Teddy Award Winner

De-Clawing Risk

PetSmart cut workers' compensation costs while almost doubling in size.
By: | November 1, 2013 • 6 min read

PetSmart is growing so fast that it outgrew its insurance carrier’s workers’ compensation program.

Considering that its employees handle scaredy-cats, snakes and Chihuahuas fierce enough to take on Great Danes, developing a more robust safety program and a hands-on claims process for the expanded company was crucial.

The results of PetSmart’s complete overhaul of its workers’ compensation program — including switching carriers, which allowed the Phoenix-based company to use a third-party claims administrator — are impressive: a 51 percent reduction in the store injury incident rate since 2008, and an estimated $33 million in cost savings from reduced claim frequency. Those metrics and others make PetSmart a 2013 Theodore Roosevelt Workers’ Compensation and Disability Management Award winner.

David Jewell, PetSmart’s director of risk and insurance, said that while the company’s footprint rose from 826 stores in 2006, to its current count of 1,301 throughout United States and Canada, its workers’ compensation costs are now less than they were in 2008. This improvement is due to a lot of reasons — instituting a safety culture, establishing accountability for safety, working on an efficient risk finance arrangement, changing how the company handles claims and managed care, and putting in place a clinical consultation program.


“In retail, and more specifically in our unique business model, this is very important,” Jewell said. “For us to achieve a downward trend on workers’ compensation costs, at a time when the company has almost doubled in size, is an incredible achievement on the part of our team.”

The biggest challenge for PetSmart was that its insurance and risk finance structure were bundled with a middle market workers’ compensation carrier. The traditional arrangement precluded the use of a TPA. But with PetSmart’s workers’ compensation estimated costs rising an estimated 64 percent between 2005 and 2008, change was in order.

“We were spending all this money and we were unable to have the control and flexibility of having a dedicated unit of onsite claims professionals who would work directly with us,” Jewell said.

Unique Risk Exposures

Pet stores present unique risk exposures to customers and employees not normally faced by other retailers — risks such as animal bites and injuries requiring a high degree of specialized loss control and claims management strategies, he said. Grooming salons in every store and boarding facilities in 196 stores create an environment in which specialized care for animal-related injuries is necessary. The company also has a supply chain network of eight large distribution centers with high severity exposures of material handling.

In 2008, Jewell and his team negotiated an agreement with Memphis-based Sedgwick Claims Management Services Inc. for an unbundled claims arrangement, and also switched to a carrier that allowed for such an arrangement.

PetSmart corporate headquarters is now home to a Sedgwick national accounts manager and a working supervisor who manages liability claims, a return to work specialist, two multiline claims examiners and one general liability examiner.

“This allows PetSmart impromptu brainstorming and discussions on challenging claims and changes in protocol,” Jewell said.


R11-13p34-36_04PetTEDDY.indd“For us to achieve a downward trend on workers’ compensation costs, at a time when the company has almost doubled in size, is an incredible achievement on the part of our team.”
— David Jewell, director of risk and insurance, PetSmart

“Having them onsite makes it less expensive for PetSmart, financial issues are communicated quicker and claims get settled faster.”

Jewell’s vision for a better workers’ compensation program was “very well balanced,” said Sedgwick’s President and CEO Dave North.

“He wanted to structure a program that would, first and foremost, take care of associates working at PetSmart,” North said. “He also wanted to take some of the difficult health care decisions out of the hands of store managers while making sure they were informed on return-to-work dates and other information they need to know.”

One of the essential program features that PetSmart wanted upfront was a post-injury clinical triage program that was not “off-the-shelf” but rather very specific to PetSmart’s operations, he said. For example, if an associate was exposed to an injury that required a tetanus shot, the team would already be informed whether or not that associate was up-to-date on his or her vaccination.


Employees with up-to-date tetanus vaccinations often do not need to leave the store for treatment.

“It was this type of customization and this level of detail that really made the PetSmart program successful,” North said.

A Progressive Approach

Christine Lawson, assistant vice president, area claim manager of Willis’ Risk Control and Claims Advocacy practice, said that Willis nominated PetSmart for the Teddy Award due to PetSmart’s “extraordinarily progressive approach to enterprise risk management.”

In 2011, Willis expanded its long-term partnership with PetSmart to include all casualty lines, making Willis its exclusive broker for property and casualty lines, Lawson said. To support PetSmart’s efforts in enhancing its workers’ compensation program, Willis aided the company in developing a strategic risk plan with three primary goals: clarification of PetSmart’s key financial and operational goals; definition of service objectives, activities, accountabilities, and deliverables to align with those goals; and establishment of specific and measurable metrics for each goal.

“Once we identified the goals, we worked hand-in-hand with PetSmart to drill down into areas that we could work together with PetSmart to improve,” she said.

Workshops were held involving cross-functional teams to develop and document mutual goals, metrics and accountabilities, Lawson said. Areas of improvement included a new risk management information system, identifying safety and claims process enhancements, and a cost-saving analysis from a claims perspective.

