Category: Risk Management

I have been operating profitably with no losses for 5 years and my insurer is non-renewing? Why? And more importantly, what can I do about it?

Maurice “Hank” Greenberg, CEO of AIG the largest insurer in the world, stated: “Market share in the risk business is a bad idea!” Also known as “drive-by” underwriting, it has come back to bite insurers.

So insurers are taking the fastest way back to a conservative, solvent posture by slashing risks from the books. Any perceived exposure is a target, especially when insurers are unable to “lay off” risk to a dwindling pool of reinsurers.

What to do? The insurance industry needs opportunists right now. Back office marketing goals still need to be met; new business booked. There are insurers out there looking for quality business at reasonable prices. A risk management specialist in the industry keeps pace with “hungry” markets.

What should I do about Directors & Officers coverage?

Volumes have been written in every professional journal about the details of the hard-ening D&O market. In my opinion, Sarbanes-Oxley has raised the bar for all operating entities. Inevitably, higher expectations have now been set for private and even non-profit organizations. A higher level of management oversight will be expected from everyone. The Sarbanes-Oxley dust needs to settle before we will have a better idea of constituent expectations and our exposures. In the meantime, fasten your seatbelts.

What to do? You need to undertake a total corporate strategy. With D&O costs increasing exponentially, front-line non-insurance risk solutions must be considered. A braced, defensive posture is necessary until the market relaxes.

Insurer insolvencies are being blamed for my limited insurance choices. What is this all about?

These times are like a 3-legged stool with all 3 legs broken. The bottom of a 10-year soft insurance market cycle, a falling stock market, and 9/11 have all hit the insurance industry with crippling losses. 40% of our reinsurers are gone; capacity is severely limited.

In the technology sector, several markets, one of them being Kemper, have gone under. Remaining technology carriers just do not have the capacity to absorb all of those risks given the greatly dimin-ished reinsurance capacity. Recent earnings reports from some major insurers indicate a return to profitability, at least in the short-term. This severe reaction in the last 2 years will end; when is a prediction I cannot make now.

We offer over 20 years experience in risk management and the technology insurance marketplace. Call us to help. We will be honored to serve you.

Let’s look at a few interesting facts:

• Robert Weisman’s editorial in 4/30/05 Boston Globe argues a shift of IT from asset to commodity.
• Nicholas Carr’s May 2003 Harvard Business Review article titled “IT Doesn’t Matter” (referenced by Weisman 4/30/05) looking at the staggering in-creases in IT spending.
• The February 2002 Newsletter editorial article teasing readers with my opinion that hardware and software has never been worse!
• My (Nancy James) September 2004 Newsletter describing a greater and greater dependency on sub-assemblers and outsourced services.

A Review:

Nicholas Carr in his 2003 HBR article cites some staggering statistics regarding US capital expenditures on IT: 1965 = 5%, 1980’s = 15%, 1990’s = 30% and 2000 = 50% (NPJ comment: remembering that Y2K remediation was part of the millennium’s expenses).

I have maintained in my newsletters for the past several years that legacy systems and legacy processes have been updated with new hardware but obsolete methods. Low-cost processing workers have been replaced with high-cost IT professionals. As a consequence, corporate leaders, with Y2K remediation systems still not functioning, are understandably reluctant to invest in new technologies. Thus, the current drag on our business costs and economy.

We also see a trend by manufacturers to outsource work to precision assemblers for board and component assembly. In fact, precision parts manufacturing more and more defines the Massachusetts technology corridors.

“Small business solutions” suppliers from IBM to local providers offer outsourced support to harried executives tired of IT headaches. For example, among small business outsourcers is a local Waltham provider, New England Data Services (NEDS), providing solutions to the disruptions caused by in-house supported networks. Craig Brenner, CEO of NEDS, stated: “We offer a wide range of outsourced services designed to remove the headaches of complex IT structures, security, and reliability from client’s facilities. With NEDS support our customers can return to their business’s core competencies.”

As our technology becomes more complex, focused solutions are needed. Commoditization may not be a bad resolution!

