GLOBAL FOCUS: FLOODS IN EUROPE HIGHLIGHT NEED FOR PREVENTION EFFORTS

Losses from central Europe's worst flooding in centuries have focused risk managers' attention on preventing and controlling such losses.

The flooding this summer caught many by surprise.

Augusta Bannek, risk manager and finance director of ZEW Kohleelektroden A.G., an energy company in Raciboz, Poland, called the flood a nightmare.

"We had two hours to evacuate 230,000 people and prepare for the onslaught of 9-foot flood waters. Everything possible was done," he said. "But time was just too short."

Flood waters submerged coal furnaces still hot from energy production, and two exploded. The facility burned, and machinery was abandoned to flames and the flood. Total insured losses reached 50 million zloty ($14.7 million).

"Part of the problem was false information," Mr. Bannek said.

Authorities had warned him flood waters would approach from the Oder River, but instead the flood came from a nearby canal.

Witold Janusz, vp of Polish industrial insurer Hestia A.G., was on the scene to assess the damage at ZEW and other facilities the company insures. "No one expected dikes to break," he said. "This region hasn't seen a flood in 500 years. The dimension of the flood was beyond anyone's expectation."

Mr. Janusz said his client's first priority is to get up and running, but soon talks will focus on flood control. "It's clear things went wrong. Dikes must be strengthened and contingency plans worked out. The government must take action so that this never happens again."

The call for government aid and more infrastructure spending is common.

While most companies in Poland are insured against flood damage, Mr. Janusz admits sums insured are far from adequate. "In contrast to Germany, where insurance covers the replacement value of property, insurance here is often based on book value. As a result, companies aren't getting the money needed to replace equipment."

Flooded halls, production stops and loss of business will likely bankrupt struggling businesses in Eastern Europe, Mr. Janusz said. Hestia Insurance S.A., a leading Polish commercial insurer, estimates industrial losses to more than 1,000 companies at 3.5 billion zloty ($1.03 billion). The relatively large losses were due to a high concentration of industry in flood areas.

Miroslav Simek, sales director for AEV Ltd., an electronic devices manufacturer for airplanes and cars in Kromeriz, Czech Republic, said no one warned him floods were coming. "The government surveyed the area but said nothing. It was only when the river jumped the bank and began to spread our way that we took countermeasures."

The company put planks over 3-foot tables to get equipment off the floor, but the water rose 4 feet. "We moved the entire production to the second floor and were able to save most of the equipment. We also rented rooms at another location and moved equipment there."

Heavy equipment, including a 3.5 million korunas ($107,100) soldering machine for computer parts, was ruined in the flood. Mr. Simek estimates total losses will exceed 11 million korunas ($336,600).

Even with insurance, struggling companies in the region say loss containment often is their best option, since the cost of replacing lost equipment and goods exceeds their insured value.

Mr. Simek said flood control has become a high priority at AEV. "This won't happen to us again."

Companies like AEV largely are on their own. State aid has been slated first for public projects, including communications networks, streets, hospitals and private individuals that suffered damage.

AEV is one of several subcontractors to Skoda Auto, a division of Germany's Volkswagen A.G. When flooding hit AEV and other subcontractors in the Moravia region, the auto maker had to stop production of its Felicia model for three days.

"Like many companies today, we operate on a just-in-time basis, and so we do not have many parts in," a Skoda spokesman said. "We plan to run extra shifts to get back on schedule."

The spokesman thinks business interruption insurance with the country's largest insurer, Ceska Pojistovna A.S., with excess coverage from Germany's Allianz Versicherung A.G., will cover lost sales but not the cost of bringing in parts.

Loss prevention and minimization can be the difference between staying in business or going under, says Roland Neick, director of operations at Oderberger Stahlbau GmbH, a steel plant in Oderberg, Germany.

Mr. Neick saw flood waters creep within 2 miles of the factory. Employees had hoisted tons of machinery above the 10-foot level and anchored above-ground tanks against floating. Containers of oil and paint were elevated, and a special raft was built to provide access to machinery once the flood hit.

"We had some experience with a flood in 1993," said Mr. Neick, referring to a flood that hit major tributaries in Germany, Holland and France. "We knew to shut down running processes and moved vital machinery, supplies and reports to a higher position we felt was safe."

All objects that water could have carried away were secured, and equipment was procured to battle the flood, including mobile pumps and hoses, sandbags, covers, spades, shovels and axes.

A massive sandbagging by 9,000 troops and 5,000 other volunteers was required to stop near-breaks in dikes near the plant. Still, 950 mostly small industrial and manufacturing companies suffered commercial losses from summer floods, with official damage estimates exceeding 300 million deutsche marks ($170.6 million).

Mr. Neick says a production stop cost his company 93,000 deutsche marks ($52,900). As a result, he has applied for aid from a government emergency fund. The company was not insured against flood.

German aid to companies exceeds that of Poland and the Czech Republic, with immediate assistance from state and federal funds amounting to 20 million deutsche marks ($11.4 million) and more than 200 million deutsche marks ($113.4 million) in low-interest loans from two German development banks.

Like Oderberger Stahlbau GmbH, many companies do not have flood insurance. That was not always the case. Prior to German reunification, flood insurance in former East Germany was compulsory. Since 1991, companies have an option to buy the insurance, which many say they cannot afford.

Thomas Loster, a Munich Reinsurance Co. flood expert, said: "The price for flood insurance depends, more than any other type of cover, on the risk circumstances in individual cases. A clear understanding of the scope of cover is essential."

As a rule, flood insurance is offered only when an adequate deductible is retained-normally .05% of the insured sum, Mr. Loster said. In most cases involving risk of total loss, limits of indemnity generally begin at 10%. A precondition for insurance is that the policy cover only freak floods, no adverse selection takes place, and insurance is provided on a full value basis with a deductible.

"Objects particularly exposed to flooding must be rated individually, if they are insured at all," Mr. Loster said. "Insurers look at previous losses, the vertical and horizontal distance from bodies of water and the building class of the structure. As far as the contents of a building, it

depends on how far they are above ground and their susceptibility to water."

Flood insurance premiums are calculated on loss potential, but the probable maximum loss isn't simply the sum of flood sources and the concentration of values in them, says Mr. Loster.

"There's just too much variety and uncertainty involved. Factors like the topography and the distribution of equipment in a factory play a role. It's also a question of how much water can lead to a flood. The question if a dike will hold or not can lead to the assessment of a total loss potential or no loss potential."

Because insurers generally refuse to insure companies with regular flood experience, several governments are seeking other solutions. Poland, for example, is looking at pooling solutions, such as those used in France and Spain.

Commercial and industrial companies in France are insured against natural catastrophes through a state-sponsored reinsurance pool called Caisse Centrale de Reassurance (GF, Oct. 7, 1996). A public law fund in Spain, Consorcio de Compensaci¢n de Seguros, has a similar function, with the private insurance industry reporting claims to the Consorcio, which gets a fixed premium share from private insurers and settles claims out of the fund.

In light of high flood losses in Central Europe, Polish insurance regulator Panstwowy Urzad Nadzoru Ubezpieczen is reviewing reinsurance arrangements of small insurers it fears may have had difficulty obtaining catastrophe coverage and consequently may not be able to pay flood claims.

Under communist rule, Poland and East Germany maintained state monopoly insurers and a catastrophe fund through the 1980s. But Danuta Walcerz, director of PUNU, said all forms of government assistance were forgotten in the 1990s after the fall of the Iron Curtain.

"We thought there was no need for large catastrophe reserves. In the past, there have only been local floods. These present floods are a 500-year event," she said.