“Willis and PetSmart work as a team to continually assess PetSmart’s risk program and ways to be make it better than ever,” she said.

A Solid Safety Program

Another critical improvement of PetSmart’s workers’ compensation program was the implementation of a solid safety program, said Virginia Baba, risk management/claims manager for PetSmart.

Stores with high incident rates are identified and placed on corrective action plans within PetSmart’s safety training observation program, called STOP.

All stores are required to develop their own safety teams who meet regularly to discuss upcoming monthly safety topics, which are provided by the company’s safety and loss prevention team, she said. The store safety teams then talk about those topics with all store associates.

There are both pet safety and human safety topics for the stores, and a separate safety topic for the distribution centers. Pet safety topics would include proper pet restraint and recognizing signs of pet stress, while human safety topics would include eye safety, strain/sprain prevention, heat illness and forklift safety.


PetSmart’s formal safety program has given the company more control over claims “in some of the more challenging jurisdictions,” Baba said. For example, by having a strong safety culture and the right TPA in place, PetSmart was able to become successfully self-insured in the state of Washington. The company was also able to opt out of workers’ compensation in the state of Texas and develop its own benefit plan.

“An excellent safety program is crucial to managing work injury claims in either of these jurisdictions,” Baba said.

The company also developed an innovative return-to-work program, in which employees coming back for transitional duty can accept in-house charitable work assignments, such as taking care of animals in the stores’ Pet Adoption Centers manned by local nonprofit organizations.

“Some of these pets are in the adoption center 24/7,” she said. “If a nonprofit volunteer isn’t available, our associates help take care of the pets, review the adoption safety checklist, and sit at the table at the front of the adoption center to answer questions from pet parents or potential adopters.”

Employees in the transitional duty program may also perform safety checks throughout the store to help drive the company’s safety culture, Baba said.

Since the inception of the return-to-work program, there has been a 48 percent reduction in “average days on restricted duty” and a 70 percent reduction in the number of associates out over 90 days.

PetSmart is also implementing a new stand-alone risk management information system to track all incidents and costs, Jewell said. “PetSmart is establishing a road map for an enterprisewide incident reporting module for the future.”

Katie Kuehner-Hebert is a freelance writer based in California. She has more than two decades of journalism experience and expertise in financial writing. She can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

Risk Focus: Cyber

Expanding Cyber BI

Cyber business interruption insurance is a thriving market, but growth carries the threat of a mega-loss. 
By: | March 5, 2018 • 7 min read

Lingering hopes that large-scale cyber attack might be a once-in-a-lifetime event were dashed last year. The four-day WannaCry ransomware strike in May across 150 countries targeted more than 300,000 computers running Microsoft Windows. A month later, NotPetya hit multinationals ranging from Danish shipping firm Maersk to pharmaceutical giant Merck.


Maersk’s chairman, Jim Hagemann Snabe, revealed at this year’s Davos summit that NotPetya shut down most of the group’s network. While it was replacing 45,000 PCs and 4,000 servers, freight transactions had to be completed manually. The combined cost of business interruption and rebuilding the system was up to $300 million.

Merck’s CFO Robert Davis told investors that its NotPetya bill included $135 million in lost sales plus $175 million in additional costs. Fellow victims FedEx and French construction group Saint Gobain reported similar financial hits from lost business and clean-up costs.

The fast-expanding world of cryptocurrencies is also increasingly targeted. Echoes of the 2014 hack that triggered the collapse of Bitcoin exchange Mt. Gox emerged this January when Japanese cryptocurrency exchange Coincheck pledged to repay customers $500 million stolen by hackers in a cyber heist.

The size and scope of last summer’s attacks accelerated discussions on both sides of the Atlantic, between risk managers and brokers seeking more comprehensive cyber business interruption insurance products.

It also recently persuaded Pool Re, the UK’s terrorism reinsurance pool set up 25 years ago after bomb attacks in London’s financial quarter, to announce that from April its cover will extend to include material damage and direct BI resulting from acts of terrorism using a cyber trigger.

“The threat from a cyber attack is evident, and businesses have become increasingly concerned about the extensive repercussions these types of attacks could have on them,” said Pool Re’s chief, Julian Enoizi. “This was a clear gap in our coverage which left businesses potentially exposed.”

Shifting Focus

Development of cyber BI insurance to date reveals something of a transatlantic divide, said Hans Allnutt, head of cyber and data risk at international law firm DAC Beachcroft. The first U.S. mainstream cyber insurance products were a response to California’s data security and breach notification legislation in 2003.

Jimaan Sané, technology underwriter, Beazley

Of more recent vintage, Europe’s first cyber policies’ wordings initially reflected U.S. wordings, with the focus on data breaches. “So underwriters had to innovate and push hard on other areas of cyber cover, particularly BI and cyber crimes such as ransomware demands and distributed denial of service attacks,” said Allnut.

“Europe now has regulation coming up this May in the form of the General Data Protection Regulation across the EU, so the focus has essentially come full circle.”

