A big part of risk management is acting to prevent problems before they happen — whether it involves the health and safety of employees, outside market forces, or mergers and acquisitions, according to the risk manager for one of the world’s largest companies.
As director of risk management for Benton Harbor, Michigan-based Whirlpool Corp., Scot Schwarting keeps an eye on myriad issues that impact or have the potential to impact the global appliance manufacturer’s operations. For Schwarting, effective risk management is about learning the business of an organization and using insurance tools to protect that business.
After graduating from North Central College in Naperville, Ill., with a biology degree, Schwarting was hired as a workers’ compensation adjuster for Liberty Mutual. Around five years later, he moved into a risk management position with one of his Liberty Mutual clients, the global food supplier OSI Industries, located in Aurora, Ill. From OSI, he was recruited to Whirlpool, where he has been for about 10 years.
Schwarting, who was named to the Risk and Insurance Management Society (RIMS) Risk Management Honor Roll this year, is a strong believer in the use of data to find out what could go wrong and to prevent unexpected calamities.
As an example, he cited a case in which a potential workers’ compensation issue could have developed on a Whirlpool assembly line. Working with the company’s health and safety organization, Schwarting and his team in 2013 began looking at data from one of the company’s health centers, focusing on workers who “were coming in and complaining about pain in the wrist and are given an aspirin or something else.”
While all of those visits did not turn into workers’ comp claims, they were an indication of a possible problem. A system was put in place in the plant’s health center to find out what was going on. It recorded data from everyone who came in for treatment and the data was organized to reflect the occurrence of “occupational visits versus visits for flu shots, or cold, or things like that. We found out that we had, on average, 82 to 85 percent more data about what was happening in the plant than we did by just managing an OSHA log or a workers’ compensation claim. It was digitized in a format that we could pull it and do an analysis on it,” he said.
The data showed that 67 percent of all the occupational visits to the health center at that plant stemmed from one line. “That was not visible when you just looked at workers’ compensation or OSHA (data). We walked the line with the appropriate people, the engineers. We made an adjustment to the line that didn’t cost any money at all. It was just an adjustment to the way that the product was going down,” Schwarting said.
Within six months the plant saw a dramatic change — a 62 percent reduction in accidents and workers’ comp claims. The plant beat its profit plan by $2.5 million for that year and over time another $4.5 million was taken off its balance reserves for incurred but not reported (IBNR) claims.
The Acquisition Proposition
Historically, Whirlpool has grown both organically and through acquisitions, and each merger or acquisition brings its own set of challenges when it comes to integrating them into the acquiring company. Such challenges are “not unique to Whirlpool,” Schwarting said. But “every single time that you do it, what you’re really trying to do is take a bowl of spaghetti and unwind all the strings.”
For Schwarting, when assessing the risk in a merger or acquisition it’s important to start with the basics, like the physical elements of the properties being acquired. “Where are the buildings at? How are they made? How are they constructed? Are they near things that have exposures? You do that as part of your due diligence,” he said.
He described a situation with a large production facility the company had acquired in Brazil. In 2007, the insurance reports for the property program for that facility showed a probable maximum loss of $300 million. Then the financial crisis hit in 2008.
“One of the things that you might recall about those years is that a large part of the emerging markets, like China, India and Brazil were growing rapidly, while the U.S. and Europe were facing the economic challenges. That $300 million risk in a very short period of time grew to be a billion-dollar probable maximum loss just because we were producing more product and more profit in those plants, and those plants didn’t have sprinkler systems.”
An enterprise risk management review showed that the escalation in probable loss was “not really any longer an insurance problem — because I can rebuild a building because I have insurance. It was really a problem of, ‘I can’t replace us in the marketplace if we aren’t able to put product out there,’ and that’s a shareholder issue. Once we recognized that it wasn’t just an insurance issue, that it was something that we needed to protect the business and create resiliency for, the business opened up and committed to a large project — over seven years and millions of dollars to retrofit … our plants with sprinkler systems.”
After addressing the physical properties, it’s time to look at the people involved, he said. “What type of injuries are they having? What are the demographics or the age of the workforce where we are geographically?” It’s also important to determine the risk in terms of talent acquisition and retention.
Finally, a risk manager has to assess the products that are being made and how they are performing in the industry in areas such as warranty, extended warranty and product liability.
“You go through all of those due diligence things. As you’re doing it, and you’re working with the business, you get a sense of the culture that led to whatever outcome you see from that due diligence,” he said. “Those are things that I can help with. Ultimately, we take away all of the key learnings and make sure that we institutionalize them across the globe.”