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STUTTGART, Germany -- German car manufacturer Mercedes-Benz is uninsured for any losses it suffers as a result of voluntarily halting production of its A-class model and redesigning it to quell safety doubts raised by a failed swerve test.
Production and deliveries of the "Baby-Benz" were suspended Nov. 11 for 12 weeks to allow implementation of the design change, which will include modification of chassis, suspension and brake mechanisms. The company recalled 3,000 cars already delivered in Europe to refit them.
Mercedes spent 2.6 billion deutsche marks ($1.5 billion) and five years developing the A-class. Despite more than 3 million miles of testing on five continents, the car failed the so-called moose-avoidance test, a well-known evaluation conducted in Sweden. The test requires rapid swerving without using the brakes.
Mercedes executives say that the company must absorb financial losses of 300 million deutsche marks ($173.6 million) stemming from the recall, costs of refitting and slimming down production by 20,000 cars next year.
None of Mercedes-Benz's losses is insured; the company will tap its own operating reserves, officials said.
For Mercedes, the moose test was a baptism by fire in crisis management. In the redesign, the company sought to fix the problem -- and to limit damage to its image -- by fitting cars with sophisticated electronic sensors that brake or kill the engine speed to prevent dramatic swerving. It also added stabilizers on the front and rear axles, lowered the body and fitted the car with wider tires as part of the redesign.
Juergen Schrempp, chairman of Daimler-Benz, said in a statement that "engineers have devoted all their energy to the search for the optimal solution, and we have found it." Full-page newspaper advertisements in 180 local papers explain the situation and assure customers the car is safe.
Of 100,000 original inquiries for the 42,000-deutsche mark ($24,300) car, Mercedes reports a 2% loss in orders. However, a company spokesman said new orders far outweigh those lost. The A-class is due for sale in most European countries in June.
The A-class is a new design, sharing only three minor components with other Mercedes models. With a short length but tall body style, it represents a departure from previous designs.
Alternative route to cover risks open
Mercedes-Benz did not take the insurance road to seek coverage for losses related to a redesign of soon-to-be released model, but experts say policies are available for such risks.
Even less concrete losses, such as possible damage to Mercedes' reputation, theoretically could be insured. "A non-traditional insurance could cover loss of reputation, but I know of no company to offer such insurance," said Kai-Uwe Schanz, a senior economist at Swiss Re Economic Research in Zurich, Switzerland.
Alternative risk transfer mechanisms are making it possible to insure previously uninsurable risks, Mr. Schanz said. "A finite product, for example, could permit transfer and containment of retrospective image loss as well as the management of prospective losses."
But the gap between theory and reality is often wide, admits Allianz A.G. Holding, which recently introduced product recall insurance. Allianz, American International Group Europe and Haftpflichtverband der Deutschen Industrie all offer recall coverage. However, no German insurers currently offer coverage for damage to a company's image.
German buyers of alternative forms of insurance face other obstacles. Frankfurt-based American International Group Europe General Manager Ulrich Reinholdt says tax law indirectly hinders ART solutions in Germany. "Germany has a tax problem, especially insurance premium tax, which makes it more attractive to write off losses," he said.
German tax authorities imposed a 15% tax on insurance premiums in 1995, which Mr. Reinholdt said impedes insurance solutions. As a result, it often costs a company more to use alternative risk transfer mechanisms than simply to absorb losses.
But, there are risk financing possibilities. "Companies face a high price in lost credibility. Companies like ours have introduced new products to help companies move quickly and efficiently to contain a crisis in the first 30 days," Mr. Reinholdt said. AIG Europe's product offers a typical limit of 1 million deutsche marks ($578,500), though higher limits and longer coverage terms are negotiable. AIG's product covers risks such as chemical leaks or product tampering and costs related to expert services needed to contain the crisis.
AIG introduced the crisis containment insurance to Germany in September, a product that helps companies put together a staff of experts, including specialized lawyers, communication experts, corporate and personal advisers, detectives, computer experts and psychologists, who would be available to walk a company through its response to a potential crisis.
Similarly, a U.S.-based AIG unit last year unveiled an directors and officers liability policy endorsement that provides up to $50,000 for crisis management counsel and public relations services (BI, Sept. 23, 1996).