Top risk and insurance concerns when negotiating an acquisition or merger

Typically, risk management and insurance due diligence doesn’t kill a deal. But it can help buyers negotiate a lower price, a larger escrow fund or earn-out, or require a letter of credit for assuming certain risks.

During a potential acquisition or merger, the buyer should give his or her risk adviser access to the data room. That adviser can review the current insurance, loss runs, loss and claims experience, safety and employee policies, contracts and financials.

“Then, we come back with a report telling them what we think — particularly making sure they don’t inherit something that will haunt them later,” says Tony DeRiggi, area vice president at Arthur J. Gallagher & Co.

Smart Business spoke with DeRiggi about a few of the many insurance factors that need to be discussed before you close the deal.

What do buyers need to know about claims-made and occurrence polices?

Most general liability, products liability and umbrella policies are occurrence policies. The coverage trigger for these policies is the date the incident occurred, so buyers don’t have to worry about future claims. Some liability policies — typically directors’ and officers’, errors and omissions, professional liability, environmental/pollution liability and possibly product and completed operations liability — are claims-made policies, which trigger when the lawsuit or demand is received.

To counter this, buyers can require sellers to purchase an extended reporting period ‘tail’ endorsement or add the potential ‘tail’ cost to the negotiations.

Where else can liability policies present challenges?

Your risk adviser should provide an in-depth review of all exclusions. Some will be common and normal; others will be different than your risk appetite or uncommon to your experience. For example, if a pollution claim is reported next year, you don’t want to find out then about an exclusion in the liability policy.

Also, it’s important to know whether the target company has ever purchased a loss-sensitive rating plan as part of its insurance program. This usually applies to workers’ compensation, general liability or automobile liability. For any loss-sensitive policies (i.e. retrospective rating plans, large deductibles, self-insured retentions, fully self-insured programs), the reserves need to be accurate, accounting for all open claims. The acquisition should include a mechanism to cover the claim payments as those claims mature and pay out. If the potential sale is an asset purchase where the buyer doesn’t pick up the seller’s liabilities, this is less of a concern but should still be addressed.

The review should examine the contractual insurance obligations and indemnification clauses found in rental/lease agreements, loan/financial agreements and contracts in general. These agreements typically have minimum insurance requirements and obligations that may differ from the buyer’s current insurance program.

A risk adviser may also do an onsite inspection of the operations. Concerns to be considered include: Do the current safety procedures meet best practices? Do the employees receive harassment training? What are the hiring practices? What are the policies for pre-employment physicals or drug screening? The risk adviser can let you know what you’re in for.

What about property insurance? Does this review work the same as liability?

On the property side, it’s still about exclusions, deductibles, etc., but it’s more straightforward. The review should also consider whether the seller’s locations are in a flood zone, windstorm zone, etc. If the acquisition involves expansion into different or foreign geographic areas, you will need to consider any specific or special risks related to those areas (i.e. earthquake, kidnap, etc.).

What else is important to understand?

After the review is complete, your risk adviser will recommend that you integrate the insurance immediately, at the expiration of the seller’s policy or to let it run separately for a year or two. This last option may be a good idea if pricing and terms are competitive, so that you can wait until you get policies in place to feel more confident about the safety or risk management practices. A number of options exist, the key is to have a good strategy addressing the newly acquired risks — keeping surprises to a minimum.

Insights Insurance/Risk Management is brought to you by Arthur J. Gallagher & Co.

Tailored coverage — and expert help — mitigate life sciences company risks

Leaders of early-stage life sciences companies often don’t have a business background and may not fully understand the risks inherent to their business. Life sciences companies face many unique risks. Insurance and risk management programs need to address these key risks and the broker must structure the coverage appropriately.

“If the broker doesn’t understand the space and know the key risks, then he or she won’t know to ask the right questions,” says Michael Kearney, area executive vice president at Arthur J. Gallagher & Co.

“One of our primary roles is to advise a company’s leadership about their risks, so they can make decisions with eyes wide open,” says Dereck M. Malzi, area assistant vice president at Arthur J. Gallagher & Co.

