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BRITISH RAIL BREAKUP ENTAILS OWN RISKS

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Privatization of Britain's railroads is producing new challenges to insurers and risk managers as the formerly nationalized British Rail breaks up into dozens of private companies.

By the end of the privatization process, which began in February 1996, there will be some 100 separate companies that formerly were part of British Rail. These include 25 passenger operating companies; Railtrack P.L.C., the company responsible for rail track throughout the country; rolling stock leasing companies; freight train operators; and maintenance companies.

This has huge implications for managing and insuring railroad risks. For example, for the first time since Britain's railroads were nationalized in 1948, liability for passenger and employee accidents and claims could involve more than one company. Safety culture also is likely to vary from one company to another, and ensuring consistent safety standards will be more difficult.

Another issue for the industry is additional primary level insurance, as many of the privatized companies will be unable to maintain the (British pounds)10 million ($16.8 million deductible held by British Rail.

Safety always was an important aspect of British Rail management and has been dealt with in detail during the privatization process.

In the new regime, responsibility for monitoring and ensuring consistent safety standards lies with Railtrack. In order to obtain an operating license, each company must present a detailed safety report, which looks at safety aspects and procedures, to Railtrack. Railtrack itself, as controller of Britain's rail infrastructure and having the central role in managing health and safety for passengers and employees on the railway, had its own safety report accepted by the Health and Safety Executive, a government-funded body responsible for ensuring safety in industry.

According to Railtrack, railway safety has improved significantly since 1945, with an 80% reduction in the fatality rate for passengers and 95% for employees. From 1992 to 1996, passenger and workforce fatality rates have dropped to just six employee deaths and 13 passenger deaths, compared with 13 employee deaths and 24 passenger deaths from 1989 to 1992.

Railtrack recognizes, however, that privatization may introduce new risks. "Restructuring of the industry in recent years has seen the emergence of new interfaces between organizations," it writes in its 1996/97 Railway Group Safety Plan. Interfaces refer to places where one company's risks and responsibilities end and another's begin.

As a result, "organizations are required to identify and detail their interfaces in safety (reprorts) or contracts," the plan says, noting that "audit and incident inquiry reports have shown that interface management is a key safety risk in the restructured railway industry."

This was recognized by the HSE well before the privatization process began. In a bulky document entitled "Ensuring Safety on Britain's Railways," the HSE advised the Secretary of State for Transport in 1993 that "it is essential that, despite possible fragmentation of control, the limits of responsibilities of each party are clear and the management of safety, particularly at the interfaces between the various players involved, are maintained."

Privatizations will "allow new companies with little or no previous experience of operating on the railways to enter the industry," the HSE noted.

"There is likely to be an influx of managers and other staff with limited experience of railway safety, potentially significant changes in working arrangements and a generally more complex arrangement of different organizations with considerably more interfaces between them," the HSE explained.

"Managing safety on multi-contractor sites is a recognized problem elsewhere, but in this case many of the parties may be on the railway network as a matter of right, possibly without the willing consent of the infrastructure controller," the HSE noted, meaning subcontractors may be working on railroad property without the permission of Railtrack.

With so many companies now involved, the industry now faces "interface issues for the first time. This is the No. 1 safety risk," said Andy Brown, project director of Transportation Risk for London-based broker Jardine Insurance Services Ltd.

"What we have to do is make sure everyone knows where their responsibility is," he said.

As a result of these and similar concerns, detailed guidelines and regulations are being drawn up.

The apportionment of liability following privatization is governed by a complex inter-party agreement known as the Claims Allocations and Handling Agreement, or CAHA. A review of CAHA recently was completed and is being studied by the Rail Regulator, a government-appointed industry regulator. The review-which analyzes all aspects of the agreement-will be sent to rail companies at the end of January, said John Gott, secretary to the Rail Industry Disputes Resolution Committee.

CAHA was developed to provide a mechanism for setting claims quickly, avoiding costly and time-consuming later-operator litigation through pre-agreed liability for smaller claims.

