Philip Morris: Going the Distance

With 50 insurance policies issued in 75 countries and an intricate network of production facilities, subsidiaries, transportation and warehousing sites, customers and suppliers around the world, the consumer products giant Philip Morris International (PMI) is a formidable entity—one that certainly poses a complex challenge from a property insurance perspective. But thanks to a detailed approach to risk, effective communication among risk management, brokerage and client service teams, and an agile global brokerage and insurance services network, it’s indeed a welcome challenge.

The operations center of Philip Morris International sits quietly on a hill, a stone’s throw from the edge of Lake Geneva, Switzerland. The building—modern, geometric and constructed largely of glass—climbs diagonally up a gentle embankment in such a way that the bulk of the building hides behind its street entrance. Employees enjoy picture-perfect views of a crystal clear alpine lake encircled by jagged, snow-capped mountains.

A New York-based underwriting account, PMI was spun off as an independent company from its parent, Altria, in 2008. But its recent history—successful as it is—is a small chapter in the long and legendary story of a cultural icon, a story that goes back to 1847, when one Mr. Philip Morris opened a single shop on London’s Bond Street, selling tobacco and ready-made cigarettes.

In time, Philip Morris International oversees the manufacturing and marketing of seven of the world’s 15 top international tobacco brands, jump-starting decades of commercial success. In 2012, PMI held an estimated 16.3 percent share of the total international market outside of the United States. It was also the fifth consecutive year that PMI met or exceeded its mid- to long-term diluted earnings per share growth target of 10 – 12 percent. This consistent level of double-digit growth puts PMI in an enviable place: at the forefront of nearly all major global consumer products companies.

With a global workforce of more than 91,000 employees, speaking 80 languages and hailing from all corners of the globe, PMI is a leading international firm with a far-reaching network of wholly owned sites, subsidiaries and suppliers.

FM Global’s vast engineering and claims networks, as well as its WorldReach® partnerships with leading carriers in local markets, matches PMI’s global presence stride for stride at both the corporate and local levels—and has done so since the 2008 spin-off. The support FM Global has provided since then has evolved, as PMI’s own needs have evolved. In 2011, PMI began a 100 percent insurance program with FM Global, which involved the full use of FM Global capacity, the PMI captive, and in-depth utilization of FM Global’s WorldReach partner network. This lockstep support comes in many forms, including contract certainty and a cost-competitive, locally compliant insurance program that suits a global entity like PMI and its multinational risk management plan.

PMI’s risk management team opened its doors for a candid discussion about its approach, philosophy and relationship with its insurance partner. The team included Fabrice Fuentes, director, treasury pension and insurance; Pawel Pietrucha, director, global risk management and insurance; Jonathan (Jon) King, manager, risk control and loss prevention; Elizabeth (Liz) Beaudet, manager, risk management and insurance; and Felipe Dantas, manager, risk management and insurance.

What are PMI’s biggest challenges in maintaining its global program?
Jon: From an engineering standpoint, FM Global has been doing an exceptional job surveying our facilities. Where we see challenges is with resident engineering, particularly when we’re undertaking projects. Our projects can’t wait, and they won’t wait.

The underwriting challenges are different. We comply with all local regulations, currency regulations; billing and paying premium can be a challenge. We consider compliance to be nonnegotiable. There are so many regulations in place all over the world. But that can be resolved by working with your WorldReach partners. Local issues come from having a global program.

Pawel: In my mind, there are two key issues. We demand 100 percent compliance. This is our philosophy. So every single territory needs to be compliant with local regulations, have contract certainty, and a policy issued on time, not three or four months down the line. It has to be done ahead of renewal date. We’re talking about servicing a global program that includes 100 or more jurisdictions.

The second thing is about relationships. We see that cooperation and communication are completely different when there’s a resident engineer doing the work. These engineers speak the same language, and they can report quickly to the location. It’s a completely different level of cooperation than if an engineer from outside the area has to do the work. You can’t compare. You certainly can’t replace FM Global’s resident engineers.

Fabrice: In essence, we share the same goal as FM Global’s underwriters. Our common goal is to mitigate losses and make the process as smooth and cost-efficient as possible. It’s easier to convey that message within the organization, to ensure that a risk control program is in place. We want to engage the entire organization, not just the engineering group, or safety and security, but general management, local management as well as finance—because ultimately an event will have financial ramifications and impact across our organization.

We want to make sure that when we undertake a big project the entire organization is engaged. This is our role in risk management: It’s about educating our entire organization, not about perusing a single engineering report. If there is a loss, the whole business will suffer. We must have continuous product in the pipeline. Insurance in this case is a business matter.

