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Opportunity knocks in 1992.

Few economic events have been more heralded, analyzed, publicized and theorized than the integration of Europe's internal market in 1992. However, until recently, Americans did not have to think in international terms. A world the United States dominated economically and politically for decades was one in which Americans could afford to be myopic. The English language would suffice in any situation, foreign travel meant they came to us, and we only had to learn superficial facts about countries to conduct overseas business-details were better left to international experts. Those days are over.

Plans have been under way for decades for a single European market, and 1992 stands as a fulfillment of the promise the European Economic Community made in 1957. Americans, however, are just becoming aware of the imminent changes. For one, the U.S. insurance market has begun to stand up and take notice of both the opportunities and challenges.

Foreign interests have directly purchased U.S. industries or invested in stock portfolios when they did not desire direct control. As a result, multinational corporations and smaller companies now offer in-house language lessons, and American workers are assimilating foreign cultures' work ethics. Still, in Americans' relatively new status as internationally aware citizens, the information available on Europe in 1992, much of it confusing and tedious, can be difficult to understand.

There is a tendency to denigrate the importance of 1992 as a mass of meaningless regulations and legislation or to inflate it to a stature that rivals all past dreams of a unified Europe. In reality, 1992 is a great event that could change the face of government and the world political economy. It can also be perceived as a nonevent that seeks to ratify what everyone has been doing or attempting to do for decades. In any case, 1992 offers opportunities for exploitation and economic confusion, as well as the hope for prosperity and another 40 years of peace in Europe.

For the U.S. risk manager of a multinational company attempting to manage foreign risks, and for the insurance industry as a whole, pertinent issues are at stake. Risk-oriented environmental, pharmaceutical and consumer regulation areas will present both restrictions and opportunities with the opening of a single market estimated to consist of 330 million European consumers with $4 trillion worth of purchasing power. Accordingly, multinationals will change their approach to European business, moves that will surely affect the multinationals' risks and the risk manager's ability to deal with them.

To anticipate how a U.S. company might react to 1992, the chart titled "Business Scenarios in 1992" on page 34 predicts changes in production, marketing, labor and other operations which signal a need for communication and possible changes in multinationals' risk management programs. U.S. corporations are included with non-European companies, even though, for example, a Swedish company's approach may be different from that of a U.S. firm. Note the distinction between national companies with only export facilities and multinationals that own one or more subsidiaries in Europe.

Risk managers must be aware of probable changes in regulations, corporate and tax laws, EC-wide insurance forms and policy issuance as well as reactions of their own companies and competitors. Generally, areas meeting the most resistance to change will involve the loss of national sovereignty through the establishment of Europe-wide trade and immigration policies, the replacing of national currencies with a single European currency and a consensus on taxation. Also resistant to change will be economic areas, which will affect individuals due to lost jobs, immigration of workers and tax and Value Added Tax (VAT) rates.

Most worrisome for the risk manager is the products area. As new products emerge, standards change and liability becomes strict. In the ECC tougher regulations on pollution liability will emerge, and greater concentration of risks will occur as companies acquire more businesses and/or centralize their activities. Other changes include the probability that more European companies will develop risk management departments. U.S. risk managers should be prepared to travel frequently to Europe or base on the Continent an assistant empowered with Europe-wide responsibilities.

New brokers will emerge and existing brokers will grow through mergers and acquisitions. Some brokers will retreat and emphasize the local nationalistic elements of their book of business, while others will contract with new networks for representation in each country. And some will just wait and watch for developments propitious to their interests. Large brokers and agents will use greater leverage. Crossborder brokering of risks will introduce new brokers to new markets, with many subsequently forming their own networks. Captive brokers may be sold to larger brokerages or may in some industries retain their foothold, turning to multinational insurers for help in controlling their subsidiaries, thus increasing their job security. Some existing brokers, unable to compete, will disappear.

Insurers will change their identity and size, with mergers resulting in higher insurance company retentions and less need for reinsurance. Other non-insurance financial institutions will emerge, emphasizing pricing rather than underwriting to capture market share. As predicted in Paolo Cecchini's book "1992: The European Challenge" (1988, Gower Publishing Co.), pricing in general will decline 10 percent to 34 percent, depending on the country and line of business.

Insurance markets themselves will change. Brokers will have increasing influence in markets or segments now dominated by insurance company sales forces. Co-insurance may increase as a means of accessing capacity, and additional policy charges and other fees may disappear under competitive pressures. General agents may be squeezed out and alternative risk transfer methods will spawn more captives and risk retention groups. The European insurance industry, staid by nature and tradition, will become more dynamic to survive the upcoming changes. U.S. insurers and brokers will have to respond in kind to this invigorated spirit.

Non-Insurance Effects

On the non-insurance side there will be other changes affecting multinationals and their employees. Mutual recognition of European university degrees and professional designations should allow professionals to move from country to country, although doctors and architects have been doing this for years. Movement-of-capital restrictions will end, allowing multinationals to recapitalize more freely.

Tourists may arrive in one European capital and not have to go through customs again until they leave the Continent. On the other hand, non-European community passport holders could face long lines and lengthy delays in customs. Prices should drop, but non-Europeans may no longer be able to recover the VAT charges for luxury items bought at the borders. However, European travelers' shopping restrictions should be eliminated. As a result travel patterns will change as well. Traffic at major airports will lessen as regional airports gain traffic due to deregulation. Telephone rates from Europe will decrease as a greater supply of hardware reduces costs of equipment for national telephone companies. Overall, Europeans' freedom to live and work in other countries will grow.

