Making the Most out of a Crisis

CALGARY, ALBERTA, CANADA—Suppose your company experiences a major hurricane, tornado or fire: Property is destroyed and your business is stalled, meaning customers are left waiting. But there are buildings to be rebuilt and equipment to be replaced, and the claims process hasn’t even started. This is when the risk manager’s skills at placing the company’s insurance coverage and negotiating for the best payout can not only demonstrate their true value, but can put the company back on course, according to experts here at RIMS Canada’s annual conference.

“When there’s a serious property loss, this is the time for the risk manager to shine, because up until then it’s about premium, premium, premium,” Tom Parsons, manager of risk management at Fairmont Raffles Hotels International in Toronto said during a RIMS Canada Conference session. “Up until a serious loss occurs, I don’t think you feel the impact that you can give back to the company. Because what we do is buy insurance, so it has to work. It is what you helped craft and build into your policy through the years. You have created a policy that is robust, and that is going to cover everything—you hope.”

Among the examples cited was a soft drink bottling plant flooded with eight feet of water following a hurricane. While the company’s high-speed bottling equipment was damaged and would need to be replaced, explained Jeffrey Phillips, managing director in PwC’s U.S. forensic advisory practice, the issue was that floodwaters were highly contaminated due to a number of chicken and hog farms in the area. As a result, the company determined that the building could not be used for any type of food processing and would need to be demolished. The insurer, however, argued that the walls could be sealed, containing any contaminants. The company had found a competitor to do some of the bottling, but it wasn’t enough to fill their orders, Phillips said.

Because delivery of the new bottling equipment was slated to take months, there was also a large business interruption period being covered, he said. This is when innovation came into play. The bottling company was able to show the insurer that buying another plant rather than rebuilding would put them back in business sooner, cutting back on their losses. The insurer agreed and sent them a check. As a result, the company purchased a larger facility in a better location.

“They were up and running in six months—the business interruption had stopped,” he said. The better location also meant reduced shipping costs and the company gained market share. Because the company was able to make the case to its insurer, both came out ahead in the long run.

Phillips recommended that companies negotiating after a crisis “communicate, communicate, communicate” with their insurers.

They should also get their insurers to sign off on major contracts such as scope of work, rates and overhead and discuss changes to operations or facilities with the adjustment team and agree on scope of property damage repair or replacement whenever possible.

Insurers will typically push to return the facility to pre-loss condition, “unless you can prove the changes will save them money,” he added. “Insurers will not be creative for you, they don’t know your business or your goals.”

Risk Managers’ Role in Addressing Climate Change

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QUEBEC CITY, CANADA—Salutations de la ville de Québec! At the first day of this year’s RIMS Canada Conference, climate change quickly emerged as one of the key challenges facing risk managers—and an area with tremendous potential for risk professionals to effect change.

Government clearly has a role to play, but the slower pace and greater number of obstacles they face lessen some of the possible impact. According to Tim East, director of risk management at the Walt Disney Company, that is where businesses come in. Every one of the Dow 30 companies has created environmental and sustainability initiatives, but only 12% of companies have a C-suite or other top-level executive charged with leading action on this front. The clear trend of embracing corporate responsibility stems from a moral obligation businesses all have, and corporations must take initiative in changing how people think, East said.

Addressing sustainability and other climate change concerns cannot be done in a silo, and efforts must focus on building resilience in all of the assets a business has: facilities, systems and people. Risk managers should be taking a leadership role, using their perspective of corporate objectives and performance to help identify and execute the most impactful change.

Risk professionals can particularly help drive this objective to boost awareness within the organization and in the broader community, while also ensuring the business itself is performing in line with sustainability goals. “Risk managers can help become part of the solution by helping to close the gap between the desires and intentions of our organizations and the performance and impact they have,” East said. “This is part of our moral obligation to reduce our impact on the environment.”

Why should companies act? “Not just because it’s good business—although it is, and not just because it’s profitable—although I think it is, but because it’s the right thing to do in the world and for the communities they serve,” East said.

