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Loss control in the new Europe.

Loss Control In the New Europe

To say that Europe is undergoing massive change is a major under-statement. Multinational organizations conducting business in Common Market and Eastern bloc countries are significantly affected by these changes. However, what is not easily discerned is the impact these changes will have on risk management and, more specifically, loss control. Loss control has historically been viewed by many European risk managers, intermediaries and insurers much the same way it has been viewed in the United States: as a means to generate information that supports an underwriting process and as a way to control and eliminate loss. Because of socialistic economies in many European countries, insurance pooling mechanisms received less attention in Europe than in the United States because the system does not reward cost savings generated by loss control measures. The reality of changing operations, legislative environment and labor force due to a liberalization of crossborder trade, however, has inspired European and U.S. subsidiary risk managers to re-evaluate the need for loss control and how political and economic changes have impacted such programs.

A primary emphasis of the European Community's trade directives is product standardization. The European Community has long acknowledged that the cumbersome process of manufacturing a single product in multiple configurations has resulted in a serious competitive disadvantage in world markets. The operating expense associated with assuring compliance to indigenous laws diverted funds from more fruitful purposes. Moreover, the directives have created an opportunity where economies of scale can be realized. No longer required to manufacture products within a country to sell to that country, plant consolidation has become a more viable and financially attractive alternative.

As manufacturing entities are combined, many new risk management issues become apparent. Not only do real property values increase, but business interruption values increase more rapidly. The ability to reconfigure manufacturing flows increases the number of internal supplier-customer relationships. As these increase, interdependency relationships become more critical. As European exposures combine with exposures in other parts of the world, such as those presented by feeder plants in Latin America, business interruption financial qualification becomes extremely important.

The Emergence of HPR

These developments have awakened interest in highly protected risk concepts. What has become evident to many managers in Europe is that HPR is not so much a series of loss control methods as a management approach to property conservation. Indeed, HPR is difficult to define precisely because it varies among countries, companies and even locations.

In the United States, the basic elements of HPR include: management attention to loss control; comprehensive catastrophe planning; proper construction based on plant and equipment; inspection schedules; adequate housekeeping; installation of automatic fire suppression systems; and protection against primary exposures such as flood, earthquake and windstrom. More often, the U.S. risk manager is surprised to discover what appears to be lack of HPR standards in Europe. In reality, however, European HPR exists, but its elements often differ from American HPR due to differences in building construction, water supplies and managements' attitude toward safety and insurance rates.

The type of construction found in the United States and Europe varies because the longevity of many European companies at one location has required them to periodically add on to buildings at the same site. The construction is normally fire resistive or non-combustible, thus creating multiple fire divisions which actually help spread risk. Since U.S. facilities tend to consist of large spans with high values under non-combustible construction and a single fire division, the lack of the fire divisions requires the use of sprinkler systems.

Regarding water supply, the amount available in Europe for sprinkler systems is often limited due to various government regulations prohibiting companies to use the public water supply for fire fighting. The implications for many European risk managers are self-evident, and the variable water sources may be too costly. In effect, the overall attitude toward safety in Europe is different from that in the United States. While Americans employ reduction measures such as sprinkler systems, Europeans tend to emphasize loss prevention. Quality housekeeping, sophisticated training programs and elimination of potential hazards are evidence of the European contention that prevention rather than reduction is a better approach toward safety engineering. Finally, insurance rate reductions for sprinkler systems in the United States and Europe also vary. Generally, the rate structure in Europe for sprinklers do not contribute to paybacks as quickly as in the United States.

Although it is unfair to characterize European risk managers as being unfamiliar with HPR fundamentals, one can say that they are not as knowledgeable about HPR's sprinkler protection aspects. This suggests that the ancillary industries associated with sprinkler protection are not as prevalent in Europe as in the United States, posing a challenge and an opportunity in this field at the advent of 1992. If economies of scale will be realized in new plant construction, it is likely that many U.S. techniques of plant construction will be adopted. Moreover, when American companies expand in Europe and begin to build plants similar to ones in the United States, the concepts of HPR sprinkler protection will need to be developed.

The Human Element

As Europe becomes unified into a common market, the society will also become more transient, putting pressure on certain societal institutions. For one, European legal systems, in which jury trials and punitive damage awards are uncommon, are likely to change. As the EC becomes more consumer-driven, liability issues will inevitably become a concern to all companies. In addition, worker safety will become more critical given the possibility of increased employee turnover and less stable work forces.

A directive that will directly impact litigation is the Product Liability Directive. The drafters made sure that appropriate defenses, such as "state of the art" and "statute of repose," were included in the directive. As a result, the directive has heightened the awareness of both home country manufacturers and importers to quality control guidelines. Although most experts do not predict a significant rise in loss frequency or severity, the combination of a more transient work force and a liberal interpretation of the directive could, in the long term, raise the ante. Therefore, the risk manager has a vested interest in exploring quality control standards and examining product recall processes.