Clearly, the European community has the ability to become Americanized, and in due course Europeans may even begin to think like Americans. Europeans may become more independent as their territory enlarges, with greater flexibility in lifestyle and less dogged nationalism. In fact, we are already witnessing the Americanization of Eastern Europe, following a series of revolutionary upheavals which left the West breathless. Both radical and subtle changes in the balance of power have followed and will continue through 1992. The political outcomes most likely to influence the economic complexion of the EC are the reunification of Germany, Eastern Europe's emergence from totalitarian dominance and a Soviet Union anxious to Westernize and increase its involvement with an expanded EC.

These events are dictating a tight timetable for resolving areas of 1992 resistant to change. Already the issues of labor rights, industrial relations and monetary and exchange policies are moving forward. The beginnings of a European central banking system can also be seen. And a role for Eastern European and European Free Trade Association countries is inevitable. In fact, much of the driving force behind the political upheaval is the glorious vision of a 19 member EC (the current 12 plus Bulgaria, Czechoslovakia, East Germany, Hungary, Poland, Romania and Yugoslavia). A close relationship will evolve as Western European countries seek Eastern European locations for production in an effort to lower labor costs and avoid regulations. Eastern Europe could well become the next Asia-Pacific production center.

Turkey and other countries with similar economies are also anxious to join the EC. Calls are being made to include the Soviet Union in efforts to rebuild Eastern European economies, with an eye to the EC helping convert the USSR to a free market system. Japan is working on ways to avoid export quotas by re-exporting through other countries; Japan's investments in Eastern Europe will facilitate its entry into the EC. Furthermore, the United States expects treaty linkage to the institutions of the EC.

While the term "1992" began as a buzzword for the completion of EC internal market integration, it has come to symbolize a new European economic and political unity. For the insurance industry, 1992 offers increased opportunities because the process of rebuilding and restructuring a continent depends on controlling and managing the risks.

An EC Primer

In 1992, 500 years after Europeans discovered the Americas, they will discover themselves. But what is 1992 and what does it mean to Americans concerned with the myriad financial, legal and political risks that prey on multinational corporations?

There is no primer existing on 1992. There is only one book, "1992: The European Challenge" by Paolo Cecchini-commissioned by the European Commission and recently made available in the United States-which purports to tell what will happen. Although it can be tedious reading for Americans, it contains solid knowledge of the European Community, its history and how it operates.

The plethora of general business articles are, for the most part, not grounded in technical knowledge. Instead, they present one point of view over another. The clearest, most basic treatment of 1992 can be found in the publications of large accounting firms, which early on embraced the topic from a non-European multinational point of view. Financial analysts can, to a certain extent, provide input on a per-industry basis, but they cannot match the booklets of accounting firms. Management counsulting firms anxious to advise multinationals on the implications of 1992 offer some published materials designed to whet appetites, but again, they do not match those of accounting firms.

Before assessing the impact of 1992 on your job responsibilities, corporation and the rest of the world, a general knowledge of Europe and the EC is essential. As far back as 1946, Winston Churchill proposed the creation of "a United States of Europe." In 1947 a base was created with Belgium, Luxembourg and the Netherlands, forming an economic union called the Benelux group. The European Economic Community came into force in 1957 with six members-Belgium, France, West Germany, Italy, Luxembourg and the Netherlandsand became known as the Common Market. In 1973 Denmark, Ireland and the United Kingdom joined. These three countries had formerly applied in 1961 and 1967, when Norway also requested entry, but were rejected. Norway later opted not to reapply. On Jan. 1, 1981, Greece became the 10th member of the EEC. And on Jan. 1, 1986, Spain and Portugal joined the Common Market.

In 1985 the Single European Act was signed, stipulating that tariffs, border restrictions and other restraints to trade be removed by Dec. 31, 1992. A more precise nickname for the events that will result in a single European market might therefore be called 1993. In fact, Jan. 1, 1993, will probably be no different than the day before, with changes evolving gradually, painfully and sporadically.

Although most insurance regulations are due to go into effect in July 1990, many countries have not yet moved legislatively to this end. Furthermore, in December 1989 all EC members except the United Kingdom endorsed a social charter of workers' rights, which supports the freedom to join labor unions and demand health and safety work standards. In addition, a development bank was set up to channel investment into Eastern Europe.

While these dates are significant, it is also important to understand European institutions, because they will ultimately determine the Continent's economic and possible political future. There are four key institutions: the European Commission, Council of Ministers, European Parliament and Court of Justice.

The European Commission, which runs the EC and speaks through the Council of Ministers, is headquartered in Brussels and houses 17 commissioners appointed by each government. There is one commissioner from each country, with two appointed for France, West Germany, Italy, Spain and the United Kingdom because of their size. The commissioners are similar to U.S. senators in terms of perks and staff. The commission employs approximately 15,000 people.

The Council of Ministers, which has representatives from each EC country, acts on proposals from the commission and usually has the final decision regarding directives and other relevant business. The council rules by majority vote and has a moving chairmanship, with each country taking its turn, in alphabetical order, and presiding for six months at a time.

The European Parliament consists of more than 500 members elected directly from throughout Europe and meets monthly in Strasbourg, France. As national parliaments have slowed down in passing local legislation, this entity could become as powerful as the U.S. Congress or the United Kingdom's parliament. Finally, the Court of Justice of the EC interprets the Treaties of Rome, the mutual agreements upon which the single market concept is based, and other EEC agreements. It is based in Luxembourg with 13 judges and its rulings have had the effect of law.
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Title Annotation:includes related information; integration of Europe's internal market
Author:Middleton, Carole Foster
Publication:Risk Management
Date:Jun 1, 1990
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