To maximize the impact of these initiatives, East urges risk managers to set and pursue to reduction targets, otherwise they stand little chance of truly achieving change. Then, he advises they commit to a process of assessing, identifying opportunities, and measuring impact annually.

On the organizational level, changing mindsets extends beyond having employees recycle or monitoring water use. Business continuity planning is a critical task at Disney, East said, and they were always good at crisis management, addressing urgent problems over the course of a couple of days. Now, however, they are devoting more focus to planning for longer events. To that end, the company is working to delink events from their consequences—rather than focusing on discrete emergency situations, it is focusing on how the business will be impacted by the conditions that could stem from any of these specific scenarios, he explained.

Getting started and shifting to a long-term focus seem daunting, and the slow rate of observable change often means adaptation and mitigation are not top of mind for businesses, said Lou Gritzo, vice president of research at FM Global. But risk professionals cannot wait for the next disaster or policy change to prompt a more serious evaluation of exposure and strategy.

Getting started on—or further investing in—mitigation efforts may be best focused on one of the main changes we are already seeing: flooding. Existing data shows a clear increase in flooding, and due to sea level risk and increased rainfall and intensity of rainfall, there will only be more, Gritzo said. To manage this growing risk, he recommends risk managers take four key steps:

  1. Know your flood exposure
  2. Be above the water level, and ensure any new construction is as far above it as possible
  3. Have and exercise a plan for flood emergencies
  4. Keep water out – in the wake of Hurricane Sandy, a number of physical protection measures have been certified and made commercial available to guard against up to a meter of water

Crime Expert Reveals Biggest Gaps in Company Security

WINNIPEG, MANITOBA, Canada – After decades of working undercover for the Royal Canadian Mounted Police, the U.S. Drug Enforcement Administration and U.S. Customs Service, crime and risk expert Chris Mathers knows where companies are vulnerable and what it takes to protect them.

“In a world where popular culture tells us that the ends justify the means, crime is all about perception,” he said in a keynote address at the 2014 RIMS Canada Conference. “Young people are bombarded with it all the time, but we are in business, too. So the question is, how vulnerable is your business?”

Mathers, who joined the forensic division of KPMG and was later named president of corporate intelligence, shared his insight into how companies can best guard against “the business of crime, and crime in business.”

During his 20 years dealing with drug traffickers, money launderers and members of organized crime syndicates, Mathers developed what he calls a “10/80/10” theory – 10% of the population is truly bad, 10% is truly good and would never lie (but you will probably never meet), and the other 80% is everywhere in between. Identifying and managing the risks of that 80% requires far more work than employers are currently doing, he said.

Background checks may be the single biggest thing companies can do better, Mathers said. While most businesses perform background checks when an employee is hired, such investigations are seldom conducted during the course of employment. As an example, he cited a case where a company had a director who was serving jail time on the weekends. Due to Canadian privacy laws, however, the case was never reported, so no one knew he had been convicted and imprisoned while on staff. In addition to possible reputation implications, the company could have been exposed to liability if any incidents had occurred at work.

While searching for criminal records of new hires is an excellent start, periodic checks should be implemented for all employees. High levels of drug use in the workplace in industries like manufacturing can be further compounded by the lack of drug testing in Canada, Mathers said. Further, 90% of corporate theft cases he have involved perpetrators who were gamblers.

He suggested that investigations should examine whether employees: have extreme views, use or are addicted to drugs, exhibit signs of alcoholism, are addicted to gambling or participate in illegal gambling, frequent prostitutes, or have relatives or a spouse associated with a criminal organization.

Associating with criminals can be a significant risk factor, regardless of the nature of the relationship. “Prostitutes are criminals and associate with criminals,” Mathers said. “They are around that activity and more likely to engage in it, which may mean they steal a client’s wallet or steal the sensitive intellectual property he’s carrying.” Similarly, an administrative assistant who is married to a member of the Hell’s Angels can introduce far more than just reputation risk if the spouse gets involved in illegal activities like drug smuggling.

