Howard Kunreuther and Peter SchmeidlerRisk Management and Decision Processes Center

E-mail: pschmeid@wharton.upenn.edu

Presented at a Conference on

ALL FOOD IS NOT CREATED EQUAL:Policy for Agricultural Product Differentiation

Berkeley, CA.November 16, 2004

Third Party (Voluntary) versus Government Certifications for Food

Safety

OUTLINE OF TALKExamples of Safety Inspections

Introduction to EPA Risk Management Program (RMP)

Third Party RMP Audit ProjectIntroduction to the Risk Management and Decision Processes

Center at the Wharton School

Product differentiation and safety and quality certification

Examples of Third Parties in Food Safety

Potential for Third Parties in Product Differentiation?

WHARTON RISK MANAGEMENT CENTERFocus on low probability-high consequence events

• Natural Disasters • Chemical Manufacturing Incidents• Terrorism and Interdependent Security• Workplace Safety

Use of Public-Private Partnerships to develop strategies to manage these risks

Private Component: Insurance and Third Party Inspections

Public Component: Regulations and Well Enforced Standards

WHARTON RISK CENTER PROJECTS Agreement with EPA Office of Emergency Prevention, Preparedness and Response (OEPPR)

• Near Miss• Third Party RMP Audits• Accident Epidemiology

Lockheed-Martin - Airline Security

Drug-Related Risk Management – with a large pharma firm

Managing and Financing Extreme Risks

Nat’l Institute of Standards and Technology – Safer Communities

Web site: http://opim.wharton.upenn.edu/risk

EXAMPLES OF SAFETY INSPECTIONS

• Steam Boilers - mandatory (by insurer)

• Workers Compensation – mandatory (by insurer, if indicated)

• LA County Restaurant Ratings Mandatory (by County)

NEED FOR WELL ENFORCED CHEMICAL SAFETY REGULATIONS

Firms Don’t Make Benefit-Cost Tradeoffs Threshold ModelsMyopia (NIMTOF)Limited AssetsInterdependencies in Multi-Division FirmsExternalities

And these points hold for other industries!

EPA RISK MANAGEMENT PROGRAM (RMP) BACKGROUND

There are 15,500 sites that meet the RMP threshold of handling at least one of 143 listed hazardous chemicals

The threshold chemical at ~50% of the sites is ammonia (refrigeration for food processing) and at ~30% of the sites is chlorine (waste water treatment and purification)

EPA has ~50 inspectors to cover the above

Some states such as Delaware and NJ have their own RMP programs and carry out inspections in lieu of EPA

RMP is administered by OEPPR formerly CEPPO , the Chemical Emergency Preparedness and Prevention Office

WHY THIRD PARTY AUDITS FOR RMP?An alternative to “Command and Control”

Limited EPA resources – infrequent inspections

Volunteer sites means EPA can focus on “bad” facilities

3rd Party provides benchmark for best practices

Private party rather than a regulator inside the facility

Opportunity for Community goodwill via transparency

Potential to avoid penalties by self reporting

Potential for lower insurance premiums

Regulatory/litigation relief in case of an incident

INSURANCE AS THE THIRD PARTY

Insurers want inspections to be “complete enough” because otherwise they lose in claims

Inspection can reveal ways the individual company can reduce its safety and legal risks

 Analysis of all inspection data can identify patterns to reduce

safety risks  Insurers should reduce premiums to reflect lower risk

PILOT STUDY: AUDITOR TRAINING

Two day training of insurance engineers and safety consultants in ammonia and chlorine safety by DNREC

Delaware – has state RMP program; 4 ammonia and 4 chlorine sites; follow-up inspections by DNREC

Pennsylvania – does not have state RMP program;4 ammonia and 9 chlorine sites; follow-up inspections by EPA Region III

Conclusions: Trainees are capable of conducting RMP compliance inspections with performance parallel to an implementing agency

PROPOSED REVISION TO SECTION 112(r) OF THE CLEAN AIR ACT AMENDMENTS FOR 3RD PARTY

AUDITSVoluntary participation EPA establishes qualification standards for auditors Facility hires auditor or works with insurer Comprehensive RMP audit performed Auditor provides report to facility Facility reviews report 

Facility can: Take corrective action and submit report to EPA or Take corrective action and not submit report to EPA or Take no action and not submit report 

If report is submitted, EPA provides regulatory benefits of waiver of fines for non-compliance (within limits) and a three year window of freedom from an EPA RMP audit

 

SAFETY & QUALITY CERTIFICATION IN FOOD MARKETS

• Supermarket Food Products are Becoming More Differentiated– More processing outside the home

• For example, branded meat entrees– Distinctive agricultural production

• Organic produce; hormone free meats– Large scale Production + special processing

• potential for greater impact if breakdown occurs• Foreign sourcing

DIFFERENTIATION IMPOSES NEW PRESSURES ON REGULATORY &

CERTIFICATION FUNCTIONS

• Regulation: How should meat inspection respond to varying safety emphases?

