Supply Chain Risks

Third-Party Reputational Risk

Compliance officials rank reputational risks posed by third-party partners as their top risk, and one-third expect the risks of bribery and corruption to increase.
By: | March 30, 2017 • 5 min read

Companies are increasingly concerned that third-party partners could be subject to bribery and corruption – which could then come back to haunt the organization in more ways than one.

Joseph Spinelli, senior managing director at Kroll, said that the vast majority of regulatory actions alleging corruption brought by the U.S. Department of Justice and the Securities and Exchange Commission usually involve third parties.

And in many of those cases, global organizations had not sufficiently vetted their third parties.

Joseph Spinelli, senior managing director, Kroll

“It’s interesting – no matter where I go, no matter who I speak with, chief compliance officers especially, I ask them what’s the one thing that keeps you up at night, and they all say “third party risk’,” Spinelli said.

“That includes suppliers, distributors, joint venture partners, agents – any type of third party.”

Compliance officials see reputational risks posed by third parties as their top risk, according to Kroll’s recently released “2017 Anti-Bribery & Corruption Benchmarking Report” in conjunction with the Ethisphere Institute.

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In 2016, that risk was No. 7 on the list, said Steven Bock, managing director and head of operations and research with Kroll’s compliance practice.

“With media scrutiny providing instant information, corporate entities are looked at not solely for what they do, but also what they do with their affiliations with regards to human trafficking, illegal child labor  – whatever the risk issues may be,” Bock said.

Plus, more than one-third (35 percent) of the respondents expect their risks from bribery and corruption to increase, while 57 percent expect the level of risk to remain the same as last year.

Top risks are expected from third party violations (40 percent), a complex global regulatory environment (14 percent), and employees making improper payments (12 percent).

According to the report, 40 percent of the respondents had more than 1,000 third parties and 29 percent had more than 5,000.

Spinelli said that global organizations need to risk-rank third parties into categories of high, medium, and low risk.

“For those third parties that fall into the high-risk category, it’s incumbent for global organizations to ensure enhanced due diligence is conducted,” Spinelli said. “This will require actual boots on the ground, with people who can speak the language, know the culture, and can ascertain all the relevant information.”

Steven Bock, managing director and head of operations and research, Kroll compliance practice

Kroll recommends that compliance officials employ a tiered screening program for third parties. If issues turn up on an initial screening, a company can then “dig deeper” to determine levels of concern, similar to a system that uses green, amber and red light symbols as triggers.

“If the third party answers truthfully and there are no issues, then it’s a green light to proceed further,” Bock said.

“If it’s amber, the company can decide whether it should proceed, and a red light would cause the company to make an immediate stop and not proceed any further without a more costly and detailed due diligence effort to understand whether the initial questions are as problematic as they seem on face value.”

The report also highlighted the importance of monitoring third parties after initial screening. More than half (55 percent) of the respondents discovered a problem with their third party’s qualifications or associations, after an initial screening.

Respondents attributed that to many factors, including misconduct that arose subsequent to the time of initial on-boarding, non-compliant behavior that was concealed or not disclosed by third parties, and red flags not discovered because of inadequate initial screening.

“I think we’ve gotten a clear message from these respondents that, from their perspective, monitoring is now a key component to an overall comprehensive and successful due diligence program,” Bock said.

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Companies must also consider the third-party firm’s reputation, it’s relationship with foreign officials – and the company’s actual business rationale for using that company, he said.

According to the report, however, nearly half (49 percent) of the respondents said they did not have enough resources to support anti-corruption efforts, and one-third had a greater level of concern about personal liability than they had the prior year.

Many of the surveyed compliance officers noted they were receiving support from their chief financial officers and finance teams.

“This is not surprising, as the chief financial officer and the finance team often have insight into the operations of multinational enterprises through their dealings with complex cross-border accounting controls and awareness of customs regarding local payment terms,” the report’s authors wrote.

Third parties must understand “there’s a zero tolerance for bribery and corruption when doing business on the organization’s behalf.” – Joseph Spinelli, senior managing director, Kroll

Respondents were also stepping up the compliance expertise and activities of board members as a result of increasing regulatory expectations by the DOJ, according to the report.

The engagement of senior leadership in anti-bribery and corruption efforts is on the rise, with more than half (51 percent) of respondents saying that senior leadership at their organization is “highly engaged,” a 4 percentage point increase over what respondents said in last year’s survey.

