About Josh Salter

Josh Salter is the communications manager at RIMS.

RIMS Legislative Summit 2017: Focus on Flood

WASHINGTON—The RIMS Legislative Summit kicked off on Wednesday in Washington, D.C. with a panel lead by Congressional office staff.

Panelists included: Democratic Staff in the U.S. House of Representatives; Jason Tuber, Senior Advisor to Senator Menendez (D-NJ); Ed Skala, Deputy Staff Director for the House Financial Services Committee; and Brandon Beall, Professional Staff Member, Office of Senate Committee on Banking, Housing and Urban Affairs; as well as Lisa Peto, chief counsel for the Financial Services Committee.

The focus was the once-again looming expiration of the National Flood Insurance Program (NFIP). The program that was set to expire in September, but was saved with a temporary extension now set to expire again on Dec. 8.

The panelists, each of whom began with the disclaimer that these were their opinions and not the opinions of their office, came to a consensus that a new NFIP was critical, that a gap in coverage is certainly not ideal and they acknowledged that their offices were working on a bi-partisan resolution.

Some of the major concerns discussed were:

  • Funding—who will fund the NFIP? If the NFIP expires or ceases to exist would the burden fall on the taxpayer and then ultimately on government anyway? Should excess flood coverage be privatized? There was also discussion on whether mandating states to offer certain protections for flood exposure would help the situation.
  • Accessibility and Affordability—what measures must be included in the new bill to not only make sure flood insurance is available but that it is available at an affordable price?
  • Residential vs. Commercial—The idea was discussed as to whether there should ultimately be two versions of the NFIP that separate residential and small businesses from large commercial businesses. It was noted that large commercial businesses might have flood coverage elsewhere or are better funded to retain some risk and, as such, should have the opportunity to opt out. This would spur new challenges to determine what qualifies a business as small or large (i.e., an online enterprise that generates considerable revenue but operates out of someone’s basement).
  • Risk Mitigation—Should risk mitigation be a part of the final bill? Incentives for both the insurer and the insured would support organizations that practice good risk management. The argument was made, however, that not all residents and not all businesses have the funds for risk management. For example, not everyone has the money in the bank to raise the height of a house or storefront.

Jim McIntyre, RIMS Washington, D.C. counsel and chair of McIntyre & Lemon stated, “It is probable that we’re looking at another extension come December. Unfortunately for the National Flood Insurance Program, bills regarding trade, healthcare and immigration will take precedent at the moment and [the NFIP] might have to wait a bit longer.”

On Day two of the summit, about 50 RIMS members descended on Capitol Hill for meetings with congressional leaders. The goal was to share RIMS priorities for a long-term National Flood Insurance Program.

Words (and Clauses) Matter

A recent report published by RIMS highlights the importance for risk professionals—or the person within the organization tasked with the responsibility—to fully understand the language included in their insurance policies.

The report A Common Language: Aligning Third-Party Contracts with Insurance Policies, suggests that there are “clauses in contacts that may not be understood as well as others, and some people may be tempted to skim past those to move work along.”  But, in this haste, deciding to “skim” past those clauses may activate exclusions, limitations and even, unknowingly, nullify the transfer of risk to a third-party.

Authored for RIMS by Brenda Tappan of United Educators, the report defines key insurance terms that should be understood by contract reviewers, as well as common contract clauses that impact the validity of both the contract and insurance policies.

“At any given time, an organization could have hundreds of contracts with external stakeholders,” Tappan said. “With in-depth knowledge of coverages held by the organization, risk professionals can play an integral role in ensuring terminology is understood and that discrepancies between third-party contracts and insurance policies are identified.”

The report advises risk managers to be aware of the following insurance contract elements:

  • Indemnification Clauses – This clause delineates whether the parties of a contract wish to retain, transfer or share responsibility from a potential third-party. Be aware that not all “bodily injury” or “property damage” will be covered, even if you have stipulated everything correctly in the indemnification clause.
  • Additional Insured Status – This status provides proof of financial capability to cover what is assumed in the indemnity clause. Keep the additional insured provision separate from indemnification clause because if the latter is found unenforceable, the additional insured clause might be unenforceable as well.
  • Waivers of Subrogation – This says that the insurer has the right to stand in the place of the insured and go against the responsible party to make themselves whole. Risk professionals might consider requesting a Waiver of Transfer of Rights endorsement. Also, get as much in writing as possible – don’t leave anything up to chance or interpretation.
  • Primary and Non-Contributory – Essentially, the insured will not seek contribution from any other insurance available. When named an additional insured, you are afforded coverage as provided by the other insurance policy.
  • Excess and Umbrella Coverage – Organizations buy this coverage to increase the limits. It can be used for commercial general liability, commercial auto, employers liability, and other primary liability policies. As an indemnitor, you will want to ensure that for any coverage that taps into the policies that provide the upper limits, there is a specified cap to the coverage contractually offered to the indemnitee.
  • Limitation of Liability – It’s an attempt by third-party contractors to cap the amount of liability they will be responsible for to a set amount prior to an incident. Be on the lookout for these limitation of liability clauses. Generally, they are found toward the end of the contract, but can have a significant impact on indemnification.

Paying it Forward: Industry Leaders Celebrate at Spencer Gala

Every year in September, leaders in the insurance world celebrate the profession and show their support for the next generation of risk management and insurance professionals. This year, close to 700 executives made their way to the Spencer Educational Foundation’s 9th Annual Gala on Thursday night at the New York Hilton Midtown. Nearly $1 million in donations were accepted at the event, a critical fundraising initiative for the Foundation. Proceeds will directly fund grant, scholarship and internship programs for undergraduate and graduate students who are pursuing careers in the field.