• Certification: What role should USDA play in responding to consumer demands regarding production processes?

• Each stretches resources; alters traditional focus

INSURANCE AND FOOD SAFETYInsurer has staff with food experience that spend 80% of their time in facilities (including restaurants)Several certified in HACCP (Hazard Analysis/Critical Control Points) Regional firms are biggest challenge – normally started small and still behaving as a small organization despite growthLack of resources – QC person becomes HACCP person and HACCP

program done in-house without consultationRelationship with insurer grows such that facilities feel more comfortable with than regulator – leads to sharing of best practicesConcerns: consolidation leading to fewer “batches”, if problem occurs

it can effect a larger populationForces insurer to look at more closely at controls

EXAMPLES OF THIRD PARTIES IN FOOD SAFETY

Pa. Egg Quality Assurance ProgramCa. Dairy Quality Assurance ProgramFresh Produce Audit Verification ProgramQualified Through VerificationMinnesota Certified Pork

PA. EGG QUALITY ASSURANCE PROGRAM(PEQAP)

Voluntary program developed by PennAg Industries Poultry Council to minimize Salmonella enteritidis (SE) contamination

Third party monitoring by the Pa. Dept. of AgricultureProgram elements – rodent control, remedying positive

houses,optional vaccination for SE, egg holding and processing requirements, testing

PEQAP symbol for successful audit By 2002 85% of egg production PEQAPProgram started in 1994Results – 1992 SE positive product 23% vs. 2003 1.8% Flocks – 1992 38% positive vs 2003 4.4%

CALIFORNIA DAIRY QUALITY ASSURANCE PROGRAM (CDQAP)

Three components – Food Safety, Environmental, Animal Welfare

Environmental component fully operational with third party audits

Food safety course ready for implementation “Food Safety and Emergency Preparedness” with focus on bio-terrorism

Use of third-party audit for Food Safety under discussion

FRESH PRODUCE AUDIT VERIFICATION PROGRAM

GAP/GHP –Good Agricultural Practices/Good Handling PracticesBased on: Guide to Minimize Microbial Food Safety Hazards for Fresh Fruits and VegetablesVoluntary independent third-party audit by F/SISAuditors are licensed fresh fruit and vegetable inspectorsPassing audit results are posted on USDA websiteResults are valid for one yearUSDA Certificate (suitable for framing)Program has been in place for 2 yearsNo plans for metrics

QUALIFIED THROUGH VERIFICATION (QTV) FOR MINIMALLY PROCESSED PRODUCE

Based on AMS QTV manualVoluntary independent audits by AMSFacility develops QTV plan + 30 day trialAMS starts audit after plan trial successfulAudit levels IV to I; frequency range – 2/mo to 1/3 moAvg. audit cost - $1200; range - $400 to 1800USDA shield with QTV in center band on passingWebsite designating participants in developmentPilot of project started in 1996Informal internal metrics

MINNESOTA CERTIFIED PORK(MNCEP)

Pilot program covering five herds; part of wider Mn. Certified Production program

Based on MNCEP Quality Handbook (ISO 9000 basis)Components: Best production procedures; Pre-harvest food

safety; Environmental stewardship; Animal welfare; Recording and Documentation (SOP’s)

Internal monthly audit by DVM/ Annual Handbook compliance audit by MN. Dept of Ag.

Processing by Swift; sold to upscale grocery chainSalmonella levels reduced form 8.7% to essentially 0Not successful because: competition from case ready goods consumer would not pay premium for guarantees quality inconsistent because herds not genetically identical

WHY THIRD PARTY AUDITS FOR FOOD SAFETY?

An alternative to “Command and Control”

Limited USDA resources – infrequent inspections

Volunteer sites means USDA can focus on “bad facilities

3rd Party provides benchmark for best practices

Regulatory/litigation relief in case of an incident

Opportunity for Community goodwill via transparency

Potential for lower insurance premiums

Questions for discussion

Are there additional opportunities in food safety for third parties?

Could these opportunities benefit the movement to product differentiation?

Can insurers play an important role as third party certifiers in food safety in conjunction with USDA?

REFERENCESCollins, L. et al. The Insurance Industry as a Qualified Third Party Auditor. Professional Safety, April 2002, 31-38

Jin, G. and Leslie, P., The Effect of Information on Product Quality: Evidence from Restaurant Hygiene Grade Cards. The Journal of Economics, May 2003, 409-451

Kunreuther,H., McNulty,P. and Kang,Y. Third Party Inspection as an Alternative to Command and Control Regulation. Risk Analysis, Vol. 2, 2002, 309-318

Kunreuther, H., Metzenbaum, S., Schmeidler, P., Private Inspections and Mandatory Insurance for Managing Safety and Environmental Risks, Leveraging the Private Sector : Management-Based Strategies for Improving Environmental Performance (Cary Coglianese and Jennifer Nash, editors), forthcoming in RFF Press