A new quantitative study has exposed what some risk managers and compliance executives have suspected: Vendors are not complying with corporate insurance requirements, representing a significant risk for their clients and partners. The report – based on thousands of anonymized verification attempts – reveals the extent of the problem, and it’s more serious than most executives might believe.
The report provides detail to help companies better identify their own risk levels. The study also reveals that this is a problem not just for risk and compliance managers, but also for C-level financial and operations executives.
Trust, and fail to verify?
The study – published as an easy-to-follow infographic titled “The State of Third-Party Insurance Verification” – shows 75% of third parties were not compliant with the insurance requirements of the companies that hire them, despite detailed policies and procedures to verify that the appropriate insurance coverage exists.
The study highlights the exact points and extent to which the verification process breaks down in three-quarters of the cases, including:
27% start but do not complete the verification process
23% fail to respond to Certificate of Insurance (COI) verification requests entirely
12% receive exceptions to the requirements
9% fall out of compliance after initial success
4% simply choose to not comply
There is a foundational disconnect between the corporate departments that specify the insurance requirements for vendors and partners, and those responsible for assuring compliance and verification. By reducing the verification process to an administrative task, its significance is downplayed to a point where it can be overlooked or ignored.
The result can be considerable unexpected financial exposure to the company the insurance requirements are designed to protect. For larger companies, these are the “deep pockets” that are frequently the targets of legal action, whether deserved or not.
In addition, failure by third-parties to obtain adequate coverage simply moves the cost to the enterprise in terms of increased coverage and higher premiums.
When enterprises can clearly demonstrate that a third-party network meets its insurance requirements, they can negotiate more competitive liability premiums and create a more efficient insurance coverage tower.
Is ops opting out?
Whether incomplete verification is a deliberate or inadvertent decision, the issue remains critical as global supply chains increase exposure to risks. The challenge is compounded by the rapid restoration of supply chains as the world emerges from the pandemic lockdown. The desire to get businesses back to full capacity can often override prudent measures to mitigate corporate liabilities.
Cyber liability is another exploding area of financial exposure for companies and their vendors and partners. The interoperations of networked systems have blurred or even erased the bright lines of culpability in the event of data breaches and the deployment of malware. This issue has exploded in recent headlines following a rise in high-profile ransomware attacks. Such vulnerabilities have existed for decades, but unprecedented ransom demands, rising losses, and increasing cyber insurance premiums are making it difficult for companies to quietly manage the fallout of data breaches in an effort to protect their brand and business.
All these exposures can come from an urgency to onboard vendors of critical supplies or services, or a desire to avoid friction with otherwise trusted partners. In many cases, this critical policy decision is made at the clerical level despite its potentially strategic implications. When interdepartmental workflows are disconnected from business outcomes, the teams managing the financial consequences of risk will struggle to keep pace as new exposures are created.
A reckoning vs. a recourse
The financial scale of these exposures elevates them to C-suite challenges that demand attention at the highest level. The challenge remains how enterprises can gain visibility into – much less gain control over – this critical operational detail.
Understanding how and where the verification process breaks down and reinforcing the process “gates” can improve compliance and better protect companies. Simplifying the process by employing a cloud-based verification service can give executives visibility into non-compliance and enable judgment calls to be made at the strategic level, where they belong.
As a result, emerging tools that can both simplify and strengthen verification processes are being increasingly adopted at large enterprises. This enables specific prescriptive remediation of gaps or oversights. Alternatively, such a detailed report can inform a strategic decision by upper management on how to handle the resource or the relationship. Leveraging these tools allows companies to better protect themselves from third-party insurance claims and can more than pay for themselves in reduced premiums gained from their rigorous use.
Businesses that can demonstrate improvements in vendor compliance through automated verification reports are positioned to negotiate more competitive insurance rates at renewal. With just minor improvements, some have reported 2-5% reductions in liability premium spend.
It is ultimately the responsibility of the C-suite to ensure third-party COI verifications are properly conducted and completed. With the right tools in place, consistent verifications can be relatively frictionless and inexpensive, lead to more favorable insurance renewals, and shield a company from potential claims.