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DIVERSE RISK MANAGEMENT

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LONDON -- Facets of life in Europe gradually are standardizing across its countries: Weight is now measured using metric units, and many of the member states will be introducing a single currency, the Euro, at the beginning of next year.

But risk management is another issue.

In a report issued earlier this month, consultant Tillinghast-Towers Perrin showed that risk management practices vary widely across Europe, though there are common features. At the same time, there is more uniformity between European risk managers as a group than between European and North American risk managers.

Tillinghast aims to make the "European Cost of Risk Survey" an annual event, providing a benchmarking tool for European risk managers. Since 1979, Tillinghast has joined forces with the Risk & Insurance Management Society Inc. to produce a North American version, though next year RIMS will be working with Ernst & Young L.L.P. Tillinghast has said it will continue to produce its own annual cost of risk survey in North America.

Although Tillinghast defines cost of risk as the sum of net insurance premiums, retained losses, risk control and loss prevention expenses as well as administrative costs, the report reaches no conclusive amount for the average cost of risk in Europe.

This is partly because the approximately 50 respondents supplied little or no information on the amount of losses their organizations sustained before deductibles were met and policies kicked in.

"Europe is probably five to 10 years behind the U.S. in terms of risk data collection," said Julian Phillips, one of the two Tillinghast risk management consultants who carried out the study. But much of this is because European risk managers focus more on property/casualty exposures than liability and workers compensation exposures, which typically take up much more of the North American risk manager's time.

Nevertheless, even though European risk managers generally identify and deal with similar types of risks, "we find that cultural and historic national differences are more clearly evident in the survey results than shared practices" across Europe, says the survey.

These differences include:

* Swedish and U.K. companies tend to use direct-writing captive insurance companies, whereas organizations based elsewhere in Europe are more likely to use captives for reinsurance business.

* German companies have notably higher costs for property and liability risks.

* Dutch and U.K. companies are more likely to use just one or two key insurance companies, unlike French, German and Belgian companies, which have relationships with many insurers.

Compared with North American companies, European organizations are more likely to have decentralized management systems. This means risk managers in Europe often need to persuade operating units to allocate money for risk control, explaining why few European multinationals have global insurance programs for risks other than property or liability. "Additionally, they do not appear to track costs incurred locally on insurance arrangements," according to the report.

And even though captives are widely used by European organizations, here again, "efforts to collect data on losses within deductibles are limited," the report says, and the deductibles themselves generally are lower than those carried by U.S. companies.

Of the whole sample for the European survey, slightly more than 40% of all respondents said they monitored costs within deductibles, ranging from less than 20% of Belgian respondents to almost 70% of Danish and Swedish respondents.

In addition to the problem of having a decentralized management structure, European risk managers are finding it increasingly difficult to keep track of global premium spending, because multinationals are increasingly switching to multiyear coverages. Consequently, risk managers find it hard to work out how much premium is attributable to a certain year.

Average property premiums across Europe work out as 0.01% of a company's assets, ranging from less than 0.005% in the Netherlands to more than 0.13% in Germany. The larger the company, the lower the property premium costs, according to the report. In general, European companies pay less for property coverage than their North American counterparts, which pay 0.046% of their assets in property premiums, the report pointed out.

Liability premiums similarly vary across Europe, ranging from just slightly more than 0.01% of revenue in Denmark and Sweden to almost 0.14% in the Netherlands.

Average liability premiums came in at 0.058% of revenue for European organizations, compared with 0.093% for U.S. companies. Even though U.S. companies take higher deductibles on their liability coverages, and the U.S. legal regime "produces higher loss costs," comments the report.

In addition, "this may be a feature of the soft insurance market and of companies questioning why they should retain more risk when insurance is relatively inexpensive but is also culturally driven," said Mr. Phillips.

The soft premium rating environment also could explain why property deductibles are low, even though European risk managers "typically devote considerable efforts to property risk control," suggests the report.

Typically, European organizations will use both insurance brokers and loss prevention service providers along with insurers to help them manage their exposures. On average, European companies pay 0.124% of their revenues for outside services, compared to 0.015% paid by their U.S. peers.

This could be because North American companies tend to have much larger risk management departments, with an average of 16 people performing a company's risk management functions, compared with an average of six in a European organization. Again, the variation in the number of people engaged in risk management activities is markedly wide across European countries, ranging from just an average of three per organization in France and Italy to an average of 13 per organization in the Netherlands.

But brokers are expected to provide a wider range of services to European companies, and survey respondents were equally split between remunerating them through fees and commissions. Most respondents use up to three brokers, and those that own captives typically pay their managers on a fee basis.

Almost three-quarters of the European companies polled in the survey own a captive, with 18% owning two. Belgian and U.K. companies are most likely to have at least one captive in place, and of those organizations that owned captives, 85% used them for reinsurance business.

At least a quarter of property premiums are retained by most companies' captives, and the same holds true for liability premiums. European captives also write credit and financial risks coverages.

Uninsured risks tend to be pollution, product recall, fraud, automobile and political risk exposures, though "very few risk managers admitted that they are deliberately not insuring some of the risks that have been identified," comments the report.

Less than 20% of European risk managers are responsible for workers compensation or employers liability programs.

An executive summary of the 1997 European Cost of Risk Survey Report is available free from Tillinghast- Towers Perrin, 44-171-379-4411. Full copies of the report are available only to survey participants. Risk managers who want to participate in next year's report should contact Julian Phillips at Tillinghast-Towers Perrin at the above telephone number.