The Issues:

So now your processing functions as well as some hardware is scattered locally or widely. What do you do with respect to fire, theft, security, privacy, and other protection?

• Your outsourcer’s contract will disclaim any direct or consequential damages. You can expect that!
• Your own property/liability insurance policy will be your corporate location site specific, with only limited coverage at any other location.
• The privacy of your internal and client data is now way out of your control (even while you hold your provider harmless!).

As a business you are now a part of a complex web of communications movement and storage. What you gain in service capability and reliability, you lose in direct control.

The Solution:

Be sure your insurer understands your new operational configuration and has solutions within at least the same boundaries as before you outsourced. You will need to consider all outsourced services as branches of your own offices and operations. Coverage for each function should be analyzed and insured by you if not by your outsourced service provider.

Gone are the days of Digital, Wang, Prime, Cullinet, Apollo, Data General, among other technology giants; the current profile of Massachusetts’ technology business is smaller components manufacturers, software shops, middle industry parts and service providers. With local tech companies on the short-end of the contract stick, managing risks and exposures is increasingly important. A review of both your contracts and increased risks should be undertaken, with strategies to limit those risks. If contractual limitations are impossible, other means, such as transfer to your insurer, should be fully utilized.

Insurance Response

Your commercial insurance program probably does cover:

• Waiver of subrogation against your landlord — your lease is usually covered under “Limited Contractual” coverage
• General liability obligations required under most contracts for standard limits (including Bodily Injury and Property Damage)
• Workers Compensation coverage for most contractual obligation language
• Most “hold harmless” clauses found in leases.

Your commercial insurance program probably does NOT cover:

• Intellectual property infringement indemnification
• Pollution
• Employee non-disclosure agreements
• Indemnification for your landlord’s building contractors
• Most “any and all causes” clauses
• “Your insurer will honor all the terms of this contract” language provisions

With the economy in turmoil, businesses are looking for every means of survival.  While assuming additional risk is a common practice during economic downturns, this current global crisis is responding to risk ultra-cautiously.  Many view those people who played fast and loose with risk as primarily responsible for our economic woes.

Thus, you need all the more caution with risk for survival and ultimate success.

But how does that work with operational dollars stretched so thin?  Let’s look at issues involving risk transfer and how it might draw added value toward you and your products.

• Liabilities assumed with your product should always be transferred!  Be sure that you are not only covered for your US sales, but also your global product distribution is insured for product failure causing injury or damage.
• Beware of the language “Coverage is global for suits first brought in the United States,” which will not respond if someone brings suit against you in a foreign court.
• Shipments FOB your loading dock still need to have transit coverage in place for the circumstances where your customer has not placed coverage and refuses to pay you for a damaged or lost (undelivered) shipment.
• Be careful to understand standard exclusions for aircraft-related products, hazardous material, and financial injury due to faulty products.  You can secure coverage for risks at reasonable prices.  These are not risks you want to overlook.
• Use the expertise of your insurance professional, accountant, and attorney to help you minimize risk to maximize value. Each perspective can help you assess and manage exposures to identifiable loss potential.

From the perspective of your risk manager’s desk, technology manufacturing is changing in both important and subtle ways.

Assemblers are becoming a more and more significant part of the manufacturing flow, reducing costs while continuing strong quality production. Overseas markets continue to be a vital source of revenue, growth and business viability to Northeast technology products in spite of terrorism threats.

Cost containment is a crucial factor in profitability as margins continue to experience pressure. Data security holds steady as the No. 1 Internet-based problem, forcing businesses to slow or redirect their plans for Web-based sales and service. The realm of consumer and corporate litigation continues to be robust, often giving executives the feeling of being held hostage to fears of litigation.

How can you manage everything while continuing innovation and profitability? Read on.