He says it’s also important to let them know what their peers are doing, e.g., “most companies are insuring this risk because the cost impact could be substantial if it happens, and the cost of insurance is reasonable.”

Smart Business spoke with Malzi and Kearney about key risk management and insurance for life sciences companies.

What is a risk that life sciences companies often overlook?

Most early-stage biotech companies don’t manufacture their clinical or drug materials. These materials are generally manufactured and tested by third parties. Emerging life sciences companies often assume that their business partners are insuring these materials. And that’s very rarely the case.

If something happens at that facility — a fire, water damage, a freezer quits — it could cost millions to replace the materials. And if the materials aren’t insured, the replacement cost comes from the company’s cash balance.

Once research moves into the human clinical testing phase, life sciences companies should consider a separate policy for their clinical supply chain. This type of policy can cover materials during shipment and while at manufacturing and storage locations. In one recent instance, after Gallagher’s life sciences team identified this uncovered risk, coverage was placed for the client’s off-site materials. Two months later, $800,000 worth of materials were destroyed and the insurance paid to replace them.

Could you provide other examples of risks overlooked by life sciences companies?

One difficult-to-absorb expense is business interruption. For example, sprinklers douse the entire lab, so the Food and Drug Administration shuts it down until it is revalidated. During the interruption, the company’s scientists sit at home but still get paid. Given that developing companies don’t yet have sales, their biggest financial risk in a business interruption event is unproductive payroll. Business interruption insurance can help reimburse for this continuing expense.

Another expensive risk is replacement of a lost research project, in particular if it runs for a longer term. In the event that a company has a six-month project and a fire destroys it five months in, the project will likely need to be rerun from the beginning. R&D restoration insurance can be secured to reimburse this expense.

How else should life sciences companies protect themselves?

Most boards of life sciences companies require director’s and officer’s liability insurance to protect against shareholder and other litigation because personal assets are on the line. Another unique risk comes from conducting clinical trials on humans. Research sites, institutions and partners will require proof of clinical trials liability insurance before the trial can be initiated.

Both of these risks, along with the insurance products that cover them, however, are complicated and require specific expertise. Life sciences companies should ensure that their broker has substantial experience in both of these areas. As an example, a clinical trial site might require $15 million of clinical trials liability insurance; an experienced broker will know that $5 million is more in line with industry standards. In addition, international studies and clinical trials are subject to very specific regulations and insurance requirements. In order to maintain timelines, the right expert can help facilitate this complicated process.

Life sciences companies should align themselves with insurance and risk management partners that focus on the life sciences industry. By doing so, they greatly reduce the risk of uninsured financial losses, improve timeline performance and maximize ROI for investors.

Insights Insurance/Risk Management is brought to you by Arthur J. Gallagher & Co.

Industry changes mean the right captive manager is even more critical

Single parent captives continue to be a viable risk management option, even though a pending court case may impose new rules for how they can be set up and run.

“There is a court case that is going to impact a segment of the captive industry, but it’s not the only segment,” says Robert Zedreck, area vice president at Arthur J. Gallagher & Co.

Whether case law or legislative changes, the reasons a company will set up a captive is never going to change — a desire to better control its risk by setting up its own insurance company that isn’t dependent on the market. But like many industries, single parent captives are always evolving, so it’s important to surround yourself with people who know the market.

Smart Business spoke with Zedreck about what’s going on with captives and how some companies are successfully using them.

What changes are you noticing in the captive space?

Fortune 500 companies have been using captive insurance companies for years, but that’s now pushing down to the middle market. Good captive candidates are now companies that have more than $30 million in annual revenue, 100-plus employees or an annual insurance spend of over $300,000.

Not only are captives managing traditional insurance risks, they also are being used to manage enterprise risks. This is any risk a business has on its balance sheet, from the deductibles it takes on its commercial or employee benefits insurance to risks that are uninsurable but have annual expenses, things like litigation, regulatory or legislative changes, accounts receivable or commercial policy exclusions.