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Third parties must understand “there’s a zero tolerance for bribery and corruption when doing business on the organization’s behalf,” Spinelli said.

Contractual arrangements are a big part of that, he said, and should specifically describe expected duties, performance of duties, payment terms and audit rights, he said. In addition, third parties should be trained periodically on – and certify that they understand – the anti-bribery and corruption compliance program, which is now mandated by the DOJ.

“Global organizations should know that the third party is actually performing the work, and what compensation the third party is receiving for that work.”

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

Lead Story

Improving the Claims Experience

Insureds and carriers agree that more communication can address common claims complaints.
By: | January 10, 2018 • 7 min read

Carriers today often argue that buying their insurance product is about much more than financial indemnity and peace of mind.

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Many insurers include a variety of risk management services and resources in their packages to position themselves as true risk partners who help clients build resiliency and prevent losses in the first place.

That’s all well and good. No company wants to experience a loss, after all. But even with the added value of all those services, the core purpose of insurance is to reimburse loss, and policyholders pay premiums because they expect delivery on that promise.

At the end of the day, nothing else matters if your insurer can’t or won’t pay your claim, and the quality of the claims experience is ultimately the barometer by which insureds will judge their insurer.

Why, then, is the process not smoother? Insureds want more transparency and faster claims payment, but claims examiners are often overburdened and disconnected from the original policy. Where does the disconnect come from, and how can it be bridged?

Both sides of the insurer-insured equation may be responsible.

Susan Hiteshew, senior manager of global insurance and risk management, Under Armor Inc.

“One of the difficult things in our industry is that oftentimes insureds don’t call their insurer until they have a claim,” said Susan Hiteshew, senior manager of global insurance and risk management for Under Armour Inc.

“It’s important to leverage all of the other value that insurers offer through mid-term touchpoints and open communication. This can help build the insurer-insured partnership so that when a claim materializes, the relationships are already established and the claim can be resolved quickly and fairly.”

“My experience has been that claims executives are often in the background until there is an issue that needs addressing with the policyholder,” said Dan Holden, manager of corporate risk and insurance for Daimler Trucks North America.

“This is unfortunate because the claims department essentially writes the checks and they should certainly be involved in the day to day operations of the policyholders in designing polices that mitigate claims.

“By being in the shadows they often miss the opportunity to strengthen the relationship with policyholders.”

Communication Breakdown

Communication barriers may stem from internal separation between claims and underwriting teams. Prior to signing a contract and throughout a policy cycle, underwriters are often in contact with insureds to keep tabs on any changes in their risk profile and to help connect clients with risk engineering resources. Claims professionals are often left out of the loop, as if they have no proactive role to play in the insured-insurer relationship.

“Claims operates on their side of the house, ready to jump in, assist and manage when the loss occurs, and underwriting operates in their silo assessing the risk story,” Hiteshew said.
“Claims and underwriting need to be in lock-step to collectively provide maximum value to insureds, whether or not losses occur.”

Both insureds and claims professionals agree that most disputes could be solved faster or avoided completely if claims decision-makers interacted with policyholders early and often — not just when a loss occurs.

“Claims and underwriting need to be in lock-step to collectively provide maximum value to insureds, whether or not losses occur.” – Susan Hiteshew, senior manager of global insurance and risk management for Under Armour Inc.

“Communication is critically important and in my opinion, should take place prior to binding business and well before a claim comes in the door,” said David Crowe, senior vice president, claims, Berkshire Hathaway Specialty Insurance.

“In my experience, the vast majority of disputes boil down to lack of communication and most disputes ultimately are resolved when the claim decision-maker gets involved directly.”

Talent and Resource Shortage

Another contributing factor to fractured communication could be claims adjuster workload and turnover. Claims adjusting is stressful work to begin with.

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Adjusters normally deal with a high volume of cases, and each case can be emotionally draining. The customer on the other side is, after all, dealing with a loss and struggling to return to business as usual. At some TPAs, adjuster turnover can exceed 25 percent.

“This is a difficult time for claims organizations to find talent who want to be in this business long-term, and claims organizations need to invest in their employees if they’re going to have any success in retaining them,” said Patrick Walsh, executive vice president of York Risk Services Group.

The claims field — like the insurance industry as a whole — is also strained by a talent crunch. There may not be enough qualified candidates to take the place of examiners looking to retire in the next ten years.

