewide, dealing with protecting both tangible and intangible assets with emphasis on enhancing business strategy.

Yet supply-chain risk management is relatively broad in its own right, including oversight of activity around three key processes:

• product flow;

• information flow; and

• finance flow.

This broadness is amplified by tangible goals recognized as part of an effective supply-chain risk-management plan:

• identification and prioritization of critical elements of the business process;

• documentation of the full supply chain to demonstrate dependencies and required skills to sustain the processes; and

• identification of the key potential supply-chain failure points.

Coordinating Supply-Chain Management and ERM

We may consider that ERM deals with the following asset classes, with some examples where appropriate:

• physical assets (buildings, equipment);

• financial assets (investments, receivables);

• customers (distribution channels, alliances);

• employees, suppliers, and partners; and

• organizational assets (management leadership, brand, and reputation).

Typical supply-chain functions include the following:

• sales and marketing;

• logistics;

• manufacturing;

• purchasing;

• finance and accounting;

• real estate; and

• legal.

These functions are well beyond the theoretical. For example, logistics establishes the flow of product - whether goods or services - within the supply chain and the methods employed to keep the product moving. Accounting records the financial value of the assets that constitute the supply chain, the inventory values that flow, and the all-important value of the throughput for which the owners invested in the supply chain in the first place.

We see the overlap of ERM and supply chain within the recognizable business functions listed earlier, as illustrated by the alignment of the ERM classes with the supply-chain functions in the following examples:

• physical assets (manufacturing, real estate);

• financial assets (purchasing, finance and accounting);

• customers (logistics, sales and marketing);

• employees, suppliers, partners (manufacturing, purchasing, logistics, legal); and

• organizational assets (finance and accounting, real estate, legal, logistics).

We therefore view supply chain characteristics as inherently more easily understood than ERM. There likely is little debate over what constitutes "manufacturing," while defining "an entity-level portfolio view of risk" might require some extended discussion.

If we accept supply chain as encompassing practical elements of ERM, the risk manager - by connecting with the departments that make up the organization's supply chain - will be better positioned to become a major force in the organization's ERM initiative. This is not to imply that challenges do not exist - risk managers will require certain skills to accomplish this end.

One such skill is obvious: the ability to understand and communicate with the members of the supply chain. Two others go hand-in-hand: the ability - and the drive - to connect with the various departments and personnel of the supply chain and the ability to educate them about risk management and the need to integrate supply-chain planning with risk-management planning.

Managing the Supply Chain: The Greater Portion of ERM?

How does following the supply-chain flow benefit the risk manager? As we see it, the risk manager gains enterprisewide knowledge and the opportunity to work with supervisors responsible for their respective areas. Such expansive perspective is available to few other individuals below the organization's "C Suite" level. Following the flow is especially valuable from the perspective of risk to the enterprise itself, allowing the risk manager to take steps to protect the "cash-to-cash" stream (meaning the flow of cash from funds expended to begin producing a "product" to the funds collected from the sales of the "product"). This approach successfully places the risk manager at the heart of the "business of the business" - exactly where any modern risk manager needs to be.

The risk manager must become familiar with details and components that make the supply chain work. We are advocating that the risk manager must be better positioned both to influence the distinctions made in terms of risk in individual decisions and to determine which risk mitigation steps to take.

The Most Effective Course for the Risk Manager

In our view, ERM through the supply-chain risk management approach presents the most effective course for the practicing risk manager. Here's why.

• Supply-chain functions are mature and, therefore, readily understood by the parties involved. This lessens the amount of "academic" information, which is often difficult to apply directly to operations, that must be imparted by the risk manager to colleagues in the supply-chain process.

The result: risk management practices and procedures are more readily embedded in the organizationwide processes. This is a key result, as successful ERM can never be a stand-alone or part-time activity, but rather needs to be a continuous, comprehensive process.

• The supply chain is ultimately overseen at the corporate level and so must ERM be if it is to flourish. Critical senior management support for the effort is built into the process by employing a supply-chain risk-management focus.

• Although those running each segment of the supply chain may not realize it, in looking out for their respective functions, each is a risk manager. The corporate risk manager who effectively eases the translation of ERM from the academic whiteboard to the manager's desk empowers more constituents to become active risk managers within their own functions. The risk manager provides a context to develop the nascent risk-management abilities of fellow managers by embedding risk awareness across the organization. Accordingly, the risk manager further serves the enterprise as a "silo-buster" and benefits by being at the center of a core organizational process.

As a result, risk management - and the risk manager - will stand out as valued contributors to the organization's overall strategic planning process.

• Supply-chain management, as a mature corporate process, has conventional measurement tools, offering risk managers the capability to gauge the effectiveness of ERM programs. This may include using established technology to facilitate the development and deployment of a risk management information system for a new platform of measurement tools.

Conversely, the risk manager who is already a coherent part of the supply chain can offer an array of unique risk analytics as a way to better risk-adjust decision-making.

