Risk-less Business


“Retail risk management is all about team building and team work, and it extends beyond the team members in my department. Certainly my team plays a key role, but it is the non-risk management team that we count on to execute risk-management strategies. My role at OfficeMax is to ‘turn on’ the Risk Manager in everyone and help them recognize the risks in all the decisions they make.”Carol Arendallsenior director risk management, OfficeMax

Risk happens—all day, every day. The days when risk could be defined simply in terms of insurance and claims management are long gone. Everything within the retail enterprise carries a measure of risk and, by default, added responsibility. By everything, that would mean all things insurable as well as all those actions, events and decisions across a retail organization that cannot be insured.

“Risk management is a philosophy that has permeated the OfficeMax organization,” explained Carol Arendall, senior director risk management at the Naperville, Ill.-based office-supply retailer, which had sales of $9 billion in 2007. “Our risk-management team is not off in the corner handling insurance and claims—risk management sits at the table for various operational decisions that get made within the organization.”

The risk-management team at OfficeMax, led by Arendall, adopted an enterprisewide approach to risk management about two years ago and actively evaluates risks throughout the organization—both those that can be insured and those that cannot.

“It’s not just about buying insurance, it’s actually using different risk techniques to identify what risks we might have even if we can’t buy insurance for it,” she continued. “The risk-management team becomes involved in [decisions] because there is a risk associated for the company.”

Arendall has spent more than 20 years in retail risk management, including 12 years at Carson Pirie Scott followed by risk management for Saks, Inc., before she joined OfficeMax three years ago.

Her expertise, suggested Gary W. Bull, managing director, retail industry practice leader, at Marsh in San Francisco, has helped position OfficeMax as a leader in strategic risk management.

As an insurance broker and strategic risk advisor, Marsh works with clients across a broad spectrum of industries. “The retail industry,” noted Bull, “is more strategic with risk management than other industries because of the nature of risks retailers are dealing with and the large amount of losses experienced in retail.”

Total cost of risk: One metric that Bull helps retailers get a handle on is their total cost of risk (TCR) relative to losses. “For a typical large retail chain, 90% of their TCR is actually retained losses, which are the losses they are assuming themselves such as general-liability claims and workers-compensation claims,” he explained.

Arendall acknowledged that Bull’s estimate would be realistic for most companies. “Retained losses are a big expense item for any corporation,” she agreed. “Workers compensation and our general liability are the top retained risks that we have.”

However, Arendall emphasized that areas that cannot be insured are equally troublesome. “One of the big ones is supply chain risks—there is so much associated with our supply chain, but only a small part of it is actually insurable,” she said. “For instance, there is risk associated with a hurricane destroying a plant in China and then we can’t get product to our stores. Or, there is the political risk associated with [international trade]. What happens after the Olympics if China shuts down its borders and won’t allow exports? We’re actually looking at all things on a much more macro level.”

Bull concurred, and said the top issues in retail risk management after retained losses are those losses pertaining to supply chain issues, followed by cyber liabilities and property insurance, most notably in what he described as catastrophe-prone areas.

A report released last month by Deloitte & Touche, Parsippany, N.J., indicated similar findings. Compiled from input gathered from national retail companies that participated on the condition of anonymity, the report, subtitled “What It Means to Be Risk Intelligent,” found that 33% of respondents expected compromised risks would be most likely to occur in the supply chain. Other risk areas of concern included brand/reputation compromises, 31%; data breaches, 19%; fraud or embezzlement, 10%; and revenue or earnings misstatement, 6%.

“It’s not so much what you do about a specific risk in the supply chain or relative to your reputation or product quality—it’s about what you do relative to all your risks and how you address those in a comprehensive way,” stated Brett Sherman, partner, audit and enterprise risk services at Deloitte and author of the report. “That’s where we are headed with an enterprise risk-management (ERM) approach.”

Although OfficeMax has clearly demonstrated success with its ERM approach, the Deloitte study found the vast majority of retailers are lagging behind. Only 24% responded “yes” to the question: “Is risk information effectively incorporated into core decision-making processes such as strategic planning, capital allocation and acquisitions?” Sixty-three percent said “no,” and 13% indicated they did not know.

Putting processes in place: In addition to embracing the enterprisewide philosophy for risk management, OfficeMax has implemented formalized processes to deal with risks.

“One of the most important things we have at OfficeMax is a very tight handle on anything contractual,” stated Arendall. “We’re very careful about signing the dotted line on anything that is going to commit OfficeMax, and we want to be very sure OfficeMax is properly protected.”

For instance, OfficeMax requires a certificate of insurance from any vendor it hires and takes the added step of linking this risk-management procedure with its accounts-payable group.

“You can’t do business with OfficeMax and get paid unless you provide us with evidence of insurance, which is actually a big deal within the risk-management world because not that many companies have linked their accounts-payable system with their risk-management department, so that’s another control we have in place,” she explained.