The area of quality control in an increasingly competitive environment will no doubt exert pressure. Although quality assurance techniques are in place, they may not be as well-documented or understood as similar programs in the United States. Product recall processes also must incorporate not only a possible change in product flow but also a change in distribution centers.

Workers' Compensation

Of special concern to U.S. risk managers involved with overseas operations is workers' compensation. In many European countries, "workers' compensation" is a form of social insurance, paid for by a uniform payroll tax on all employers, and as a result, management lacks the motivation to apply loss prevention methods to this exposure. Although this socialistic nature is not likely to change, as Europe becomes more competitive and cost-conscious due to the directives and the opening of Eastern European markets, management will need to become more aware of the costs associated with worker safety. Ultimately, Europeans will adopt American risk management techniques to respond to this growing exposure.

Quantifying workers' compensation costs has long been a matter for U.S. risk managers. They will likely transfer this methodology to overseas subsidiaries, and then convince the subsidiaries that it is wise to invest in loss control, particularly employee safety. Although such activities reduce losses, the costs associated with implementing such programs remain fairly stable in pool mechanisms. The immeasurable benefits are found in the areas of lost time, employee morale and the overall subjective expenses associated with employee injury cases.

The work of EC agencies charged with overseeing health and safety matters is particularly important to U.S. risk managers. In the United Kingdom, the Health and Safety Executive is empowered to monitor compliance with employee safety regulations much the same way as the Occupational Safety and Health Administration does in the United States. Individual U.K. directors and officers can be held criminally liable for employee fatalities. Recently, a director of a plastics company was sentenced to one year in prison after an employee had been killed. In another case, British Petroleum was fined $7 million after two incidents in which three people were killed and two others were seriously injured. As a result, senior managers at Common Market firms have directed more attention to workplace safety as a result of these decisions.

The Environment

The demise of the Berlin Wall has brought not only hope but also stark realization of the harsh realities associated with the costs of centralized economies. Western Europe is now faced with the integration of an Eastern Europe that is pockmarked with environmental problems. Environmental loss control has become more integral to the risk management programs of industrial firms operating in a more environmentally-conscious Western Europe. Yet, according to the October 1990 issue of International Business, the statistics themselves are frightening: 40 percent of the forests in Eastern bloc countries are classified as dead or dying. As much as 60 percent of the drinking water supply is deemed inadequate. And 20 percent of all infants born in these countries suffer from birth defects that can be directly traced to environmental causes. Cost estimates for cleanup efforts alone exceed $1 trillion.

The Green Party in Germany has succeeded in putting environmental issues on the political agenda. In January, a German law went into effect that is expected to increase business' liability and insurance costs. The law attempts to control pollution by introducing strict liability and stiffer penalties. Key elements, which experts also expect other Common Market countries to consider, are: strict liability for soil and air pollution; liability for pollution caused by "normal operations"; allowing right of action against companies even if there is "reasonable suspicion" that it was responsible for the occurrence triggering the loss; allowing parties to seek personal injury damage up to 160 million Deutschmarks; removal of a cap on the maximum amount that can be collected by a worker injured in a pollution incident; and forcing litigation in German courts against foreign companies.

Additionally, the United Kingdom has issued "white papers" on the current condition of the environment and has recommended corrective actions at governmental and private industry levels. Legislation under consideration involves right of action against the polluter and an assessment mechanism to fund cleanups. In the Netherlands, France and Italy, pollution is covered by pools of private insurers. The policy forms clearly exclude coverage for pollution. Again the dilemma faced by the risk managers in these countries is that, although loss control measures may clearly reduce loss severity and frequency, the bottom-line cost savings are not so evident. Care must then be taken by the risk manager that subjective costs be translated into objective impacts, such as loss of market share as a result of negative publicity surrounding an environmental incident.

Capacity for insurance coverage remains adequate for European pollution exposures. There are, however, signals that this is changing quickly as insurance markets respond to the progressive German directives, as well as the anticipated establishment of a Common Market "EPA." (How this will affect the Eastern European nations, which will probably seek EC membership later in the decade, remains to be seen.)

Certainly, U.S. risk managers need to stay attuned to developments within the environmental legislative arena in Europe and ensure that all service providers involved in international risk management programs are equipped to respond to problems as they arise. Environmental testing programs and quality control standards should be an integral part of European loss control programs. Many insurers and brokers operating in Europe have already responded by beginning to provide environmental loss control services.

Post-1992 Europe presents both opportunities and new problems. It is the perfect time for the risk manager to examine the application of a company's loss control philosophy globally. Control of one's losses and associated loss costs will be one of the key factors in successfully implementing a global risk management program. Success in competing within the new marketplace will become increasingly dependent on how well these risks are managed.

Teresa L. Pahl, ARM, CPCU, is senior vice president and Pierre Ruette is vice president of Corroon & Black International in Chicago and New York, respectively.
COPYRIGHT 1991 Risk Management Society Publishing, Inc.
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1991 Gale, Cengage Learning. All rights reserved.

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Author:Pahl, Teresa L.; Ruette, Pierre
Publication:Risk Management
Date:Oct 1, 1991
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