Question

Loss control activities of a business focus on finding and implementing solutions to reduce the probability of loss (loss prevention) and/or reduce the actual amount of loss (loss reduction), and therefore reduce the total cost of risk to maximize firm profitability.

Loss control techniques have been widely used in environmental loss prevention, catastrophic loss prevention, and employee-related risk management. Many firms face loss exposures caused by using, storing, and transporting hazardous materials, caustic substances, gasses, acids, etc., and may have unique issues posed by deployment of “greener” vehicle fleets using CNG, LNG, and bio-fuel solutions. Catastrophic risks, such as earthquakes, tornado, hurricanes or big fire, also pose significant threat to the property safety and business continuation for firms. Employee behavior-related risks and product safety are also important concern of corporate risk management.

Lack of effective loss control (such as inadequate systems, inadequate standards, and inadequate compliance with safety standards) may cause significant damage to a firm, such as injury costs, property damage, liability damage, bad press, lower sales, loss of employee morale, so on and so forth, as British Petroleum (BP) or Toyota had suffered in the past.

In this project, select an S&P 500 company and analyze its loss control policies focusing on either environmental loss prevention, or catastrophic loss prevention, or employee-related risk management.

Your analysis should address the following questions in the least:

• How likely the firm is subject to catastrophic losses?
• Has the business suffered losses of the kind in the past?
• What losses could be caused to the firm if a catastrophic event occurs?

A. Direct Property Loss

B. Indirect (or consequential) Property Loss

C. Liability Loss

    D. Personnel Loss

     E. Crime

     F. Other Loss Exposures

• What loss control activities has the firm implemented to reduce the loss?
  • E.g. For Property loss control, comment on Facility design and construction, Automatic Sprinkler Protection, Preventative maintenance, Equipment and Process controls and safeguards, Human Element programs, Pre-incident planning and Business continuity planning
  • Proactive Safety procedures vs. Reactive Safety & Recovery policies

Answer 1

For the purpose of this analysis, I have selected Johnson and Johnson and gathered information from their latest 10-K SEC filing.

• How likely the firm is subject to catastrophic losses?

The company operates in three business units = Consumer, Pharmaceutical and Medical Devices. They also operate in 60 different countries.

The medical and pharmaceutical business units are subject to stringent regulations and any failure by the company to adhere to the code and ensuring with the regulations can cause punitive damages to be applied on the company. They also be sure to use safe work place habits and chemicals.

Being present in 60 countries, the company needs to rely on information security to inter-act with all parts of the business. Any significant threat from cyber attacks can cause production losses or loss of valuable and confidential product related patent thefts.

The company also faces country specific geo-political risks and production units may be hampered in case of regional instability.

• Has the business suffered losses of the kind in the past?

Yes, in 2014, in India, they lost the license to operate tests revealed that the company used ethylene oxide to sterilise baby talcum powder. Ethylene oxide is suspected to cause cancer.

In 2018, the company had to pay punitive damages to the tune of INR 12 millions per patient for selling them faulty hip joints.

As recent as 2019, the company was ordered to pay a $300 million fine o a woman who claimed her use of the talc powder caused cancer.

• What losses could be caused to the firm if a catastrophic event occurs?

A. Direct Property Loss - depending on the type of event - a hurricane destroying their factory, an angry mob destroying their company warehouse, they could lose production and distribution capabilities.

B. Indirect (or consequential) Property Loss- they might be forced to close down operations at a particular place.

C. Liability Loss - they might be required to pay damages to clients / patients for the faulty products or medicines.

D. Personnel Loss - they might have accidents at plants

E. Crime - their might be theft at warehouses or cyber attacks on their network which can cause loss of valuable patents.

F. Other Loss Exposures - changing environmental regulations or new research / tests can make some of their products obsolete.

What loss control activities has the firm implemented to reduce the loss?

The Company maintains cyber security insurance in the event of an information security or cyber incident.

The Company uses financial instruments to mitigate the impact of fluctuations in currency exchange rates on its cash flows