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Maintaining HPR with new technology.

FROM MANAGING AN OFFICE TO operating a manufacturing plant or running virtually any kind of business, technology has transformed the business world. New technological developments have resulted in faster, more efficient manufacturing processes and better storage procedures and facilities. However, with these new hi-tech changes have come new, often unforeseen hazards that heighten and augment the job responsibilities of the risk manager. For instance, innovations in the design of plastic bottles and aerosol cans have drastically altered the way certain products are stored; warehouse storage piles, which have increased from a standard of 12 feet to the 50 feet that some rack storage columns now top off at, have resulted in new, formidable challenges in property/casualty coverage. Additionally, the introduction of products such as plastic dashboards, synthetic garments and computers has also created new storage hazards and thus had an impact on loss control techniques.

Fortunately, research and testing organizations continue to keep pace with burgeoning technological advancements. New products such as improved sprinklers and fire doors, state-ofthe-art boilers, and safer containers and packing materials result in better ways to prevent and minimize losses. Nevertheless, as even newer materials and manufacturing processes are developed, additional hazards are sure to follow; this ever-evolving process provides a daunting challenge for risk managers striving to maintain their firms' highly protected risk (HPR) status. For companies eager to either earn or maintain the HPR label, implementing the newest and most effective protections in their buildings, manufacturing and storage facilities, and production processes is vital; however, risk managers must also help their companies develop and put into force the managerial and philosophical outlook that is necessary to achieving HPR.

What Is HPR?

In the face of constant and often unpredictable change, the very concept of what HPR actually is remains uncertain. "The definition of HPR is amorphous," declares Mike Burke, vice president and chief engineer at Allendale Insurance, a Rhode Island-based company specializing in HPR coverage. "Insurers, for example, will define it differently depending on who you talk to."

But while the HPR designation may differ from insurer to insurer, from industry to industry, and even from one company to another, the cherished label usually means that a company has taken every possible precaution to protect its facilities and goods from risk. That may mean state-of-the-art sprinklers at one plant or a new fire detection system at another. But whatever it means for a particular organization, the HPR label demonstrates that a company has done its all to protect its property - and not merely purchased an insurance policy.

"Generally, HPR can be defined as the loss control standards needed to earn lower premium rates from insurers," says Mr. Burke. "Typically, HPR refers to the stringent protective measures taken against the threat of fire, but it can also mean loss control techniques used to protect against floods, wind damage and earthquakes." Specifically, these measures include state-of-the-art sprinkler systems that operate with an adequate water supply; suitable design and construction of company buildings; safe storage practices, especially of hazardous substances; the proper maintenance of equipment and buildings; and fire fighting strategies developed in tandem with the local fire department.

"New technological developments definitely help a company maintain higher levels of protection," declares Roger Basset, assistant vice president, engineering, with Protection Mutual. Chief among these new developments is the Early Suppression-Fast Response (ESFR) sprinkler, pioneered by Factory Mutual Research Corp. The ESFR systems, which are installed in ceilings, are used over high-pile storage areas that previously were protected by less effective in-rack sprinklers. The ESFR also works to actually suppress a fire, instead of merely controlling its spread.

Frank Suppe, vice president and chief engineering officer at Arkwright Insurance in Waltham, Massachusetts, says that although technological innovations may usher in new ways to protect a facility, a company wishing to achieve HPR does not necessarily need to implement the latest equipment. "The ESFR sprinkler, which was created to provide the optimum fire protection, has been primarily installed in new buildings. Since the cost of retrofit is high, we wouldn't recommend that a client implement an ESFR system into a preexisting plant unless there was a real need to." Mr. Suppe points out that the decision to retrofit a plant or warehouse depends on whether the added protection exceeds the cost of retrofit. "Also, although the ESFR provides the greatest amount of protection from fire, for many companies other sprinkler types will provide adequate protection."