Assemblers

Cost-effective JIT methodologies have caused complex systems manufacturers to turn over more of the parts assemblies to large specialists in the market. This solution creates its own set of additional risk problems. Initially, you will need to look at this new assembler facility on your survival critical path. How dependent are you upon the continuous operation of that assembler? Have you established a substitute plant in the event of an unforeseen shutdown due to loss? Are there any geo-economic issues at that site? Then you need to address the finer points of parts, capital equipment and inventory protection. Who owns the fire loss (check your contract), you or the assembler? How quickly can you replace capital equipment? How secure is your intellectual property      (designs, tools, finished product) in the assembler’s plant? Is someone on your staff responsible for seeing that certificates of insurance are kept current? Have you calculated the additional cost of lost income at this location should the assembler go down? Do you have employees reporting to the assembler’s plant regularly?

Your To-Do List:
• Don’t treat your assembler just like any other vendor!
• Look at each assembler as an independent unit of your own operations and configure the insurance for each as if it were one of yours.
• Take each part – property, liability, shipping, loss-of-income – and determine who owns each piece.
• Transfer as much as you can to the assembler via your contract.
• Negotiate your insurance rates carefully (remember, since your insurer has no control over hazards management at the assembler, the more building engineering you can provide your own insurer, the lower your rates).
• Be sure your workers compensation policy reflects the new state exposure if the assembler is in another state (Massachusetts manufacturers purchase a lot of assembly services from New Hampshire) and your people either report there or visit regularly.
• Adjust each of your insurance policies to reflect the exposures represented in your new manufacturing model.

Overseas Customers

Assuming that you are a U.S. company with no overseas offices but you sell worldwide, you probably already have a global shipping policy in place. Be sure that your products liability covers your products globally for suits brought abroad as well as in the U.S. If you and/or any of your employees travel overseas, it is mandatory for their protection to place global package insurance. This global policy looks just like your domestic program, offering property, general and products liability, hired auto liability, workers compensation and repatriation (the cost to bring an injured           or deceased employee back home). Premiums begin at $2,500 to cover five or six annual trips overseas. Remember, however, that new threats of terrorism have changed the climate of risk. No global shipping or package policy has ever provided for terrorism coverage since it was not part of the cultural mentality. There is a growing “excluded country” list, which automatically
denies coverage for losses in those listed countries. Keep current with that.

Your To-Do List
• Place a global package insurance policy with one of the several insurers specializing in overseas risk. For short money, you need to protect company people traveling overseas for you.
• Ask about kidnap and ransom coverage costs while you’re at it.

Margin Slip

One red flag to very cautious underwriters now is what kind of margins your product enjoys. Do you have enough cash to properly quality control, repair, upgrade and service your product? When companies are squeezed, quality degrades. Litigation ensues. Underwriters know this.

Your To-Do List
• Your brokers and underwriter are part of your risk team. Use them; let them help you.

Data Security

Data security is currently the greatest area of technology concern for both consumers and businesses. Credit card and identity theft are increasing, especially via the Web. Only a few years ago most businesses fully expected to be using the Internet to receive orders and accept payments, anticipating Web-based sales as an important segment of their revenue.

Wide publication of security breaches has dampened Internet business enthusiasm, postponing plans for direct e-commerce sales while retaining basic e-mail sales contact information. Have these security problems retarded economic growth? Are successful (but large) investments in Internet data security solutions a decisive factor in separating growth companies from slow or static sales? Does this issue continue to plague your management team?

Assuming your Web site is primarily a product-advertising vehicle, your own Web design team probably does not have the necessary legal skills to assess the magnitude of the exposures associated with possible security breaches. Outsourcing your e-commerce function still falls short of any real protection from liability for security breaks since transference of your security risks via contract is complicated and typically impossible.

The lack of insurance for these complex first-party and third-party exposures continues to be one of the many problems still to be solved. Insurers are excluding most if not all Internet security exposures. Only specialty products address these perils at noticeable associated costs.

Your To-Do List

• If your business is not an Internet-based talent house, do not yet embark on Internet sales without the help of Internet and legal professionals. Remember, your risk management team includes your lawyer, accountant and insurance broker. Let them help you plan and execute a strategy to keep as far from the threat of litigation as possible.

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