When Dellanie Fragnoli was a school girl, she probably never imagined the “what I did on my summer vacation” story she would tell years later as keynote speaker of the annual Walton Lecture in the Carson College of Business. Invited to share her career expertise as assistant vice president of risk management for Costco, Fragnoli captivated students and faculty with “What I Did on Summer Break: Recalls, Renewals and Wrecks.”
Charged with managing diverse business risks for one of the world’s largest retailers, Fragnoli told real-life stories of what can go wrong when you least expect it. As an example, in 2014 while driving to vacation on Lake Chelan in Washington, she received a phone call that a plane had crashed into a Costco business delivery site in San Diego. Fortunately, the plane landed in an empty area, and no one was hurt.
Five days before, a driver in Ontario, Canada, accidentally lost control and backed into a Costco store, fatally injuring a child.
Manage reputation by doing the right thing
“There are things you aren’t prepared for as a risk manager,” she told the audience. “You probably have resources to help you deal with the issue, but you may not recognize it. This is where it pays to know your company’s culture.”
Fragnoli explained that she knew Costco had a flight department that could provide useful information during the plane crash crisis. Additionally, one of the employees in the risk management department was a pilot who was able to help secure the plane.
She said in a company where reputation and volume is everything, customer perception is crucial. Costco does not have a public relations department, so the risk management team heavily monitors social media after a crisis to assess what Costco members are thinking.
Fragnoli said risk managers must be prepared to challenge retailers’ and store managers’ inclinations to resume sales immediately after a crisis. In the case of the fatality, Costco’s risk management assessed community reaction and made the decision to close the store for a day.
“Reputation can be a double-edged sword,” she said. “People think highly of Costco and hold it to a higher standard. It is important to do the right thing.”
Volume is everything to Costco, Fragnoli said, which increases the loss exposure when it comes to product recalls. More recalls have occurred due to Costco’s dependency on global sourcing. With products coming from all over the world, she said it is hard to know what you are getting in terms of quality.
2014 proved to be as nearly exciting as the summer of 2013 for Fragnoli, when two food recalls involving occurred just months apart, affecting Costco stores everywhere. Recalls have five different classifications; the most serious is when severe illness or death can occur, and the least serious is deemed a quality-only issue.
In this case, the recalls were of the most serious classification. Listeria and E.coli contamination were discovered on fruit and meat; both can cause serious and sometimes fatal infections in young children, frail or elderly people and those with a weakened immune system.
Managing these recalls and others begins with assessing the degree of risk exposure and knowing the vendor agreement, Fragnoli said. Frequently the risk management process involves transferring risk to the vendor.
The product is pulled and returned to the vendor, and Costco members are notified by voicemail and regular mail to contact the vendor for more information. Costco also has an online claims reporting system that collects member information for the vendor.
“Vendors are not required to have product recall insurance,” Fragnoli warned. “If the vendor is small, indemnification – or compensation for a particular loss suffered – is only as good as the vendor’s insurance policy.”
Insurance renewal strategies
A company the size and sophistication of Costco requires a team of people to handle its insurance program. The company uses a broker to manage the services of three major insurance programs that provide up to $200 million in coverage.
From her experience managing complex insurance policies and negotiating renewal contracts, Fragnoli recommended reviewing the previous year’s renewal records and analyzing prior losses. When a risk manager is negotiating an insurance program, it is important to consider the strength of the insurer’s balance sheet, cash flow and collateral to get an accurate baseline quote.
“Examine any new risk exposures you may have and determine if the policy offers new coverage enhancements,” she said. “Consider if the insurer has been flexible with underwriting before you decide to bid.”
The more risk a company has, the more important it is to not think compartmentally, she said. As she concluded the lecture, she urged future risk managers to be flexible and innately curious about the types of risk they may encounter in business.
About the Walton Lecture Series
The Walton Lecture Series brings industry professionals to campus to share business perspectives and reinforce classroom material. The lecture is sponsored by the Department of Finance and Management Science, home to one of the few risk management programs in the country. Learn more or contact Michael J. McNamara, Mutual of Enumclaw/Field and Distinguished Professor of Insurance, at firstname.lastname@example.org.