Risk managers of retail businesses are broadening their definition of what constitutes risk to include the fallout of Draconian cost-cutting measures, as well as problems with suppliers and other vendors following a brutally disappointing holiday sales season, expert say.

With the recession continuing to shrink consumer demand, risk managers may be able to maintain or even lower insurance costs despite reports of a hardening commercial lines market, as retailers reduce their store outlets, inventory and headcount, according to Len Churnetski, manager director of the retail industry practice at Aon Consulting.

Indeed, closing stores and laying off employees can yield immediate premium “release,” he said–with lower payrolls translating into less risk for workers' compensation, commercial auto, general liability and property exposures, Mr. Churnetski explained.

However, every decision to shut down stores as a means of staying in business long term raises the potential for new liabilities and lawsuits, and thus should involve risk management due diligence, he suggested during a recent symposium on the sector attended by risk managers from 25 major retailers and a number of large insurance carriers that underwrite risk in the sector.

Another key area is increasing scrutiny of workers' comp and liability claims, as employers are likely to see increased loss activity during layoffs and closings, so risk managers must be even more careful in scrutinizing them, he said.

But dealing with a suddenly shrinking economy is just the latest emerging issue for risk managers in the retail category. Top management, as well as risk managers, are also scrutinizing other potential “enterprise” exposures that could threaten a retailer's profitability and even their viability, he said–citing cyber-risk and environmental risk and two such concerns.

Besides personnel and physical stores, a survey of attendees identified a number of other retail risks, including threats to the supply chain, computer systems, directors' and officers' liability, employment practices and business interruption exposure, among others, Mr. Churnetski noted.

In the survey at the symposium, nearly one-third of the retailers who participated noted they experience a 76-to-100 percent turnover of store employees annually.

This turnover, along with increasing external threats and evolving data security regulation, has led many retailers to increase their focus on cyber-risk management, the survey found.

However, 59 percent of those polled do not have a cyber-liability insurance policy in place at present. Instead, they have chosen to allocate those resources to loss prevention to thwart potential data breaches.

A growing concern is network/cyber-risk, which involves both professional hackers and former employers “worming” their way into a computer system.

High turnover rates worsen the problem, because of the need to constantly screen new employees and to make sure they communicate with each other and understand the corporate mitigation risk programs the company has in place.

The deepening economic crisis has only exacerbated the problem, according to Mr. Churnetski. “How can we cut our salary and expenses while dealing with higher shrinkage problems that always grow during an economic downturn?” he asked.

Another trend, he said, is that securing products from around the world raises the potential for business interruption risks if key merchandise is late in arriving. “As a result, retailers are trying to push the problems back to the manufacturers,” he noted.

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