Sat | Mar 17, 2018

Cedric Stephens | The real culprits in the Coffee Board insurance debacle

Published:Friday | March 24, 2017 | 12:00 AM

The recent firing of the Coffee Industry Board's (CDB) legal officer and company secretary, according to this newspaper's editorial of March 10, 2017, "ostensibly for underinsuring the agency's warehoused coffee stock and misleading her principals about it" is, in the opinion of this writer, scapegoating.

Other individuals were responsible for the debacle, which ultimately will be passed on to taxpayers.

Underinsurance is a sign of organisational failure. Blackwell's Encyclopaedia of Sociology defines it as "failure against some measure of performance, or failure to achieve a goal that is normally expected".

The 'normally expected goal' was the payment by the CIB's insurers of its claim for an estimated US$3 million in coffee beans that were destroyed or damaged when its premises were inundated in September 2016.

The CIB recovered substantially less than the value of the inventory from its insurers. The board and senior management were collectively responsible for this situation. Proper policies, systems, processes and procedures were not in place to effectively identify, manage and mitigate the risks to which the entity's assets were exposed.

The end result: the insurance contract did not respond to the disaster as expected.

Managing risks is one of the essential tasks of boards. This is particularly important in a place like Jamaica that is exposed to many risks and natural disasters like hurricanes, earthquakes and floods.

One local public company, for example, defines in great detail the board's functions in its shareholders report. Risk management is one of the listed responsibilities. In describing some of the risks in the notes to the financial statements, there are declarations that say "directors have overall responsibility for the establishment and oversight of the risk management framework" and "the entity's risk management policies are established to identify and analyse the risks ... and reviewed regularly".

The boards of public companies, with very few exceptions, abdicated their risk management functions in the past.

Because of this and perceptions of corruption surrounding the appointment of insurance brokers by these entities, a Seaga administration centralised insurance procurement in the finance ministry under the supervision of an Insurance Placement Committee. The mission of the unit was to obtain insurance coverage at the lowest cost.

It beggars belief that at the start of the 2016 hurricane season - the first "above-average season" since 2012 - that not a single member of the CIB's board of directors or senior management was aware of this fact - that dangers were posed by the possibility of flooding from nearby gullies - or suggested measures to reduce the hazard.

Did it not occur to members of either group that inventories normally build up during the September-March period when the reaping of coffee takes place and that its insurance policy should have been programmed to automatically accommodate fluctuations in value annually?

Was 2016 the first year in which the premises were flooded? Did the organisation have a business continuity plan and, if not, why not?

From what I know of the location, the area is prone to flooding. Regular clearing of the nearby gullies that empty into the sea is one of the simple and relatively inexpensive things that can be done to reduce the risk of flooding.

The flooding of the CIB's premises was caused by a weather system associated with Hurricane Matthew, a Category 4 event. It veered north from Jamaica to where it was headed at one time, and made a direct hit on the western coast of Haiti. If it had made landfall here the losses would have been catastrophic.

In the lingo of the IMF, such an event would have shocked the Jamaican economy.

Samuda's mistake

Karl Samuda, the portfolio minister and a former businessman - who presumably appointed persons to serve as directors of CIB - was reported in the editorial to have said that merely by "looking at the premium payments" should have a raised a red flag about the quality and value of the coffee board's insurance.

This is a mistake that many businessmen and insurance buyers make. Buying insurance that responds effectively when it is needed is a complex undertaking that involves many moving parts and individuals.

According to AIRMIC, an association of companies and individuals that specialise in risks and insurance management for corporate insurance buyers in the United Kingdom, insurance policies that are 'business-critical' and can lead to "significant balance sheet damage when the insured events occur, need to be on the boardroom agenda". Further, that senior executives need to have at least enough knowledge to ask the right questions of their insurance specialist - not from an in-house lawyer.

"Too many companies wait until a crisis occurs to do this," according to a recent AIRMIC report, which also notes "it is best practice for senior management to test their insurance programme against specific scenarios such as those at the top of their corporate risk map with their insurance advisers", before the disaster occurs.

"This will demonstrate how the policies will respond in the in event of a claim, improve understanding and flush out any gaps in cover."

Was this exercise ever carried out in CIB?

What typically happens now in many public and private companies in Jamaica - that generally do not hire insurance managers or have access to independent insurance specialists - is that emphasis is placed on the procurement of insurance to the detriment of everything else.

In public-sector companies especially, the focus is on ensuring that the entity acts in compliance with the Government of Jamaica's procurement policies. Buying suitable insurance contracts represents only a very small part of the process of managing risks as those who were involved in the long decision-making chain are now finding out.

Laying the blame at the feet of only one individual will not solve the problem.

Nasty surprises unlikely

Insurance brokers, generally, are incentivised to win procurement contests. In the case of government sector accounts, actuaries and members of the Cabinet are also involved in the decision-making process. Price is the major factor. The long decision chain creates the illusion that when the contracts are called upon to pay, nasty surprises are unlikely.

When insurance contracts are viewed by senior management and directors not solely in terms of how much they cost, but rather as legal instruments that are intended to provide contingent capital when disaster strikes, the debacle that was recently uncovered at the Coffee Industry Board is unlikely to be repeated.

This assumes, of course, that senior officials who are chosen to manage and oversee these organisations are selected on the basis their skills, experience and competence - not politics. These are important considerations.

The only thing a former government minister, a UWI graduate, asked when a candidate with a first-class degree in electrical engineering from UWI and a doctorate in physics from Oxford University was proposed as a director of a science-based company, for which the minister had portfolio responsibility, was whether the nominee was a card-carrying member of the minister's political party.

Because the person was not a member, he was deemed ineligible to serve.

- Cedric E. Stephens provides independent information and advice about the management of risks and insurance.