There also has been more activity in the employee benefits space where prices are skyrocketing. In a captive arrangement, companies are able to either share risk with other top performers as it relates to their employee benefits programs, or set up a captive to smooth the volatility for years where they have more losses than expected.

Are captives the same as self-insurance?

Companies can be self-insured without having a captive. They just haven’t formalized the process and formed an insurance company. For example, if a business has a rainy day fund for balance sheet risk, a captive helps formalize that process, where the captive team helps identify and quantify those exposures. Again, it’s a licensed insurance company that increases credibility and covers a business for severity in an attempt to smooth earnings.

What are best practices for the most successful captives?

It starts with a feasibility study that holistically looks at your risk management program, in order to identify areas that can be better managed via a captive insurance company. The feasibility study helps determine which captive(s) are appropriate for your risk management goals, whether that means forming your own captive or joining an existing one. Your captive manager will work with you to develop a business plan for the formation and ongoing management of your captive.

It’s critical to have the right team to manage, audit and provide legal and tax opinions on your captive insurance company. The captive manager is the quarterback who coordinates these service providers and helps identify the appropriate risks.

Captives are a long-term approach that needs to be well thought out. You need to work with someone who is going to put a lot of time and effort into a feasibility study. You need to work with credible partners, from the manager to the captive actuary to those performing the legal and tax work and audit opinions.

Even with potential industry changes, this is a viable risk management tool. Many companies are still forming new captives; so if your company faces significant exposures, take some time to explore whether a captive insurance company is a better way to control that process.

Insights Insurance/Risk Management is brought to you by Arthur J. Gallagher & Co.

In big oil and gas, who is protecting the little guy?

The tri-state area of western Pennsylvania, Ohio and West Virginia continues to be an active participant in energy exploration, dominated by the Marcellus Shale formation. While many embrace the opportunity, risks still come from government regulations, contracts, federal policy or inexperienced crews. Plus, small and midsize oil and gas companies, which support larger parent companies, may have difficulty managing these risks due to their limited resources.

Many health, safety, environment and regulatory managers know that with the limited resources their oil and gas companies have, especially with personnel, they need to lean on their insurance consultants. They are an extra set of eyes for safety and compliance.

Smart Business spoke with Taylor Troiano, area vice president at Arthur J. Gallagher & Co., about what’s going on in the industry.

What is the current safety climate for the energy sector?

When oil and gas exploded onto the scene several years ago, the industry was flooded with prospects, mostly enthusiastic workers seeking employment. The volatile mixture of innovations and inexperienced employees gave safety professionals and operation managers instant problems. While the potential risk of serious injury was real, fortunately very few experienced serious injury.

A company’s most valuable resource for a strong safety program is its employees. An engaged and active employee who believes in safety and risk management creates a safer environment for everyone.

Now, more than ever, it is imperative to have participation and involvement from employees, because an industry upturn could mean another rush of inexperienced workers returning or switching to oil and gas jobs. Many employers build that engagement with monthly safety meetings with a safety committee, which also takes advantage of the 5 percent discount on workers’ compenstation premiums from the state of Pennsylvania. But daily tailgate safety meetings can take that one step further. This is a great way to get employees together to discuss the challenges and risks they face in the field every day.

How do you think the national and local elections will impact the industry?

Employers and industry players have high expectations, and most are encouraged that local energy sources can continue to have a worldwide impact and strengthen our national economy. Positive changes seem realistic, but what the changes will be is yet to be seen.

What risks keep business leaders in oil and gas up at night?

Over the past 18 months, oil and gas companies have dealt with a downturn in the industry, which looks to be on the rise now. But, in this challenging environment, turnover has been a problem. When employers have new employees with less experience, that creates more exposure to safety issues. Companies have also had to ask employees to do more with less, which again, can increase their safety risk.

Many companies are restructuring their policies and personnel programs, while also offering more individual level training to maintain critical skills. One example could be adding a safety bonus for a limited amount of incident and accidents. It not only provides an incentive to help the business keep employees, it creates team unity.

What’s your takeaway about safety and compliance in oil and gas?

