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Web revolution creates new era for retail risk management

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The shift from brick-and-mortar stores to online shopping websites has the potential to shake up the retail risk management environment like a dozen boxes tumbling off a warehouse shelf.

As more retailers head for the mall exit and enhance their web footprint instead, their insurance and risk management needs will radically change, experts say. General liability risks may fade, as will some workers compensation exposures, but other comp risks will rise and emerging risks that retailers are still learning to grapple with will accelerate.

Tallying the announcements over the past several months, chains including Macy’s Inc., J.C. Penney Co., and Sears Holdings Corp., which operates both Kmart and Sears stores, are set to close a total of at least 388 outlets this year. In addition, last month Sears disclosed in its financial statements that it may not be viable in the future. In 2016, Wal-Mart Stores Inc. announced it was closing 154 stores in the United States. And the bleeding doesn’t stop with the retail behemoths: Several smaller outlets, combined representing hundreds of stores, have either gone out of business entirely or shifted to an online-only business model.

“What we will continue to see for the foreseeable future is that continued shift,” said Jeff Sizemore, Cincinnati-based senior vice president and workforce strategies, retail wholesale, distribution center practice leader for Marsh Risk Consulting, a unit of Marsh L.L.C. “You are going to see the bricks-and-mortar stores continue to shrink and, conversely, electronic fulfillment continues to grow.”

General liability

For retail risk managers, an immediate consequence of moving online is a reduction in general liability exposure.

Fewer stores means fewer consumers walking around, viewing merchandise, reaching for boxes on high shelves, trying on clothing and slipping on floors.

“As the (retail) environment shrinks you have less exposure and less traffic,” said Mr. Sizemore, highlighting what he and other experts peg as a major benefit of store closures in terms of overall risk management.

“General liability is nonexistent” in a warehouse, said Ernie Aquino, New York-based area senior vice president for Arthur J. Gallagher & Co. “In a big store environment, general liability … is (high) in terms of number of claims and costs. There is no limit. There are a lot of advantages in insurance costs” for retailers who close stores, said Mr. Aquino.

According to a September 2016 study by Seattle-based actuarial firm Milliman Inc., general liability represents 20% of the total risk costs in retail, with stores experiencing one incident for every 500 people in the United States.

Amy Angell, Boston-based principal and consulting actuary for Milliman who authored the study, said the effect of store closures is a significant reduction in general liability risk for retailers.

“Conceptually, you eliminate one big risk and that is your customers,” she said. “That’s the second biggest risk to retailers; they have people in their stores and they have to create an environment that is safe for the public and people do slip and fall. If someone is sitting at their computer, ordering things online, you eliminate those risks.” The largest risk is workers comp, she said.

Terry Grisim, Elmhurst, Illinois-based president of Safety Management Consultants Inc., estimates that half of liability claims in retail result from slips and falls, leading to another area of diminishing risk: workers compensation for retail workers walking those same floors. “If the patrons are falling, the employees are too,” he said.

Workers compensation

Experts predict the shakeup in malls and shopping centers across the country will have a drastic effect on workers compensation, which a Milliman study puts at 40% of retailers’ risk-related expenses.

Workplace injury rates

Mark Walls, Chicago-based vice president of communications and strategic analysis for Safety National Casualty Corp., said “the net effect is job loss,” since more automation reduces workforces and warehouses and distribution centers employ fewer workers than retail stores. As payroll size is an important component of workers comp pricing, comp exposures will fall.

According to the U.S. Bureau of Labor Statistics for 2017, there are 15.9 million retail workers and 948,600 “warehousing and storage workers” in the United States.

Moreover, ancillary vendors — from workers comp bill reviewers to niche medical services — will likely feel the loss, Mr. Walls added.

“Less premium dollars on the front end and on the back end, fewer claims, and then you will see less medical management,” he said. “There’s going to be a trickle-down effect.”

Claims severity

Muddying the outlook, the types of injuries that occur in a warehouse environment tend to be more severe, said Max Koonce, Memphis, Tennessee-based managing director for retail business unit for third-party administrator Sedgwick Claims Management Services Inc.

According to the most recent figures from the Bureau of Labor Statistics, injuries are more frequent in a warehouse environment: the injury rate in the retail trade was 3.5 incidents per 100 employees in 2015 compared with 5 per 100 for employees in the category of “warehousing and storage.”

Yet Mr. Koonce predicts improved numbers in the future for warehouse operations, as companies with warehouse operations zero in on greater safety measures.

