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Changes ahead for European risk managers.

AT PRESENT, THE EUROPEAN COMMUNITY (EC) goal of abolishing all obstacles to freedom of movement for people, services and capital across member countries' borders has only been partially realized, but the process is well under way. And so far, this movement toward the implementation of a common market has resulted in some profound changes that are causing risk managers to think differently about their jobs. For one, a plethora of EC liability, health and safety laws are being enacted. In addition, the imminent emergence of a single market has resulted in significant operational changes in the insurance industry. This new environment, bred by the removal of Europe's internal borders -- and the resultant increase in pressure on businesses to align their operations in accordance with these changes -- is creating both new responsibilities and opportunities for European risk managers.

Of critical importance are the legislative changes in health, safety, liability and related issues. These new laws, a consequence of the shift in political and social values, are on the one hand attempting to stimulate economic forces by deregulation and the removal of national barriers to international trade; on the other hand, they impose significant liability consequences on corporations whose products or services pose a real or potential danger to the public. Additionally, the risk exposures themselves are increasing in number and in size.

One example of such new legislation is the European Community Product Liability Directive, which was adopted in 1985 with a requirement that it be implemented by member states by July 1988 -- though few made any attempt to meet the deadline. The directive requires member states to introduce laws imposing strict liability on producers of defective products found to cause injuries or dangers; it also imposes joint and several liability. Although the directive contains three restrictive elements -- the development risks of a state-of-the-art defense, the exclusion of primary agricultural products and a financial ceiling of Ecu 70 million -- it is sure to have a great effect on both business and insurers. The full impact of this directive has yet to be felt, but it is reasonable to postulate a number of probable liability consequences.

First, due to its expansion of consumers' powers and rights, the directive is likely to result in an increase in claims. Under the old system, less than 30 percent of accident victims in EC-member countries pursued claims for compensation, primarily because consumers bore the burden of proving negligence. However, under the directive, this proof of negligence requirement is no longer necessary. As a result, the number of settled claims is likely to increase; this, combined with the expenses associated with the investigation of unsuccessful actions, will lead to increases in insurers' and businesses' legal costs.

The directive is also likely to cause a rise in forum shopping. For example, the decision of member states in regard to the options, the different effective dates of the legislation, and the principle of joint and several liability may result in actions being taken in one member state and judgments being enforced in another. Additionally, factors such as campaigns by consumer groups, increased media attention, heightened lawyer involvement, increased availability of legal expenses insurance, as well as trade unions and other organizations offering free legal advice, are likely to accelerate the effects of the legislation.

And there are more laws in the works. Another directive, currently being prepared, will impose strict liability on service providers. In addition, a directive on "civil liability for waste," which would make producers of waste strictly liable for damages, is also being introduced.

Increasingly in Europe risk management standards are not merely being chosen by companies to suit their own business needs, but are being imposed on them by society via EC legislation, in much the same way as, say, accounting standards are imposed on business rather than freely chosen. Ultimately, European risk managers may find that essential aspects of the practice of their discipline are delineated by externally set standards and controls, as indeed is the case for the corporate accountant.


Undoubtedly, the expansion of risk exposures and the new legislative environment will profoundly affect risk management practices in Europe in the 1990s. Consequently, how can companies meet their dramatically altered risk management needs and remain viable? The companies most likely to survive will be the ones that have instituted comprehensive risk management systems; highly developed risk management practices in industry will become indispensable for attracting high-quality insurance capacity. As for insurers, those who will remain to serve their clients' needs will be the ones able to withstand heavy insurance losses, particularly in the area of liability. Of necessity, these insurers will be large, with the financial resources necessary to cope with the greatest demands -- in particular those whose success derives from a tradition of sound selective underwriting and its usual concomitant of long-term relationships, as well as other services. Additionally, insurers will have to pay closer attention to their clients' risk management philosophies and practices and, in response, offer risk engineering services in order to eliminate or reduce the risk of loss.

Meanwhile, the range and size of risks arising from industrial processes continues to increase; consider, for example, the immense pollution risks in Eastern Europe, which have come to light since the collapse of communism. So far, European business has yet to feel the full bite of this recent anti-industry, pro-consumer legislation; the new Directive on Civil Liability for Damage Caused by Waste, for example, is still only in draft form. Consequently, these new developments seem to point to a watershed in the 1990s for industrial risk management and the deep pockets who will be expected to pay the ever-increasing bills for liability claims -- that is, the insurance industry.


At the day-to-day level of risk management, new developments, particularly those in the liability area, are forcing Europe's major corporate buyers of insurance to look for long-term partnerships with secure insurers who can meet their needs in regard to capacity, a flexible attitude to insurance and self-insurance, and services such as risk engineering and risk management information systems. However, numerous changes are rocking the insurance industry in Europe. For one, the European Community is gradually moving toward a single insurance license system, which will limit supervision of an insurer to the country in which it has its head office. Thus, any branch, agency or subsidiary based in an EC state will be able to write any insurance business in any other EC state. The new rules will also allow EC-based insurers to establish subsidiaries and branches in any state.

These freedoms may not mean much in the United Kingdom, which already has an open insurance marketplace, but for many of Europe's risk managers it is a dramatic development. Formerly accustomed to operating in highly protected markets, these risk managers will now be bombarded by a wide range of insurance product choices that they will have to assess for quality and security. In addition, another type of product, the so-called Euro-wide policies, will also be available. These policies are designed to take advantage of the ability to sell one insurance contract to cover a client's interests cross-border throughout the European Community. However, Euro-policies have yet to be widely utilized, which is not surprising given that each of the EC states still has its own legal system, method of taxation, regulations on insurance supervision, market wordings and rating systems and social security systems--not to mention each country's different language, culture and business practices.