Health and safety is a critical area to differentiate in the oil and gas industry because it provides a competitive edge. Operators often use safety records to gauge their relationships with a company, but with so many service companies competing for business, it can be a management nightmare.

Several of the most progressive businesses are using ISNetworld and Avetta to track specific policies, safety records, Occupational Safety and Health Administration compliance, and Environmental Protection Agency and Department of Transportation requirements, but effectively maintaining them requires time, money and close attention. That’s where your risk manager can help.

Insights Insurance/Risk Management is brought to you by Arthur J. Gallagher & Co.

New OSHA rules reshape drug testing and filing requirements

New rules, under the Occupational Safety and Health Act (OSHA), will have widespread ripples in the business world this year.

“Big changes are coming to drug-testing policies and the way injuries and illnesses are reported — and there are a lot of nuances that employers need to make sure they are following within the new legislation,” says Josh Daly, ARM, a risk management consultant at Arthur J. Gallagher & Co.

Smart Business spoke with Daly about what these OSHA changes mean for employers.

What are OSHA’s new recordkeeping requirements?

In order to prevent work-related injuries and illnesses, OSHA has for decades required almost all employers keep track of their work injuries and illnesses in an OSHA 300 log. This information was internal and only provided to OSHA in the event of a physical audit or written request. Now, certain employers also must log on to OSHA’s website and submit this recorded information electronically.

The idea is that this will nudge employers into improving workplace safety and health, because the information ultimately will be posted to OSHA’s website. OSHA also plans to use this for its own data analysis, helping it spot trends that need to be addressed, including potential audits with certain employers.

While OSHA claims all personally identifiable information will be removed when the data is posted, employers need to understand they’re creating a permanent record that can be used as a competitive advantage or disadvantage after it’s been publically disclosed.

Who needs to file these electronic submissions?

If your organization has a single physical location with 250 or more employees and has been required to keep records previously, you will have to submit this data.

In addition, if your company has between 20 and 249 employees and you are in what OSHA deems a high-risk industry, you have to submit this data. The term ‘high risk’ applies to more industry classifications than you may think. For example, a variety of grocery stores, department stores, general rental centers, food service distributors, etc., will now be required to post this information.

If you’re already tracking this data and you fall into one of the two required categories, make sure your recordkeeping is in an easily transferable electronic format. It’s also a good idea to spend more time reviewing this data to verify accuracy, before you submit it.

What do employers need to know about the new OSHA rules on drug testing?

Under the new law, OSHA has ruled against mandatory ‘blanket’ post-accident drug screenings for all employers. It believes that employees don’t report legitimate workplace injuries because of these policies, and therefore they are retaliatory.

OSHA’s comments seem to indicate drug testing can be administered when there is a reasonable belief of drug use, such as a motor vehicle or forklift accident. This rule doesn’t apply if you have to drug test for a state or federal guidelines, such as a mandatory post-accident drug test as part of a commercial driver’s license. And you can still continue pre-employment drug testing and random drug testing.

Since enforcement of this law began Dec. 1, 2016, it’s a good idea with this increased scrutiny to remind all your employees — not just senior management — of your organization’s anti-retaliation practices, and document the discussion.

Also, consult your risk management professionals and legal counsel to verify that your internal policies and procedures, including safety incentive programs, are reasonable and in compliance with OSHA’s revised stance on workplace retaliation.

With workplace incidents now requiring independent review, it will be important to set up an efficient assessment process to ensure that the testing that is still allowed is completed in a timely manner.

While these changes won’t significantly alter your existing responsibilities, they increase the risk of a citation and need to be considered as your organization evaluates its risk management programs. For the complete list of changes, visit OSHA’s website.

Insights Insurance/Risk Management is brought to you by Arthur J. Gallagher & Co.

Every business has cyberrisk. What are you doing about yours?

Many employers underestimate their risk of a cyber breach and the overall cost of cyber claims.

Data breaches have increased 23 percent in the last year, according to the Symantec Internet Security Threat Report 20. The average cost of a data breach also is now at $4 million, the Ponemon Institute’s 2016 Cost of Data Breach study found.