“You are going to see a decrease in accidents,” he said. “If you are moving the function to a warehouse environment, then you are talking about moving merchandise with workers who are well-trained to do that in a safe environment.” Mr. Sizemore said that safety training often lags in a retail-store setting, where sales staff have diverse responsibilities — such as unpacking merchandise and arranging displays — and employee turnover is high.

“(In a store) you are going to get training that is at best, weakly effective,” he said.

“It’s a much greater challenge to reach all of the audience in a store environment than a distribution environment, (which is) much more confined and where training is regimented, where the onboarding process is much more structured.” Mr. Aquino, of Gallagher, said more automation has the potential to further decrease the frequency of claims.

“Although the warehouse has greater exposures, increasingly there are fewer employees you need,” he said. “It’s more labor-intensive, but some of the advantages are that you can automate a lot of the operation. (In some warehouses) almost everything is done through robotics or mechanical handling.”

Mr. Grisim added that automation can eliminate some of the most common warehouse injuries. “The more automation you have, the less material handling you have,” he said. “Strains and sprains are a big chunk of what happens in a warehouse space.”

Yet Amy Mattle, Chicago-based executive vice president and global client advocate for Willis Towers Watson P.L.C., said the increase in automation could intensify pressure on workers as they rush to fill orders, and lead to more injuries.

“Retailers will still need people assembling and packing,” Ms. Mattle said. “Retailers are all trying to get faster. It’s the Amazon effect. Everybody expects their order to arrive in a few days, and you could see a workforce rushing. If (retailers) are not careful, they could see more workers comp costs and injuries from that perspective.”

Mr. Aquino said some retailers are avoiding the risk altogether by outsourcing, another trend for retailers that are enhancing their mail-order business. “Some are using third-party (for) distribution and warehousing,” he said.

Cyber risk

Retailers, no strangers to well-publicized data breaches, will need to enhance their cyber security as more of their business moves online, according to experts.

“I see cyber (breaches) increasing 100%,” said Ms. Mattle, adding that retailers are asking for higher limits in network security and cyber security and that the cost for insurance is going up. “(The year) 2016 was big for cyber breaches in retail.” Retail occupancies may pay higher rates for cyber because stores have access to personal information that is desired by cyber thieves, said Gary Love, Johnston, Rhode Island-based manager of operations underwriting for FM Global, highlighting cyber as the issue to watch as retailers change their business model.

“Moving to less brick-and-mortar stores, in and of itself, is not a material factor unless the move is accompanied by an increased reliance on internet sales, in which case the cyber exposure can be even greater,” he said. “Cyber is new and is really causing a lot of thought and question marks and unanswered questions in the marketplace.”

Erik Rasmussen, Los Angeles-based managing director and North American cyber practice leader for Kroll Inc., said some retailers are lagging when it comes to enhancing their security online but he expects a major shift in 2017.

“We are seeing two to three a week in e-commerce breaches from both smaller and larger retailers,” he said. “People need to constantly upgrade their e-commerce platforms. The migration to e-commerce is forcing retailers to implement more security controls.”

And while data such as credit card information and addresses are stored in fewer places, so are actual products — leading to another increasing area of liability for retailers who move to more online sales: business interruption.

Experts say that instead of hundreds of stores, there are only a few warehouses, leading to concentrated losses if a catastrophe occurs — anything from an accidental fire or arson to an act of nature such as an earthquake or flood.

“This concentration is a big exposure for business interruption when you have all your goods in one to three locations,” said Mr. Aquino.

Mr. Love of FM Global said the increased exposures will cause retailers to rethink their policies. For example, because retailers rely on “seasonality” of sales of certain items — such as holiday gifts — a catastrophe at a warehouse could cost them a season of sales for items that will not be needed once insurance kicks in.

“(Retailers) will need to make sure their limits are adequate,” he said, adding that seasonality is not considered part of normal business interruption policies. “They will have to rethink … to pick the right coverages.”

On the business interruption side, retailers may be able to fulfill orders using another warehouse if one warehouse experiences a loss, said Carl Cincotta, New York-based managing principal and retail practice leader for Integro Insurance Brokers, adding that retailers will move in the direction of rethinking their products and their supply chains, and making sure all coverages are adequate.

“I think you will see more customization and more of a forensic analysis of when these losses occur; it’s not as clean cut as in a bricks and mortar facility,” Mr. Cincotta said.