• Supply-chain risk management offers another avenue of measurement to the risk manager. Its maturity as a quantifiable discipline, in turn, lends itself to scenario-planning analysis, defined as determining a variety of potential outcomes with emphasis on plausibility over prediction.

The myriad benefits brought to the organization include the following. Supply-chain risk management:

• creates process consistency, mitigating redundant efforts;

• improves communication;

• improves the ability to anticipate "events" and set up means with which to deal with them;

• enhances the measurement of risk across the enterprise;

• helps business units to identify risks they might not otherwise have recognized; and

• enables better use of organizational assets.

Value of a Cross-Functional Supply-Chain Risk Management Team

The risk manager, via the supply chain and through the course of standard risk-management procedures, touches operational units across the organization. In fact, formalizing this situation via the creation of a cross-functional supply-chain risk management team - with an end-to-end perspective of the supply chain - is considered a critical step toward a successful plan. It has the added benefit of providing the risk manager with a window on the external elements of the supply chain, especially important with companies going beyond first-tier suppliers.

This enables another important element of successful supply-chain risk management: embedding risk management awareness and practices into mission-critical points along the supply chain. The ultimate goal is to have risk management principles so interwoven into the fabric of each operation that supply-chain managers become virtual extensions of the formal risk-management department.

Ultimately, the role of risk managers progresses to where they are involved with nearly all facets of the organization, playing a broad strategic role and connected to all types of risk, both insurable and noninsurable. By protecting the company's supply chain, the risk manager protects the greater portion of the organization itself - the 80% solution to ERM.

MIT wants to hear from you!

MIT is conducting an online survey of attitudes toward supply chain risks and risk management and ISO and InsWorld are collaborating to provide support for the effort.

Companies would like their Supply Chains to operate smoothly all day, every day. But disruptions occur. Events in your own shop and on the other side of the world can bring down your supply chain. We want to know if people in different regions and different cultures think about and manage risks differently.

Be the first view the results - If you complete the survey you can sign up to get a copy of the results in early 2010 when it is completed. Please help by adding your insights and experiences to our growing knowledge base on supply chain risks.

The survey will target:

• areas that include North America, Europe, China, India, Africa, and Latin America

• sectors that include manufacturing, retail, and distribution companies

• job functions that include supply chain, business, and financial management

The survey aims to gain a better understanding of:

• the importance of risk prevention, event response, and control points

• risk and disruption frequencies and priorities

• what companies are doing to address risks

• details about the respondent's region, country, languages spoken, work setting, size of company, and type of industry

The average time to complete the survey is 12 minutes.

It can be found by going to:
http://tinyurl.com/RiskSurveySN1

As senior insurance professionals, you are ideal respondents to the survey and ideal recipients for the survey's results.

ISO and InsWorld thank you in advance for your participation.

John Liner Review
ISO

Impact on Utilization From an Increase in Workers Compensation Indemnity Benefits

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The results of this analysis provide support for the utilization effects of statutory changes in indemnity benefits.

For Oregon, the 33.0% increase in the maximum weekly TTD benefit resulted in a 17.5% impact on utilization. This implies a duration/benefit elasticity of 0.53 (17.5% / 33.0%). The 7.6% increase in benefit duration in response to a 17.6% increase in the maximum weekly indemnity benefit in New Mexico translates into a duration/benefit elasticity of 0.43 (7.6% / 17.6%).

In terms of TTD indemnity costs, both the Oregon (38%) and New Mexico (33%) studies show that approximately 35% of the total cost impact can be attributed to a duration utilization effect. The focus of this research has been on two event studies where TTD benefits had increased. Some might interpret our findings to also conclude that a decrease in TTD indemnity benefits would result in a utilization impact. However, no such analysis was performed with which to reach such a conclusion.

Note that the difference in differences approach used here captures the portion of the utilization effect that is attributable to changes in duration only; in other words, this method is not suitable for measuring the impact on the frequency of claims that may arise from a statutory indemnity benefit change. However, there are studies indicating that statutory indemnity benefit changes may affect frequency.

NCCI's estimate of the utilization impact on claim durations from a change in statutory indemnity benefits reasonably agrees with estimates of prior studies, thereby providing additional support for the inclusion of such utilization impacts in legislative cost analyses. Producing more accurate and responsive cost impacts will enhance the legislative pricing and ratemaking services offered by NCCI, and it will provide valuable information to aid public policy decision making.

View complete report: Impact on Utilization From an Increase in Workers Compensation Indemnity Benefits

National Council on Compensation Insurance

Fire Legal Liability Insurance

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Preparing Your Organization for Risk, Threats and Opportunities: The Importance of Enterprise-Wide Risk Management (ERM) Education

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What is ERM? It is a holistic approach to managing an organization's uncertainty in order to maximize stakeholder value and optimize risk taking. Unlike traditional risk management, ERM deals with the strategic risks your organization faces, not just the operational ones. With a properly designed and implemented ERM program, an organization can optimize its risk taking, which will allow it to react more quickly and efficiently to avoid or mitigate threats and capitalize on opportunities.