“One of the biggest challenges facing the claims industry is a growing shortage of talent,” said Scott Rogers, president, National Accounts, Sedgwick. “This shortage is due to a combination of the number of claims professionals expected to retire in the coming years and an underdeveloped pipeline of talent in our marketplace.

“The lack of investment in ensuring a positive work environment, training, and technology for claims professionals is finally catching up to the industry.”

The pool of adjusters gets stretched even thinner in the aftermath of catastrophes — especially when a string of catastrophes occurs, as they did in the U.S in the third quarter of 2017.

“From an industry perspective, Harvey, Irma and Maria reminded us of the limitations on resources available when multiple catastrophes occur in close succession,” said Crowe.

“From independent and/or CAT adjusters to building consultants, restoration companies and contractors, resources became thin once Irma made landfall.”

Is Tech the Solution?

This is where Insurtech may help things. Automation of some processes could free up time for claims professionals, resulting in faster deployment of adjusters where they’re needed most and, ultimately, speedier claims payment.

“There is some really exciting work being done with artificial intelligence and blockchain technologies that could yield a meaningful ROI to both insureds and insurers,” Hiteshew said.

“The claim set-up process and coverage validation on some claims could be automated, which could allow adjusters to focus their work on more complex losses, expedite claim resolution and payment as well.”

Dan Holden, manager, Corporate Risk & Insurance, Daimler Trucks North America

Predictive modeling and analytics can also help claims examiners prioritize tasks and maximize productivity by flagging high-risk claims.

“We use our data to identify claims with the possibility of exceeding a specified high dollar amount in total incurred costs,” Rogers said. “If the model predicts that a claim will become a large loss, the claim is redirected to our complex claims unit. This allows us to focus appropriate resources that impact key areas like return to work.”

“York has implemented a number of models that are focused on helping the claims professional take action when it’s really required and that will have a positive impact on the claim experience,” Walsh said.

“We’ve implemented centers of excellence where our experts provide additional support and direction so claim professionals aren’t getting deluged with a bunch of predictive model alerts that they don’t understand.”

“Technology can certainly expedite the claims process, but that could also lead to even more cases being heaped on examiners.” — Dan Holden, manager, Corporate Risk & Insurance, Daimler Trucks North America

Many technology platforms focused on claims management include client portals meant to improve the customer experience by facilitating claim submission and communication with examiners.

“With convenient, easy-to-use applications, claimants can send important documents and photos to their claims professionals, thereby accelerating the claims process. They can designate their communication preferences, whether it’s email, text message, etc.,” Sedgwick’s Rogers said. “Additionally, rules can be established that direct workflow and send real time notifications when triggered by specific claim events.”

However, many in the industry don’t expect technology to revolutionize claims management any time soon, and are quick to point out its downsides. Those include even less personal interaction and deteriorating customer service.

While they acknowledge that Insurtech has the potential to simplify and speed up the claims workflow, they emphasize that insurance is a “people business” and the key to improving the claims process lies in better, more proactive communication and strengthening of the insurer-insured relationship.

Additionally, automation is often a double-edged sword in terms of making work easier for the claims examiner.

“Technology can certainly expedite the claims process, but that could also lead to even more cases being heaped on examiners,” Holden said.

“So while the intent is to make things more streamlined for claims staff, the byproduct is that management assumes that examiners can now handle more files. If management carries that assumption too far, you risk diminishing returns and examiner burnout.”

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By further taking real people out of the equation and reducing personal interaction, Holden says technology also contributes to deteriorating customer service.

“When I started more than 30 years ago as a claims examiner, I asked a few of the seasoned examiners what they felt had changed since they began their own careers 30 year earlier. Their answer was unanimous: a decline in customer service,” Holden said.

“It fell to the wayside to be replaced by faster, more impersonal methodologies.”

Insurtech may improve customer satisfaction for simpler claims, allowing policyholders to upload images with the click of a button, automating claim valuation and fast-tracking payment. But for complex claims, where the value of an insurance policy really comes into play, tech may do more harm than good.

“Technology is an important tool and allows for more timely payment and processing of claims, but it is not THE answer,” BHSI’s Crowe said. “Behind all of the technology is people.” &

Katie Dwyer is an associate editor at Risk & Insurance®. She can be reached at [email protected]