At present, the Zurich American Insurance Co. has probably gone as far as any insurer can to meet the expectations of Euro-products. However, the company's "Euro-policy," which is a direct insurance all-risks property, business interruption and comprehensive liability policy covering exposures in the EC for large risks, faces certain age-old global program problems such as gaps, overlaps and premium taxes. The company has to deal with these problems in much the same ways that it and other global insurers have always done.

Therefore, when insurers explain their new products for the new Europe, saying that they provide for certain local or central loss payments in different currencies, and the options of central or local premium payments -- again in different currencies -- and such services as premium tax efficiency, it is clear that a single market is not yet in evidence. These options, and all the others, are offered because the insurance relates to different markets with different rules, regulations, standards, rates and needs --and not to a so-called single market.

Because of these problems, Euro-policies still have a long way to go before they become widely popular. So, of particular interest in today's Europe are the new insurance groupings, which have been developing over the past few years as a result of mergers, takeovers and the implementation of new Euro-wide networks in the insurance industry. This flurry of merger and acquisition activity, which represented the new groups' efforts to position themselves to take advantage of the single market when and if it arrives, has provided risk managers with new choices of carrier, security and services. The products offered may be similar, but their servicing capabilities have in many cases changed, and usually for the better; the trend has been for insurance companies to combine and offer as a by-product a wider range of expertise and more local servicing facilities.

One of the changes that will be seen in the future -- and which is already under way -- is that international insurers will be increasingly required to respond from the location in which the risk manager presents the business. For example, if a risk manager wants to place his business in London, then the quote and control will emanate from there. Similarly, an international risk manager ought to be able to go to the same insurer and get a quote from Frankfurt, Paris, Milan or any other city in the European Community.

However, despite deregulation and the resultant availability of new products, risk managers have to bear in mind that the insurance markets of major European countries are still dominated by monolithic groupings of large insurers who usually deal direct and have overwhelming market muscle in their still protectionist environments. In addition, markets in certain EC countries vary in operating philosophy. The Americans and British tend to think that their heavily brokered markets are the natural way of transacting insurance business, although the truth is that most markets operate differently; Germany, for example, is one of them. Some 3,000 insurance brokers take a market share of about 10 percent in Germany, while captive intermediaries number 226, with a market share of 3 percent. Sales via banks represent a market share of about 5 percent and direct sales of about 2 percent. Most business, clearly, is handled through tied and independent agents. There are, indeed, no legal provisions in Germany governing access to the profession of broker or agent. Still, brokers there are beginning to make headway, so risk managers must keep a watchful eye on new developments.


The introduction of cross-border freedom to sell insurance services within the European Community obviously implies greater choice for Europe's corporate insurance buyers, some of whom, as was mentioned before, are accustomed to operating only in highly protected home markets. However, this new freedom to choose their insurers from a wide range of international companies is making these buyers think more intensely about the whole process of risk financing and alternatives for self-funding deducible levels, self-insurance funds, captive insurance companies, rent-a-captives and financial reinsurance. Now that the European insurance market is becoming more open like the U.S. and UK markets, the psychology of its corporate insurance buyers is coming to resemble that of U.S. and UK buyers who, for the past decade or so, have been extending their reliance on alternative risk financing mechanisms.

In Europe, the past few years have seen the creation of captives by major European companies such as BMW. But captives are only one tool that can be used for alternative risk financing; many industries are now funding the retention of more of their won risks using the whole range of the self-funding methods mentioned earlier.

This process of change has been stimulated indirectly by another freedom-of-service consequence: the creation of many new giant companies following the recent spate of mergers and takeovers. Most of today's European captives are owned by multinational companies that have decided they want the buying power and control that comes from the central organization of risk financing. In addition, more companies have recently achieved multinational status and the geographical and risk spread that makes country-by-country, division-by-division decisions on risk retention levels and insurance purchasing uneconomical.

In the past, the European-owned captive typically concentrated on property insurance exposures, often because property and business interruption premiums accounted for most of the corporate premium spent, and also because liability covers had been inexpensive; this lack of liability has been due to Europeans' reluctance to litigate as well as the fact that workers' compensation and employers' liability have been, in many cases, run by state-controlled entities.

However, the growth in litigation and related insurance costs is now forcing many firms to use their captives for liability exposures. This is not necessarily as dangerous as it sounds. For example, the captive and its parent can benefit from the long-tail nature of liability insurance, which generates considerable investment income. In addition, underwriting liability business can produce greater benefits for the captive than writing short-tail property business; moreover, this latter capability can often be as effectively dealt with out of an annual self-insurance fund as in a captive.

All told, these new developments will dramatically alter the risk management scene in Europe. Although these changes seem sure to benefit the public, their effect on companies will depend on how well their risk managers do their jobs. However, now that top management is forced by new laws and self-interest to pay more attention to risk management issues, risk managers have the opportunity to both serve society and increase their status in the corporate hierarchy.
COPYRIGHT 1992 Risk Management Society Publishing, Inc.
No portion of this article can be reproduced without the express written permission from the copyright holder.
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Title Annotation:Global Risk
Author:Best, Chris F.
Publication:Risk Management
Article Type:Cover Story
Date:Oct 1, 1992
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