“With the rising number of breaches and costs associated with them, cyber insurance should be a key component in every company’s insurance portfolio,” says Angela Corcoran, client service supervisor at Arthur J. Gallagher & Co. “If employers don’t have cyber coverage, now is the time to reach out to their insurance advisers. For those employers who’ve already purchased cyber policies, it is important to ensure that their limits are adequate to cover their risks.”

Smart Business spoke with Corcoran about the latest cyberrisk developments.

What risks can cyber insurance cover?

Every organization has some sort of cyberrisk, even if it isn’t transacting business over the internet. Any entity that interacts with the public or hosts a website has cyber exposure. Any employer that collects even a minimal amount of personally identifiable information is at risk of a privacy liability claim. Additionally, all employers are vulnerable to cyber extortion — a threat of a cyberattack on their website or computer systems in exchange for money.

Cyber policies are designed to insure against these scenarios and more. Most policies provide first-party coverage, which responds to direct losses to the insured, and third-party coverage, which is designed to cover the insured’s liability to others.

Also, cyber policy components provide coverage for things like network security, privacy liability, breach response, media liability, extortion, etc., which can be tailored to fit each employer’s particular risk. For example, retailers or businesses that accepts credit card transactions can buy PCI Assessment coverage that will pick up costs associated with assessments against the company for breaches of Payment Card Data Security Standards. The appropriate limit is partially determined by the number of credit card transactions each year and the company’s PCI compliance level.

How can an employer determine what level of insurance to get?

There’s no magic formula to determine the proper amount of cyber limits. Every business is unique. Employers can reach out to their insurance advisers who should have tools and models that can help drill down to appropriate limits based on their exposures.

What’s happening with the coverage prices?

A year ago, cyber rates were increasing rapidly, due to high-profile data breaches. In the past six months, rates seem to have stabilized; however, expect continued rate fluctuation as claims evolve.

Are there emerging products that employers should watch for in 2017?

Cyber insurance is ever evolving. As cybercriminals get bolder and more sophisticated, new exposures arise, forcing insurers to constantly revise their underwriting and claim handling approach.

A recent addition to some cyber policies is social engineering coverage, sometimes referred to as fraudulent impersonation or cyber deception. Coverage is provided for the deceptive misleading of a company’s employees into releasing funds or confidential information to an illegitimate third party. This can happen when an employee receives a fraudulent email that looks like it’s from the CEO. The email requests funds to be wire transferred to an account, and only afterwards, does the employee realize that the email was a fraud. Social engineering coverage can sometimes be added to crime policies as well as cyber policies. All employers should consider this, as all companies are vulnerable.

What else would you like to share?

Many employers have a false sense of comfort in response plans that have not been adequately tested. It’s a good idea to sit down with senior management, key personnel and insurance advisers for a tabletop exercise, a ‘fire drill’ to simulate the company’s response to cyber claim scenarios. This allows employers to vet their current response plans, identify shortfalls and focus on where changes can be made, in order to strengthen their response to potential cyber claims.

Insights Insurance/Risk Management is brought to you by Arthur J. Gallagher & Co.

How to find the total cost of risk — and do something about it

When it comes to driving down your company’s risk management costs, employers may not always see the whole picture. In fact, depending on your individual business, you could save 20 percent of your insurance spend by focusing on additional risk cost drivers outside of your insurance premiums.

Six buckets of risks drive costs:

  • Insurance premiums.
  • Program structure.
  • Losses within a deductible/retention.
  • Uninsurable or uninsured losses.
  • Coverage gaps.
  • Contractual liability.

Most employers regularly manage their insurance premiums and program structure. The other cost drivers tend to slide under the radar.

“There’s no trigger that says I’ve got to be thinking about this right now — unlike your annual insurance renewal,” says Robert Zedreck, area vice president at Arthur J. Gallagher & Co.

In other words, there’s no annual physical for the other cost drivers, even though they factor just as much into your total risk costs.

