Filed Under:Technology, Distribution Channels

Supply Chain, Cyber & Rising Property Rates Emerging Concerns for Retail Risk Managers

Traditional exposures such as General Liability, Workers’ Comp and Product Recall still merit keen attention

What does being part of the global economy really mean?

Consider how even a midsize food retailer sources the items that stock its shelves today: procuring produce from South and Central America; getting gourmet products from Europe; and flying in farm-raised seafood from China.

It’s no wonder, then, that managing supply chains is a top-of-mind concern for retail risk managers, according to consultancy-group Accenture’s 2011 Global Risk Management Study: Retail Industry Report.

Another big concern for “Big Box” retailers is the rising cost of property insurance across the board—and even steeper spikes in catastrophe-exposed areas.

To help retailers cope with increasing costs, brokers are developing innovating approaches, such as Marsh’s Marine Cargo Retail Stock-Throughput program.

Usually, inventory in overseas transit is covered by Marine placement and then transferred to Property coverage lines upon reaching a warehouse or a store, says Mac Nadel, U.S. retail/wholesale practice leader at Marsh.

But the stock-throughput coverage allows a Marine policy to continue covering the goods, helping to lower a buyer’s insurance costs.

GO PHISH: PAYMENT METHODS TAKE CENTER STAGE

Technology-related issues also remain leading concerns, with prevention of security breaches moving up seven notches on the list of top concerns of retailers, as ranked in the 2012 Retail Risk Factor Report from financial-advisory organization BDO (see chart).

While smartphones and e-commerce have allowed retailers to expand their business across the globe by letting consumers anywhere buy with the click of a button, electronic-distribution channels must be monitored to make sure they are not  exposing their customers’ data to hacking attacks.

As many businesses switch from catalogue sales to e-commerce as part of their multichannel distribution efforts, information privacy and network security is at the forefront of the risk battle, says Nadel at Marsh, as  non-cash electronic payments expose companies and customers to data-poaching, identity theft and fraud.

And cyber crime, specifically hacking, viruses and malware, made the biggest leap in Aon Analytics’ most-recent Retail Risk Report, coming in as the fifth-highest retail risk last year.

And this concern is amply justified by real-world incidents.

TJX Cos., which operates retail stores in the United States, Canada, Ireland and the UK, reported in 2007 that over the two previous years data-security breaches compromised more than 45 million of its customer records.

The information was stolen by hackers who had tapped data transmissions from handheld equipment that accounted store inventory, and the thieves used it to break encryption codes and steal the usernames and passwords of employees at company headquarters.

And the risks associated with doing business online aren’t limited only to criminal activity.

In a February 2011 case against Williams-Sonoma, the cookware retailer, the California Supreme Court ruled that the practice of asking credit-card customers for their ZIP codes for the purposes of selling their credit-card information to third-party marketing companies violated state consumer-privacy statutes. The Song Beverly Credit Card Act now triggers penalties of up to $1,000 per request.

GENERAL LIABILITY, WORKERS’ COMP STILL TOP CLAIM SOURCES

For all the emerging concerns over cyber exposures and supply chains, the “bread-and-butter” exposures, such as General Liability and Workers’ Compensation, still count toward as much as 80 percent of claims hitting the retail industry, says Ace Hardware Corp. Director of Risk Management William Montanez, a member of NU’s Risk Managers Advisory Board.

Basically, “the role of a risk manager within a retail operation is to manage the cost of risk by creating a safe environment within the retail space, to educate all employees in workplace safety culture, and to develop a strategy to ensure proper contractual transfer of risk with manufacturers with Product Liability and defense costs,” he says.

Expanding on Product liability risks, Montanez adds:  “At the end of the day, we are retailers, not manufacturers. We have to be very adept at insurance-transfer mechanisms with our suppliers. Essentially, if there is a Product liability issue, we want to be able to shift it back to the manufacturers instead of absorbing the cost of picking up the case.”

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