Felipe: We have one main objective, to ensure we understand our exposures so that they can be adequately managed. One challenge is to ensure we use a uniform yardstick, while recognizing local constraints. Circumstances vary from big markets to small markets, high-volume production to specialized production, highly automated to largely manual processes. The same solution cannot necessarily be applied everywhere. That means everyone has to have the same awareness of risk in order to drive continuous risk improvement. To deal with this challenge we need to constantly communicate. We’ve created a training program, supported by FM Global, to share fundamental risk engineering and methodologies to a broad audience across PMI. We’ve been very pleased with the outcome of those trainings, with high satisfaction rates from the attendees. We also see increased activity to implement risk recommendations in areas where we have presented our seminar.

"These engineers speak the same language, and they can report quickly to the location. It's a completely different level of cooperation than if an engineer from outside the area has to do the work. You can't compare. You certainly can't replace FM Global's resident engineers."

What are some of the strengths of PMI’s global program?
Felipe: The global property program is very well structured. Although it is centrally controlled, our program is not structured in a silo. Central control gives the program focus and continuous attention; it also provides a simple, single point of contact for all our affiliates to come to for support. Likewise, we use the FM Global Risk Reports to communicate potential issues throughout our operations. We team with safety, security, engineering, supply chain, operations, procurement and legal to devise solutions that are effective for PMI, and the answer isn’t always more sprinklers.

How do you benchmark your facilities if they haven’t had a loss?
Fabrice: You can really only measure them if they’ve had a loss, and see how fast they can put product back in the pipeline. Then you can measure yourself against the competition: ‘So what competitive advantage can I gain?’ This is a real-life case study, not some intellectual analysis on paper.

How do you manage your supply chain concerns and your third-party facilities?
Liz: From a risk control perspective, we treat our third-party facilities the same way we treat our own facilities. That’s the general rule for risk management purposes. We do understand the nature of some territories where you can’t replicate the laws and standards. But we go into these facilities and really work with the provider. It’s something that is practiced in reality. It’s our goal to implement our standards in all of our third-party warehouses. It could take six months, a year or more before we get there; but eventually we get there and implement all of our training and education. We believe in what we do, and that philosophy flows out to these facilities.

Talk about the partnership you have with your client service team.
Jon: The program at PMI wouldn’t be as successful without the support of our client service team. We have a tremendous engineer in Rocky Pacheco, and excellent underwriting and overall management with Pat Duus. They are supported by a very large FM Global team that allows Pat and Rocky to be extremely responsive to us. They know us very well and know our needs very well, and they move heaven and earth to get us services when we need them. It’s not always easy. FM Global also provides comprehensive training to their people. I always give Rocky a hard time when he can’t be where I need him to be because he’s in training! I tease him, but he’s making himself better at what he does, which is also good for us.

Over the last few years, you’ve given your field engineers more and more authority. Fortunately, I think we have a strong account team that takes a very practical and pragmatic approach to assessing risk, identifying what’s important to work on, and not trying to get the last little nail hammered down. It’s a great team, and it’s also a very committed team. They’re quite important to us.

Pawel: The FM Global team has more years with this company than I have! I started to know them at the time of the spin-off. I have been amazed at our recent stewardship meetings, when Rocky and Jon were going over some recommendations with Pat. She knew them by heart! This was shocking, that in this specific aspect somebody knows more about this company than I do! We have contact with New York operations manager Vincent Reyda, too, and what we hear from him is constant support. The relationships are great and are what allow us to function so effectively as business partners.

Jon: When you get to the account level, Rocky and Pat have a broader picture; their relationship with PMI is not with one facility, but with all of them. For example, in terms of a specific recommendation put forth by a field engineer, they may say: ‘Yeah, that might be a critical issue, but for the account, it’s not. An event or a loss might disrupt production at this facility for a month, but I know that if something does happen, PMI has a business continuity plan in place at this facility.’ We appreciate this broad view of the account. One of the most interesting and fascinating aspects of this job is when you’re sitting around the table looking at a new project, a factory or site, and you go through that negotiation over the best way to protect it.

What keeps you awake? What are you concerned about?

Fabrice: Mitigating losses, ensuring business continuity and running cost-efficient programs. There’s a tendency to feel at ease, to be complacent. You need that spark to stay abreast of changes, constantly improving processes, and better uses of our resources. It’s a complex environment, so we need to keep pace with those changes and make sure we can respond in a most effective manner.

Pawel: Whatever you can’t control is what keeps me awake. Natural disasters. Thai Flooding. Earthquakes in Japan. The rest we can control, and I’m comfortable with how we operate. With locations below sea level, all you can do is have a business continuity plan in place. Of course, it’s one thing to have a BCP on paper, another to test it.

Jon: I’m comfortable that we’re well-protected from everything we can think of. There might be something out there we don’t know about, or haven’t seen. That’s the part that keeps me awake and the part that keeps us on constant alert.