Developing and implementing an effective ERM approach requires a significant investment of resources, as well as education across the enterprise. But it is an investment that will yield two important organizational benefits:

• Enhanced decision making

• Improved risk communication

Enhanced Decision Making 

No matter what kind of business you run, an ERM approach allows you to explore new opportunities for profit and growth while effectively managing internal and external threats. Rather than consolidating risk management decisions at the top of the organization, an ERM approach opens this up to decision makers at all levels. The idea is that when risks, threats, and opportunities are understood across the enterprise, decision making is made more nimble to meet marketplace challenges. In addition, the following advantages can be realized:

Increased profitability. ERM increases your organization's profitability because strategic decisions involve more than preparing only for adverse outcomes. Properly implemented, ERM allows organizations to engage in additional business opportunities by allocating resources through rational decision making at the optimal level. With ERM, strategic decision making is integrated across departmental and unit silos, which makes it more sound and improves economic efficiency. Over time, organizations with a sound ERM approach will show higher earnings.

Reduced earnings volatility. In addition to maintaining cash flows and balancing its budget, your organization must manage its cash flow to ensure adequate capital to meet challenges and to explore strategic growth opportunities. ERM provides a framework that allows organizations to deploy capital through organization-wide decision making, which ultimately results in stable earnings projections to achieve higher financial ratings, appeal to stakeholders, and fund future projects.

Improved ability to meet strategic goals. ERM provides for organization-wide involvement in the strategic formulation and decision-making process. This process examines internal and external factors that contribute to threats to growth and the achievement of established goals. When used effectively, ERM can reduce variation through thorough risk identification, assessment, and management, thus improving your organization's ability to meet its strategic goals.

Increased management accountability. While an ERM approach must be supported in the C-suite, those closest to a particular risk are in the best position to evaluate and manage it. Therefore, ERM must be embedded throughout your organization's corporate culture. When ERM is part of your organization's DNA, the board and senior executives establish the overall mission, vision, and strategic goals, but each manager is responsible and accountable for decision making about risks within his or her individual unit, which increases accountability.

Improved Risk Communication

ERM allows your organization to develop systems that drive information, eliminating the barriers created by "information silos." You know the problem with silos-they limit access to critical knowledge about risks, corporate strategies, and organizational frameworks. ERM also encourages communication about risk management across all layers of the enterprise. This includes making managers aware of the need to identify obstacles and opportunities that could interfere with or aid in the achievement of your organization's strategic goals.

Improved organization-wide communication results in fewer surprises for managers who could otherwise lack adequate information or full knowledge of the gravity of risk. Strong communication can also mean greater management consensus and improved stakeholder acceptance.

Management consensus. ERM improves management consensus by creating a culture that embraces risk as a component of each decision. By empowering all managers to consider risk optimization and the cost of risk, ERM provides them with more complete information about the potential effects of a decision, including the downsides and upsides. Managers who can successfully gauge threats and opportunities act more confidently because they can appropriately evaluate the alternatives associated with a course of action. Upper management must lead the initiative and motivate all employees to embrace ERM and encourage risk ownership across all levels of your organization.

Stakeholder acceptance. ERM improves acceptance by internal stakeholders by building a spirit of cooperation among management, which can also increase confidence among employees. Boosting the spirit of cooperation begins with managers understanding that the way they manage risk will have a positive impact on the organization, employees, and themselves. A strong ERM program also encourages the buy-in of an organization's external stakeholders by establishing management strategies that protect the organization's reputation and assets. Experts estimate that for many organizations, intangible, reputation-related assets may be worth several times more than tangible ones.

Establishing an effective ERM approach can be a complex endeavor. This is why ERM education is critical. Like the practice of ERM itself, ERM education must be provided throughout your entire organization, from the C-suite to the loading dock. There are a variety of ways to acquire the necessary knowledge and skills. An education program like Enterprise-Wide Risk Management: Developing and Implementing from the American Institute for CPCU and Insurance Institute of America will help provide the necessary understanding for building a solid ERM foundation within your organization. Whatever education provider you choose, it is critical that the program be ERM-specific. It is also critical that ERM training be conducted at all levels of your organization, so managers and other decision-makers understand the role and benefits of ERM as they relate to their job functions.

Richard G. Berthelsen, JD, CPCU, ARM, is director of content development for the American Institute for CPCU/Insurance Institute of American (the Institutes) in Malvern, Pennsylvania. The Institutes are not-for-profit organizations offering educational programs, professional certification, and research to people who practice or have an interest in risk management and/or property-casualty insurance. Mr. Berthelsen can be reached at berthelsen@cpcuiia.org.

© 2009 American Institute for CPCU/Insurance Institute of America

www.aicpcu.org

Richard G. Berthelsen, JD, CPCU, ARM
American Institute for CPCU and Insurance Institute of America

Risk Management-Why and How

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Download Risk Management -- Why and How.

International Risk Management Institute

International Risk Management Institute