Smart Business spoke with Zedreck about how to add the necessary checkups on all risk cost drivers to build a comprehensive risk management program.

Which companies are more successful at examining the total cost of risk?

The organization needs somebody who takes ownership for examining the frequency and severity of risk, with a process that’s connected to the business’s culture. Typically, that person is a risk manager in larger companies, or somebody on the executive team of a smaller company that has a passion for it.

How can organizations without an internal risk manager better manage these costs?

The solution is to find a risk adviser you trust that has the process down to a science, so you don’t have to. Your risk adviser needs a process that holds him or her accountable for delivering on measurable objectives on all these risk areas that drive your costs.

It’s not uncommon to find risk advisers who say they focus on more than your insurance program. It is uncommon to find firms that have it in their DNA and do it all the time for middle market companies.

What are examples of manageable risk costs that can be decreased?

If you have a fleet of vehicles, you may decide to self-insure your first layer of risk with a high deductible. Then, you need to manage those costs as they come up, by asking questions. Should you be going to different garages? Why is a particular driver wrecking his vehicle multiple times?

These kinds of questions also can apply to safety costs. What’s your spend on personal protection equipment? Is it more cost effective to buy in bulk once a year, rather than as piecemeal as needed?

It’s a good idea to review your claims management process. Who is involved and when? How long does it take to report it? Who is communicating from the accident investigation back to the safety committee?

The same thing applies to contractual liability. As you enter into contracts, you are assuming risk. Somebody needs to be reviewing the language and tracking certificates of insurance.

Even if you’re reviewing trends, a deeper look may be warranted. If you have 100 claims last year and 70 this year, that’s good, right? But what’s driving the 70? Are there common denominators? How are you going to get from 70 to 35? Should you really feel good about the 70, or do your peers only have 10?

How can companies get started on this?

Executives understand that comprehensive risk management is important. There’s only so much you can save through insurance brokering. But it doesn’t have to be overwhelming or time consuming.

Start by identifying the top three to five risks that aren’t covered by your insurance program. Then, the next time you meet with your risk adviser, ask for help putting together a process to deal with them.

You’re paying your risk adviser to help you with costs that you’re insuring every year. So, create a relationship where you’re communicating regularly on these other buckets of costs. Then, agree on the objectives to be met and the process for holding each other accountable for the results.

Insights Insurance/Risk Management is brought to you by Arthur J. Gallagher & Co.

How to chart your risk course with a risk heat map

As a business leader, you deal with risks in your business every day. Inherently, you take steps to mitigate those risks. So, when you and your risk adviser conducted your most recent risk heat mapping session, did the process help you and your team prioritize your approach to managing your business risks? If you haven’t had such a session recently, please read on.

Smart Business spoke with Dereck M. Malzi, area assistant vice president at Arthur J. Gallagher & Co., about how risk heat maps work and why business leaders should take a fresh look at their organization’s risks through a different lens.

What exactly are risk heat maps?

A risk heat map plots risk points on a grid. The horizontal axis measures the impact of the risk, and the vertical axis measures the frequency of occurrence. If business leaders plot a risk close to the axis intersection — normally 0,0 in geometry — they believe that risk is not impactful and not likely to happen. The other extreme is the graph’s top right-hand corner, which plots risks that would be very impactful and very likely to occur.

riskmap_ajgOnce the scatter diagram is assembled, the map is color coded to identify risks as insurable, partially insurable and uninsurable in the traditional insurance marketplace (see simplified version to the right).

Risks to be plotted include traditionally insurable risks such as workers’ compensation and products liability, as well as other risks that may need attention prior to a catastrophic event. Examples include loss of a key customer or supplier, loss of reputation, loss of a license, copyright infringement and other risks you may be aware of and have learned to accept. Then there are the blind spots:

Risks not brought to your attention, such as recent regulatory changes in a territory that you do business but aren’t necessarily briefed on routinely. It can be somewhat surprising what is uncovered during the collaborative process.

Then the conversation shifts to what actions need to be taken to address those risks. Some can be transferred to insurance companies by endorsing a policy. Others can be transferred in a contract. Some can be engineered out of the business through training and some can be avoided with a change in strategic direction.