Employees within a company can also rationalize criminal behavior. In the case of a man found to have stolen thousands of dollars through expense account fraud, for example, Mathers said the company faced a wrongful dismissal suit from the thief. He was never told that he could not steal, the man said, claiming the practice was an “unofficial bonus program.” Further, he claimed his boss had been doing it for years. “People see that behavior and come to think it is OK because they become accustomed to seeing it,” Mathers said. Maintaining regular internal investigations and ensuring compliance does not just bust wrong-doers, but prevents others from developing, especially as new technology continually emerges to make theft easier to commit and harder to track.

“There are no new crimes – they’re the same crimes, they’re just using new techniques to get them to you,” he said. Companies need to keep updating their monitoring strategies to match.

 

Asking the Big Questions about Canada’s Future

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Photo: Hilary Tuttle

WINNIPEG, MANITOBA, Canada — In keeping with this year’s RIMS Canada Conference theme, “Crossroads: Changing Landscapes,” Eric Noël, senior vice president of Oxford Analytica in North America and initiator of the Canada Towards 2030 Project, presented research and projections on the top trends that will shape the nation’s future.

“Risk managers cannot afford to freeze in the face of uncertainty or change, and the longer a difficult decision is delayed, the higher its cost, so this is a call for action,” Noël said. “Remember that failing to plan is planning to fail.”

Yet projecting out 16 years introduces many ideas and problems that cannot accurately be planned for today. Instead, the planning he encourages is strategic and much broader in scope, examining broad trends, then drilling down into specific political, economic, and environmental implications. For example, Noël said, “Black swans will be the dictator of geopolitical change.” While such events cannot be planned for specifically, it is critical to consider long-term questions of how to engage in global power systems and what areas of primary strength the nation should focus on.

canada towards 2030In other areas, key trends and questions for strategic risk management planning include:

• The most important population trend in Canada is migrations and the resultant political shift. Because of the tremendous shift west and the allocation of votes, a future prime minister could be elected without a single vote from Quebec, bringing dramatically different priorities into office than a candidate who requires the support of the East.

• Aging will not only impact the workforce and demands on the medical system, but will also signal changes in the country’s median income, sovereign debt ranking, and provincial budgets. A larger number of retirees and elderly citizens will increase retirement benefit spending to 13% of Canada’s GDP, and the provinces must start setting aside billions now to pay for that care.

• The first group of less financially-prepared, due to changes in saving practices, will soon be retiring. This will prompt deleveraging and scaling down, whether that means selling their vacation homes or cutting back on lifestyle spending. Further, for those with the financial means, there will be an increase in the number of people with the ability to snowbird. This will have a significant impact on Canada, at the city level, when thousands of residents depart for several months every year.

• Canada’s booming oil industry may be a double-edged sword due to finite resources. The addiction to fuel is becoming an addiction to fiscal incomes for parts of the country as oil royalties surge.

• Political risk is underrated in emerging markets, and emerging markets are quickly becoming divergent markets. “The next economies trying to achieve that $1 trillion level in the future are countries transitioning from the hundreds of billion in GDP such as Indonesia, Turkey, Saudi Arabia, Nigeria, Argentina, etc,” said Noël. “They have nothing in common with our current $1 trillion economies clients in terms of stability and due to their particular political systems will have us re-assess our risks more than just once quantitative easing is gone or China has slowed down. Political risk matters a lot for the future of globalization.” BRIC-centric thinking will no longer suffice and current global powers will have to adapt to cooperate with these new players, or they may opt to ally more closely with similar nations instead.

The Canada Towards 2030 Project is an apolitical, independent and non-prescriptive initiative dedicated to creating and sharing long-term research about Canada’s future. According to the group, “Uncertainties should not frighten or paralyze us; they should help us anticipate and prepare. Avoiding or minimizing a risk—as well as finding and maximizing a new opportunity—requires imagination and leadership.”

To that end, Noël and his team aim to use research and non-prescriptive thought leadership on some of the biggest topics shaping the future of the country, including labor, agriculture, governance, oil production and consumption and water supply. “The mission of the C2030 project is to offer a high quality forward-thinking experience to people interested in exploring the future of Canada, increasing their awareness of long-term trends, helping them improve their ability to anticipate change and facilitate the creation of or adaptation to the future they want,” the website explains.