“The Gala is a wonderful reminder of just how generous and passionate professionals in this industry are,” said Ron Davis, executive vice president at Zurich and Spencer Educational Foundation chairman. “Tonight we’re celebrating the profession that has afforded us so much by giving back and creating meaningful opportunities for future risk professionals.”

The Gala honored 2017 Spencer Scholars Jayde Lim Ah Tock, a junior from Temple University, and James Pappas, a senior at St. John’s University. “Being a Spencer Scholar has allowed me to focus on my university’s program,” Tock said. “I want to thank the donors for allowing me to pursue something that is so important to me.”

When speaking about the support Spencer provided, Pappas said he is now “confident, optimistic and energized” about his future and knows he is “joining an amazing industry that truly makes a difference.”

Among the industry leaders in attendance were honorees Joseph Tocco, chief executive, north America insurance at XL Catlin, and Michael Rice, chief executive officer at JLT Specialty USA. Both are longtime Spencer supporters and were recognized for their efforts to move the Foundation’s mission forward.

The night’s festivities concluded with remarks from the honorees whose comments focused on the industry’s talent gap and the aging risk management workforce.

“The world needs our industry and our industry needs to attract and develop new talent,” Rice said. “Spencer is a wonderful conduit that allows us to celebrate this talent and the future of the profession.”

Tocco added, “I’m proud to be in an industry that places so much energy on education. Enlisting the next generation of risk professionals is more imperative now than ever before. We need to make “risk management” students’ first choice and not a profession by accident.”

Students around the world have benefited from Spencer funding. Since its inception, the charitable nonprofit has awarded 970 scholarships totaling about $6.4 million, and $3.25 million in grants to universities and professional institutions for educational programs and conferences.

The Risk of Being Too Delicious

Shockwaves were felt around the wing-eating world last week, when Buffalo Wild Wings announced it will be discontinuing its Tuesday night half-priced wing promotion.

According to reports, the franchise’s decision was a difficult one as the promotion was “a major driver of traffic” and “boosted same-store sales” for some locations. Ultimately, the deal was just too delicious. With wing prices on the rise (jumping 11 cents per pound in a year), the promotion started to impact the company’s bottom line. In fact, the food chain blamed the historically high wing prices for its 63% profit drop in the second quarter, turning the crowd-pleasing promotion into a losing proposition.

It is an interesting risk that many organizations, especially in retail, must take, however. How do organizations develop a promotion that attracts new customers and entices existing ones to visit more frequently, purchase something new or add a service without causing any financial hardships? And, perhaps more importantly, at what point is the promotion no longer worth it?

The majority of promotions go off without a hitch. It is probably safe to say that most of them have either a positive or neutral effect. Companies must be prepared, however, for those rare deals that negatively impact businesses’ finances or reputation.

While Buffalo Wild Wings’ risk management approach to this promotion may have intervened in time to save them from a worse fate, others have not been so lucky.

Take, for example, seafood chain Red Lobster’s 2003 all-you-can-eat summer crab leg special that ultimately put the company in hot water. Parent company Darden’s then Chief Executive Joe Lee was quoted as saying, “It wasn’t the second helping, it was the third that hurt.” “And the fourth,” then Red Lobster President Dick Rivera added on a conference call to investors.

The deal lasted a bit too long and was linked to the wipeout of $405.9 million in stock value in a single session, with stock prices dropping 12%.

Red Lobster isn’t alone. In 2009, Kentucky Fried Chicken decided to introduce its new grilled chicken option by hiring mega star Oprah Winfrey to make an announcement during her show, giving away an online voucher for a free lunch. About 16 million people printed out the voucher. Stores ran out of food and eventually stopped accepting the coupon. Even worse, competitors jumped in and offered discounted meals to voucher holders.

Then there was McDonald’s, which gave away MP3 players with viruses; an unapproved promotion code for free Domino’s pizza was leaked to 10,000 people; and the obvious consequences of a 10 cent beer night at a Cleveland Indians game. What could go wrong? (Hint: chaos ensued.)

Risk management can play a vital role in supporting marketing initiatives, like the creation of an effective promotion. And, for practitioners managing an enterprise risk management program, it highlights just how important collaboration between different business areas really is.

Companies can be blinded by opportunities that include increased traffic, return customers and add-on purchases. Some deals are just too good to be true—not just for the consumer, but the company making the offer as well. It is apparent that the downside of the promotion must be carefully assessed and that tolerance limits be set in order to know when to pull the plug on a deal.

When developing a risk tolerance statement for a promotion, it’s important to also realize that sometimes the financial losses associated with a promotion is not the only thing to look at and might not be a bad thing at all.

Take a look at Costco, that refuses to raise the price on its $4.99 rotisserie chicken and $1.50 hotdogs.

“I can only tell you what history has shown us: When others were raising their chicken prices from $4.99 to $5.99, we were willing to eat, if you will, $30 to $40 million a year in gross margin by keeping it at $4.99,” the bulk wholesale giant’s Chief Financial Officer Richard Galanti told the Seattle Times in 2015.

The philosophy is rather simple and has worked for Costco. Cheap, delicious rotisserie chicken brings people into their warehouses. And, hopefully, on their way to pick up dinner, they will also grab new patio furniture, a television, golf clubs, a 64 oz. jar of mayonnaise and a five pound bag of cashews. The wholesaler banks on statistics indicating that consumers spend on average $136 each time they enter the warehouse.

Developing a promotion should not be done on a whim. Careful consideration must be taken before the promotion is introduced. Many different groups within the organization should be included in the conversation…and risk management can take the lead on bringing those groups together and initiating the dialogue.

So, before the company serves up that next mouth-watering deal, risk management must realize that it has a real opportunity to support value creation and show its worth way before the pot boils over.