Why don’t businesses already do this and what is a risk adviser’s role in the process?

Risk heat mapping isn’t new, but many companies aren’t utilizing this tool. They may not be aware of it, feel too busy to bother with it or think it won’t help them.

That’s where a risk adviser plays an important role. He or she should guide you through a risk treatment and response plan, in order to avoid, prevent, reduce, transfer or retain the risk. The goal is to avoid surprises, spend your insurance dollars efficiently and utilize the most effective risk management tools at your disposal.

You may find yourself becoming more or less comfortable with a certain risk; but you will make an informed decision on the best way to deal with it. You don’t want to fall into the routine of automatically renewing the same basic insurance program on the theory that — ‘Well, it was good last year, it’s probably good this year.’

How long will it take to create a map?

If the right people are in the room for 90 minutes, you could end up with a good draft of a risk heat map. Then, it’s a matter of determining who is going to run with what and how to implement your action plan.

When is the best time to start the process?

There are two preferred times: (1) just before you start the insurance program renewal process. Typically, five months before renewal, you meet with your broker to talk about the insurance market and set a renewal strategy. If you back that up 30 days, you can start the conversation at 180 days with a risk heat map discussion. The map is then used to form your renewal strategies. By the time you renew your insurance, six months later, well thought out decisions inform your choices and you have specific action plans for dealing with your risks. Or (2), another good time would be a company retreat or strategic planning session with the executive team and/or board.

A risk heat map may confirm what you’re doing, save you from a blind spot or help you reprioritize your risk management plans. It’s a relatively small investment of time for the potential rewards you will discover.

Insights Insurance/Risk Management is brought to you by Arthur J. Gallagher & Co.

How to cover foreign risk — before it hits your company bank account

In today’s global economy, most businesses have some type of foreign risk exposure whether it’s exporting goods or services to foreign countries, opening or acquiring operations outside its home country, or even sending employees overseas to conduct business on behalf of the company.

That’s why you need to understand your risk exposures and then transfer that risk to an appropriate insurance program, so that you are not unknowingly self-insuring or even over-insuring, says Marilyn Salley, client executive at Arthur J. Gallagher.

Smart Business spoke with Salley about how to minimize your company’s global risk.

What trends are you seeing with global risk?

Unfortunately, some businesses are finding that they don’t have the right coverage in place until after they have a claim.

Not all insurance policies are created equal.

A ‘standard’ commercial general liability policy purchased for operations in the United States has very specific coverage territory limitations. For example, if a domestic business had a product liability claim that occurred in the United States, it would be covered because the standard territory includes the United States (and its territories), Puerto Rico and Canada. If this business also sold goods in Mexico, the United Kingdom, China or any other country, the business would be self-insuring for that same loss if it occurred outside the covered territory — unless a worldwide endorsement was added to the policy. This type of endorsement must be negotiated and is usually only available for incidental sales.

How should a U.S. based company cover risk exposures outside the United States?

Businesses should purchase a foreign insurance package for risk exposures for travel, sales and operations outside the United States. This can be a very cost-effective approach to transfer risks related to foreign general liability, foreign automobile liability, foreign voluntary workers’ compensation, travel accident/sickness, kidnap and ransom and terrorism.

What should you look for when purchasing an international insurance package?

Insurance rules and regulations vary dramatically by country. It’s extremely important to make sure the coverage is broad and tailored to the countries where your exposure exists.

A business with local foreign operations must consider whether insurance is compulsory, legal and taxable. For instance, a U.S. business that has a local operation in China — even a small sales office — should have a master foreign package policy, in addition to a local policy that is issued in China by your U.S. brokers local office. In China, non-admitted insurance is illegal, and violators are subject to fines and/or incarceration.

Every country has its own regulatory guidelines for insurance. When the local policy is placed, make sure you’re receiving a policy digest in English, so you know what you have purchased.

Why is it important for businesses with employees who travel to have a foreign package?