Despite the desirability of the HPR label, it is important to realize that being HPR does not necessarily provide a company with complete protection against risk; to ensure that protective devices and procedures will virtually eliminate the dangers of a catastrophic loss, risk managers should follow three steps, says David Eaton, manager of risk, insurance and benefits financing at Bandag Inc. in Muscatine, Iowa. "First, be sure the originally designed protection system is adequate for the hazard; second, make sure that storage configuration and commodity content are accounted for in the system design; and third, make sure the local plant emergency organization and local fire department know how to optimally manage the protection system in the event of a fire."

Mr. Eaton is speaking from experience; in 1983, Bandag, a manufacturer of retread tire materials, had a fire that completely destroyed its newest, most efficiently outfitted plant in Georgia, The plant, along with all of Bandag's other facilities, had been equipped with sprinkler and fire detection systems that the company and its insurer determined would provide adequate protection; Bandag was an HPR in good standing.

But the HPR designation did nothing to save Bandag from $13 million worth of destruction. The fire, probably caused by a malfunctioning heater, burned for three weeks, destroying three and one-half million pounds of rubber. Fortunately, five other plants were able to compensate for the manufacturing output lost by the fire; this excess production capacity was a risk management technique that helped save the company. Bandag did not carry business interruption insurance because it had the capacity at the other plants to handle the extra shipping and freight. "Not many companies recover from such a major disaster," Mr. Eaton says.

Amazingly, though, Bandag more than survived the disaster; it came out of the experience stronger. After the catastrophe, the company was determined to make itself invulnerable to fire loss. Starting in 1988, the firm developed its own HPR standards by conducting largescale tests at its own expense.

The company conducted two bulk tests and two rack storage tests at a fire testing site in Florida. The four tests, which consumed 10 truckloads of finished goods, demonstrated that Bandag's fire protection was inadequate. One test, simulating the effectiveness of the sprinkler system that had been installed at the demolished plant, was a failure.

Bandag conducted three more tests to learn the information it needed to upgrade the sprinkler systems at its remaining plants in North America and other parts of the world. This upgrading cost Bandag several million dollars.

Not satisfied to stop there, Bandag also developed its own training program. It named the program the Plant Emergency Organization, or PEO. Part of the training included day-long fire safety seminars conducted at its American plants as well as at plants in Europe and South Africa. The firm also conducts follow-up courses periodically. In addition, Mr. Eaton visits each American plant at least once a year and each European plant every two years to ensure that each staff member at the plants is prepared to handle an emergency.

"We take HPR seriously," says Mr. Eaton. "But there's more to it than sprinklers. Bandag's philosophy is that it considers PEO training to be as important as spending money on sprinkler heads and pipes. The bottom line is whether a company will be able to rebound from a fire and retain its market share, not how much the cost is to meet the standards of HPP. The first question is how important it is to keep supplying your customers. Then, if you determine you can keep supplying them only without an interruption, you'd better take a look at your standards of HPR. Having been through a major fire, we realize we want to be viable when the plant is put back together. Insurance becomes secondary at that point."

And, as in the case of Bandag, many companies are learning that both training and teamwork are also crucial to maintaining virtually risk-free facilities. For example, many risk managers have been working hand-in-hand with underwriters and engineers, meeting together as teams at least once a year to plan their loss control strategies. Instead of informing insurers about their plans to design new storage facilities or new detection devices - as was the case for many firms in the past - risk managers are now inviting insurers to join them at their planning sessions.

Grant Johnson, risk manager at George A. Hormel & Co., a food company based in Austin, Minnesota, has been working with Hormel's insurers this way for the past three years. He meets with the company's insurance brokers and the insurer's loss prevention division twice a year. "We talk about what we're going to do even before we put in for our budget," he says. "Every time an inspection is held at a location, we require an exit interview with the inspectors to see if they found any problems. If so, we work on remedying the problems right away. Nothing should show up on an engineer's report that isn't talked about before the report is written up. There are no surprises."

Mr. Johnson stresses that "things are constantly changing." For example, as recently as six years ago, the company stored its products in metal cans; it now uses plastic containers. The company designated one specific plant for storing the plastic receptacles. But, Mr. Johnson said, "the storage requirements for metal empty cans are different from those for plastic. With the change came the question, `How would this area be protected?'" Hormel is still working with its insurers to come up with an adequate answer.