Also going out this month is a guidance document on insurance against third- party liability, prepared by the Rail Regulator after consultation with the industry. The document lays down minimum insurance requirements for train operating companies-currently (British pounds)155 million ($259.7 million) of third party liability cover-and a requirement that all operating companies sign up to CAHA.

Both arrangements likely will be subject to constant review as the privatized industry develops. Indeed, the current CAHA review identifies four to five areas too complex to be dealt with in the current review and that require more study, said Mr. Gott.

But it seems some serious concerns remain to be answered regarding CAHA and insurance arrangements. For example, there is no obligation for contractors or subcontractors of the licensed operators to carry (British pounds)155 million of insurance, leaving the possibility of a gap in cover.

"In the emergent railway industry, where the employment of contractors and subcontractors is likely to increase, this is a potentially significant and undesirable gap in the protection afforded to third parties," the Rail Regulator, John Swift, noted in the insurance consultation document.

This view is echoed by others involved in the industry.

Lack of insurance coverage among subcontractors is a "serious concern," said Colin Hamling, manager of strategic innovation and development for St. Paul International Insurance Co. Ltd. St. Paul's currently underwrites the primary level (up to (British pounds)10 million) for most of the rail operating companies.

"Subcontractors on railway prem-ises have the same ability to incur catastrophic liabilities and historically have caused some major accidents," said Mr. Hamling, noting that many subcontractors carry insurance limits of just (British pounds)1 million ($1.7 million).

As a result, "a lot of work needs to be done to bring contract standards into the industry," he said, including the introduction of "higher insurance limits for subcontractors."

Another concern in the industry is that fact that the rolling stock leasing companies are not party to the agreement," noted Mr. Brown. Such companies lease rail cars and vehicles. This is rooted historically, said Mr. Gott, explaining that the "private owners of rolling stock were never part of any British Rail liability agreement."

But "the fact that the (rolling stock companies) are not parties to the agreement should be looked at in more detail," agreed Mr. Gott, adding, however, that "we believe we can operate (the agreement) without them," he added.

The ability of Railtrack, as provider of the railway infrastructure, to act as a safety monitor, also raises concern.

Although most observers so far are satisfied with Railtrack's ability to do the job, there is some concern whether the organization can remain impartial as another company operating in the industry rather than an independent body.

"I don't feel prejudiced by Railtrack's role, but it may be that the industry would be better served by having a separate safety monitor," said St. Paul's Mr. Hamling, noting however that it is early and "a lot of changes may develop."

Connex South Central Ltd., one of the newly privatized train operators responsible for running trains in South London and several counties in the south of England, thinks Railtrack is proving "adequate as a chief monitor so long as it demonstrates impartiality," said a spokesman.

Railtrack's position "generates conflict," said Jardine's Mr. Brown.

"It doesn't hold logic that the monitoring of railway standards which apply to other private companies is within the infrastructure controller," he said.

The central collection of claims data and compensation payments also is causing some concern in the industry. A pivotal plank of CAHA is the provision of a "central agency for the collection of claims data so as to establish an industry claims history (and to provide) claims handling arrangement," according to the Rail Regulator.

Railway Claims Ltd., or RCL, was formed in April 1994 to manage and administer CAHA as well as to handle industry claims, according to Chief Executive David Brindley.

RCL is a non-profit organization, formed from British Rail's formerly extensive claims-handling department to handle claims filed against any rail company.

"The Regulator was concerned that there should be a consistency in the way things are done to protect the public interest," said Mr. Brindley. A central claims agency, together with the CAHA arrangement, would mean members of the public could make claims without worrying about the complexities of which rail company was liable.

However, while adherence to CAHA is mandatory in order for train operators to secure a license, using RCL is not, and a number of new owners and their insurers are seeking to take greater control of claims themselves.

Mr. Brindley understands that "insurance companies who are underwriting rail risk at this (primary) level for the first time want to understand claims handling and RCL can play a major part in providing that understanding."

He stresses the importance of maintaining a consistent claims-handling arrangement for the industry as well as a comprehensive claims-recording procedure. British Rail was "meticulous" in its recordkeeping for claims, he noted.

Meanwhile, there are services RCL still can perform for the industry as a whole, such as monitoring CAHA, said Mr. Brindley.