In today’s world, it’s important to have all of the appropriate insurance in place to protect your assets and your employees. When you have employees traveling overseas, it’s imperative to have travel accident/sickness coverage as well as kidnap and ransom coverage. This would be in addition to foreign voluntary workers’ compensation, automobile and more.

In some countries, if a medical evacuation is required, the individual must provide a credit card before services will be rendered. This can be truly impossible due to circumstances and extraordinary costs. A business can transfer this risk to the insurance carriers and take the burden off employees.

Through the use of technology, an employee can now download the carriers app and obtain local assistance for any need, whether it’s medical assistance, personal assistance or travel assistance.

Is this something midsized companies can do, when they don’t have as many resources?

Of course, this level of service is totally open to midsized companies. Partner with a risk adviser today that can seamlessly provide an integrated insurance program, regulatory guidance and local resources across the globe.

Insights Insurance/Risk Management is brought to you by Arthur J. Gallagher & Co.

How a new point of view can help you be an employer of choice

Have you ever squeezed a balloon and watched the air bulge out the other side? This metaphor explains how many companies manage employee benefit risks, says Gus Georgiadis, area president of Gallagher Benefit Services at Arthur J. Gallagher. But a new approach can help your organization be a more attractive place to work.

“Employers that are in that top tier of being able to attract and retain talent, and in earning the right to say that they are an employer of choice, they are the ones that are managing their risks across the entire organization,” Georgiadis says.

Smart Business spoke with Georgiadis about how to minimize benefit risk with a horizontal approach.

What do you mean by managing risks across the organization?

You need to focus on your total employee rewards. Employees benefit from various types of non-wage compensation, beyond direct compensation, and an employer will incur expenses as a result of these. You need to manage the risk side of these expenses, whether it’s a leave policy, long- or short-term disability policies, paid time off, absence management, injury protection or workers’ compensation programs.

Top employers manage the risks of these programs to ensure that they are 1) competitive and 2) cost affordable. Because as program costs rise and talent becomes more competitive, organizations have to think holistically about the total rewards, in order to attract and retain top talent.

Why do employers often fall back into vertical management?

Historically companies have been organized within their management teams around vertical components. Human resources manages health benefits, the CFO suite has responsibility for elements of risk management, and yet another person from production oversees safety and workers’ compensation. Even smaller organizations, where people wear multiple hats, must shift their thinking.

There isn’t enough cross-pollination to see if a policy in one area can help another, or if a trend might indicate a larger problem. For example, an employer might focus solely on medical costs and shift first dollar responsibilities to employees with a qualified health plan. But management also has to consider how that could affect diabetics. Employees might not do what’s necessary to manage their diabetes with higher out-of-pocket costs. This in turn can affect their ability to come to work and be productive.

Another example is opioid use. In an ideal setting it’s intended for pain management and to get people back to work, but there are issues of dependency or having medicated employees at work, which could lead to workplace safety or productivity issues. You can’t tackle a problem in isolation, because there’s a cause and effect across the organization.

What best practices can business owners use to collectively manage these risks?

The forward-thinking companies, regardless of how they are organized, come together to evaluate data and consider trends and strategies to ensure that they’re not missing opportunities. Organizations should bring together the key decisions-makers and stakeholders to think through these issues in a collaborative way.

The data analytics has to be populated not just with medical and pharmacy, but also with long and short-term disability, absence and workers’ compensation data. Musculoskeletal claims, for instance, might impact absence management or disability, while also suggesting a workplace issue with the production line.

Larger organizations have access to more data analytics, but common sense can provide the same conclusions. Consider the use of vendor summits, where you periodically bring your vendors together, in order to identify commonalities and pull the thread on issues across those vendors. It allows the organization to have dialog and consider ways to tackle problems.

If you seek out help from expert risk managers to rethink your approach, it can help the entire spectrum of risk. You will begin to understand the true implications of each decision, and in turn ensure your programs are more viable, cost effective and geared toward being a place where people want to work.

Insights Insurance/Risk Management is brought to you by Arthur J. Gallagher & Co.