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Aquisition Integration for Logistics and Cargo Insurance

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chess-game
During my 36 years in the marine insurance industry, one of the most common issues has been failure to properly integrate acquisitions into cargo logistics insurance programs—which can result in gaps in cargo insurance coverage. Old habits die hard, however, and this is particularly true in logistics operations.

When an organization acquires a new company, there is a choice. The buyer can allow the acquisition to continue to operate independent of its logistics program (rarely is cargo insurance left independent) or fully integrate them into the buyer’s logistics and cargo insurance programs. The most common occurrence is full integration into the buyer’s logistics and cargo insurance programs for cost savings and continuity.

If the independent logistics option is chosen for the acquisition, it is still critical to perform a detailed gap analysis of the logistics SOPs (Standard Operating Procedures) used by the acquisition to assure their program does not present unique exposures not currently considered or addressed in the buyer’s program. The most objective and effective gap analysis should be performed by an outside consultant working with the buyer’s designated logistics representative.

A risk management representative is not required but may wish to attend. The consultant must have extensive experience in logistics audits as well as a clear understanding of implications of the terms and conditions of the cargo policy. This team will create a gap analysis report that details variances from best practices and the key drivers in the buyer’s logistics program that are critical to the marine cargo insurance program. This also allows the buyer’s cargo program to be adjusted for any unique requirements of coverage by the acquisition to assure there are no coverage gaps.

Importance of SOPs
It is worth a moment to address SOPs for logistics and security for shipping and storing goods in the due course of transit. Formal SOPs are critical to assure compliance, and proper measurement of compliance. SOPs also provide continuity of logistics’ programs so learned processes and shipping lane specific issues are not lost when there is a change in personnel.

In instances when the buyer decides for full integration, the process is much the same as described above for the independence option for logistics by the acquisition. The most important difference is that the gap analysis details the variances between the acquisition and the buyer’s logistics program SOPs and rates the findings into levels of importance for timely adoption; critical, second tier and third tier variances. The critical issues require adoption as soon as possible while the other variances can be corrected over the course of time.

It is important to complete a followup audit(s). If there are critical issues, a followup audit might be completed after the buyer has been advised that the critical variances have been finalized, to independently confirm compliance has been obtained if deemed appropriate. Regardless, a one-year audit is recommended to examine all the variances in the gap analysis to determine the level of compliance to correct all originally identified variances.

Again, old habits and processes die hard. You will often hear, “We always did it this way.” It is important during the gap analysis to integrate local issues required as needed, as long as it does not compromise the goal of the SOP.

The integrations, especially acquired foreign companies, can be difficult, involving politics by other units of both companies outside of the logistics, security and risk management units. It is critical that senior management of both the buyer and the acquisition company have “full buy-in” on the integration process to overcome the political infighting that can develop.

The best analogy of this process would be a chess game—complex and variable with many moving, interrelated parts.

Linking ERM and the Insurance Underwriting Process

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Enterprise Risk Management (ERM), in one form or another, has been around for almost two decades. The number of publicly traded companies, especially those in highly regulated industry sectors, have been deploying the ERM process primarily because they were pushed (explicitly or implicitly) to do so by the major credit rating agencies, government mandates such as SEC 33-9089 or Dodd-Frank, their internal/external auditors, or members of the board of directors.  No matter where the spark came from, however, the number of companies utilizing the ERM process continues to grow.

CFOs, CROs, and risk managers that have been practicing ERM for years have been incurring the expenses for doing so. As ERM programs mature it might be time to consider, in monetary terms, the value the company and its insurers places on all the work that has been done over the years. CFOs ask questions about return on investment (ROI) all the time – why not about ERM? Linking enterprise risk management and the insurance underwriting process is one approach to produce a tangible result. Because the vast majority of commercial insurance renewals are Jan. 1, CROs and risk managers should consider initiating a discussion with some of their insurers to determine the potential credits for having a functioning ERM program.

Brokers typically represent the vast majority of larger middle-market and Fortune 1000 publicly traded accounts. Brokers start to work with their larger accounts months before renewal dates and assemble a submission package for insurance underwriters. The inclusion of a timely and relevant ERM report to the underwriting submission that demonstrates the changes to the risk profile of the company should make a stronger case for favorable rate considerations for their clients. The general headings that we recommend for discussion within the underwriting submission include:

• Risk organization and governance

• Risk appetite, tolerance and limits

• Risk metrics and measurement

• Risk management process, procedures and controls

• Risk monitoring, reporting and communication

These are the same general areas that insurers themselves are being asked to discuss with their own regulators as part of the new Own Risk and Solvency Assessment (ORSA) soon to be issued by the National Association of Insurance Commissioners. If the broker or insurer does not think that having a functioning ERM program does not merit a price reduction – especially for directors & officers liability insurance – investigate further and dig deeper. Early in the renewal process is a good time for the risk manager, CRO, or CFO to meet directly with underwriters to discuss their ERM from two different perspectives: the amount of rate reduction, or the steps that could be taken to improve the risk profile enough to warrant a premium reduction.

Executive management of a company that adopted and implemented an ERM program five years ago should be considering the return on the investment that the company has made over the years. It will be up to the CFO and risk manager to demonstrate how the ERM process has been used to either change or improve the company’s risk profile from what it had been. We suggest a close working collaboration between the company and their insurance broker to craft an underwriting submission that details the benefits of the ERM program.

The collaboration would also be enhanced by including a company representative such as the CFO on the team, to represent the company in front of underwriters that may be encountering this negotiating tactic for the first time. Since the majority of corporate insurance renewals take place on Jan. 1, initiating a conversation in the summer with the insurance broker(s) involved would not be a bad idea. One caveat however, ERM in one company is not ERM in another. Completing a risk identification and assessment does not an ERM program make.