Additionally, an enterprisewide approach should certainly encompass comprehensive claims management and require strict attention to systematic procedures.

“When an incident happens in one of our stores, we have processes and procedures in place so the store [associates] know what they’re supposed to do and how they are supposed to react,” said Arendall. “We spent a lot of time identifying appropriate doctors to send our associates to so we make sure our associates get the best possible medical care. Similarly, we have processes in place for our truck drivers because we have a sizeable [transportation] fleet. There’s a lot that goes on behind the scenes that you wouldn’t expect with respect to the processes we have in place.”

Healthy claims management: Taking a proactive stance to deal with incidents, particularly those that are health-related, is a critical component of effective risk management. The volume of workers-compensation and general-liabilities claims being generated across the retail industry is “staggering,” according to Scott P. Rogers, managing director of the retail business unit at Sedgwick Claims Management Services.

Memphis, Tenn.-based Sedgwick, which adjudicates losses on behalf of its clients, realizes 25% of its revenues and 50% of its overall claims volume from retail accounts.

“With big-box retailers, which is our niche, there is a tremendous amount of volume and significant amount of money budgeted for casualty [claims],” said Rogers. “These are not small line items.”

Among the trends that Sedgwick is seeing across retail claims is an upturn in indemnity benefits paid to out-of-work employees and an overall shift in the percentage of total spend allocated to medical costs.

Relative to indemnity benefits, basically the wage-replacement money paid to workers injured on the job, Kathy Tazic, client assistance director at Sedgwick, explained, “Employees may be entitled to more than just wage replacement, sometimes there are settlements for long-term injuries that can be ongoing for quite a lengthy time.”

Another issue concerning retailers, she noted, is the rising cost of health care. “Medical costs for workers compensation have escalated to the point that it now exceeds the amount of indemnity pay,” Tazic said.

Although rising medical costs are a big concern, the major focus according to Tazic and Rogers is the quality of medical care provided to injured workers.

“In the last couple of years, there’s been a tremendous emphasis on what goes on immediately when an accident occurs,” reported Rogers. “The objective is to deal with it immediately. Get the proper care, not the cheapest care, and get them back to work as quickly as possible.”

That is certainly the case at OfficeMax, where workers-compensation claims are all about making sure an injured associate is well cared for. “It’s important for us that our associates are treated appropriately and that we get them the best possible medical care,” stated Arendall. “We want to provide an environment where they can come back to work on a light-duty basis and where we can accommodate their restrictions—it’s more of a holistic approach. We’re not just trying to save the last nickel out of our claims dollar. We are trying to treat our associates the way we would want to be treated ourselves.”

On another positive note, Rogers observed that workers-compensation claims have been leveling off. “There has been a push to prevent accidents from happening, and with mature retail programs we’ve seen the volume of workers-compensation claims flatten, or in some cases, even decline,” he said. “That’s not true for general-liability claims though—customer claims may actually be increasing.”

He attributed the increase in reported customer incidents to the fact that retailers are more proactive about documenting and reporting incidents, perhaps as an extension of the trend to highlight customer-service commitments.

“With respect to workers compensation, we’ve certainly seen our claims go down, and on the customer accidents that has not been what we’ve seen,” Arendall reported. However, OfficeMax falls into that category of retailers that has intensified its customer-service programs to an extent that no incident, however minor, would go unreported.

“When a customer has an incident in one of our stores, it’s absolutely essential to us that we treat that customer appropriately,” said Arendall.

It’s a classic case of what goes around, comes around. Although she can’t cite specific instances with customer or employee settlements, Arendall is convinced that the commitment to “do the right thing” by customers and employees “has had a very positive impact for us on our claims program.”

“It’s one of those long-term things,” she suggested. “I can’t tell you that because we treated that person nicely we got a good settlement on the claim. But intuitively I think we believe that.”

Asked what elements are integral to successful risk management, Arendall told Chain Store Age, “It is absolutely essential that retailers study the trends and what is going on in the marketplace—on a claims side, on the insurance side and on the enterprise risk-management side.”

For instance, OfficeMax has embraced the trend to be green and is a leader in implementing sustainable practices. However, from a risk perspective, Arendall posed the questions: “What’s the next regulation the government is going to impose? What if the government required every retailer that sells computers to recycle computers?”

Those are concerns for risk management—but with every risk comes opportunity.

“It is also essential that when you interact with the marketplace you are honest and show integrity,” she concluded. “That has a big impact on how the markets view your company.”

OfficeMax saw this recently when its senior-management team met with insurance underwriters. “The insurance underwriters felt very comfortable with what our senior management communicated to them and they want to provide insurance to OfficeMax,” Arendall reported. “When you have a good story and you deal with integrity, people want to work with you.”

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