The teamwork approach has brought with it another benefit for Mr. Johnson - help in seeing the big picture of risk control. "Before teamwork, we didn't prioritize as we do now. It was more piecemeal then. Now we try to look at everything within the plant. If there are four or five recommendations such as changing sprinklers, increasing their head size or changing something else, it used to be we might work on one. Now we work on all at the same time."

Mr. Burke is also a strong advocate of the team approach. In the past, when companies mapped out business strategies without consulting their insurers and considered protection only as an afterthought, the costs would often mount. "The cost of retrofit can be five times more than if a company incorporated changes in its initial designs," Mr. Burke says. "Up to about five years ago, a company would send us final building plans, we'd review them, identify problems, and they'd have to fix those problems. Now our goal is to educate our clients from the beginning; we help them review the plans while they're being developed. When final plans show up at our office, they should be a confirmation of agreements we all made before. Now the charge to our engineers is to continually work with our clients so that they are with them when they decide to make changes."

Encouraging Change

Another factor in the HPR game is making sure upper management understands that when changes have to be implemented, not being adequately protected can ultimately cost more than cutting comers. "Part of the way you manage is by cost," said Harold Lang, director of corporate insurance and risk management at Kohler Co., a Wisconsin-based manufacturer of plumbing and plumbing specialty products. "If you need to make some changes in protecting your plant, you should make a cost analysis to see if it's financially advantageous to do so. However, you have to realize that skimping on protection creates a higher potential for loss; in some cases, if you're not HPR, you could lose your business in the event of a major loss."

Recently, Kohler, like Hormel, was affected by the introduction of plastics to its industry. The difficulties associated with storing such items as plastic plumbing parts, molded plastic hot tubs and wrap-around plastic tub enclosures required that the company overhaul its sprinkler systems in several facilities. "In the past, there was not a high concentration of highly flammable plastic parts as there is now, and you could get away with a normal occupancy sprinkler system," Mr. Lang said. "When that changed, we worked with our insurers toward resolving the problem."

The cost of Kohler's insurance premium did not increase during the changeover. "If the insurer is convinced that you recognize the problem and have made it a high priority capital item, you will get great cooperation out of them. They don't want you to become nonHPR," he says. Besides working with insurers to keep facilities in good shape, risk managers must also focus on training staff members to perform in a manner consistent with the maintenance of HPR standards. "Part of HPR is proper training," said Micheleine Marcantonatos, manager of property services at AIG Consultants, an arm of the New Yorkbased American International Group. "The best protected property is not worth much if the human element is not there."

Leslie Brown, risk manager at Four Seasons Hotels, a company that works hard to maintain its HPR status, also places a high value on training. Ms. Brown sees to it that Four Seasons employees know what to do in case of a disaster. "We put a lot of effort into emergency response procedures," Ms. Brown said. "There are procedures in place, everybody has a responsibility, we have tests. And we do them every shift, not just in the morning when the morning shift is there. We have fire drills, and we bring people up right from the time of orientation."


* Does the company's management demonstrate a commitment to HPR?

* Are the properties high-challenge risks that need specialized engineering services in order to be protected?

* Is there adequate premium involved in the coverage to warrant engineering services?

* Are the protection systems of superior design and in accordance with recognized standards (either the National Fire Protection Association or the HPR carrier)?

* Is building construction in a good state of maintenance and repair?

* Is there adequate sprinkler protection designed to control anticipated fires in the area of origin?

* Is there proper supervision in the form of a satisfactory watchperson or alarm?

* Are adequate public or private fire protection and water supplies available?
COPYRIGHT 1992 Risk Management Society Publishing, Inc.
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1992 Gale, Cengage Learning. All rights reserved.

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Title Annotation:business risk managers; highly protected risk
Author:Moss, Vicki
Publication:Risk Management
Date:Sep 1, 1992
Previous Article:Expert systems for risk management.
Next Article:One company's success with HPR.

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