Cyber insurance policies also provide a degree of cover for BI resulting from one of three main triggers, said Jimaan Sané, technology underwriter for specialist insurer Beazley. “First is the malicious-type trigger, where the system goes down or an outage results directly from a hack.

“Second is any incident involving negligence — the so-called ‘fat finger’ — where human or operational error causes a loss or there has been failure to upgrade or maintain the system. Third is any broader unplanned outage that hits either the company or anyone on which it relies, such as a service provider.”

The importance of cyber BI covering negligent acts in addition to phishing and social engineering attacks was underlined by last May’s IT meltdown suffered by airline BA.

This was triggered by a technician who switched off and then reconnected the power supply to BA’s data center, physically damaging servers and distribution panels.

Compensating delayed passengers cost the company around $80 million, although the bill fell short of the $461 million operational error loss suffered by Knight Capital in 2012, which pushed it close to bankruptcy and decimated its share price.

Mistaken Assumption

Awareness of potentially huge BI losses resulting from cyber attack was heightened by well-publicized hacks suffered by retailers such as Target and Home Depot in late 2013 and 2014, said Matt Kletzli, SVP and head of management liability at Victor O. Schinnerer & Company.


However, the incidents didn’t initially alarm smaller, less high-profile businesses, which assumed they wouldn’t be similarly targeted.

“But perpetrators employing bots and ransomware set out to expose any firms with weaknesses in their system,” he added.

“Suddenly, smaller firms found that even when they weren’t themselves targeted, many of those around them had fallen victim to attacks. Awareness started to lift, as the focus moved from large, headline-grabbing attacks to more everyday incidents.”

Publications such as the Director’s Handbook of Cyber-Risk Oversight, issued by the National Association of Corporate Directors and the Internet Security Alliance fixed the issue firmly on boardroom agendas.

“What’s possibly of greater concern is the sheer number of different businesses that can be affected by a single cyber attack and the cost of getting them up and running again quickly.” — Jimaan Sané, technology underwriter, Beazley

Reformed ex-hackers were recruited to offer board members their insights into the most vulnerable points across the company’s systems — in much the same way as forger-turned-security-expert Frank Abagnale Jr., subject of the Spielberg biopic “Catch Me If You Can.”

There also has been an increasing focus on systemic risk related to cyber attacks. Allnutt cites “Business Blackout,” a July 2015 study by Lloyd’s of London and the Cambridge University’s Centre for Risk Studies.

This detailed analysis of what could result from a major cyber attack on America’s power grid predicted a cost to the U.S. economy of hundreds of billions and claims to the insurance industry totalling upwards of $21.4 billion.

Lloyd’s described the scenario as both “technologically possible” and “improbable.” Three years on, however, it appears less fanciful.

In January, the head of the UK’s National Cyber Security Centre, Ciaran Martin, said the UK had been fortunate in so far averting a ‘category one’ attack. A C1 would shut down the financial services sector on which the country relies heavily and other vital infrastructure. It was a case of “when, not if” such an assault would be launched, he warned.

AI: Friend or Foe?

Despite daunting potential financial losses, pioneers of cyber BI insurance such as Beazley, Zurich, AIG and Chubb now see new competitors in the market. Capacity is growing steadily, said Allnutt.

“Not only is cyber insurance a new product, it also offers a new source of premium revenue so there is considerable appetite for taking it on,” he added. “However, whilst most insurers are comfortable with the liability aspects of cyber risk; not all insurers are covering loss of income.”

Matt Kletzli, SVP and head of management liability, Victor O. Schinnerer & Company

Kletzli added that available products include several well-written, broad cyber coverages that take into account all types of potential cyber attack and don’t attempt to limit cover by applying a narrow definition of BI loss.

“It’s a rapidly-evolving coverage — and needs to be — in order to keep up with changing circumstances,” he said.

The good news, according to a Fitch report, is that the cyber loss ratio has been reduced to 45 percent as more companies buy cover and the market continues to expand, bringing down the size of the average loss.

“The bad news is that at cyber events, talk is regularly turning to ‘what will be the Hurricane Katrina-type event’ for the cyber market?” said Kletzli.

“What’s worse is that with hurricane losses, underwriters know which regions are most at risk, whereas cyber is a global risk and insurers potentially face huge aggregation.”


Nor is the advent of robotics and artificial intelligence (AI) necessarily cause for optimism. As Allnutt noted, while AI can potentially be used to decode malware, by the same token sophisticated criminals can employ it to develop new malware and escalate the ‘computer versus computer’ battle.

“The trend towards greater automation of business means that we can expect more incidents involving loss of income,” said Sané. “What’s possibly of greater concern is the sheer number of different businesses that can be affected by a single cyber attack and the cost of getting them up and running again quickly.

“We’re likely to see a growing number of attacks where the aim is to cause disruption, rather than demand a ransom.

“The paradox of cyber BI is that the more sophisticated your organization and the more it embraces automation, the bigger the potential impact when an outage does occur. Those old-fashioned businesses still reliant on traditional processes generally aren’t affected as much and incur smaller losses.” &

Graham Buck is editor of gtnews.com. He can be reached at riskletters.com.