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NEW RISKS NEED NEW COVER

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OXFORD, England -- As the business environment evolves, companies' liability exposures are rapidly changing, and insurers are not keeping pace, a risk management consultant warns.

Speaking at the Fifth Liability Insurance Conference in Oxford, Clive Pracy, an associate partner at management consultant Andersen Consulting in London, identified intense competition and globalization as main drivers of consolidation in all industries. In addition, technological developments such as electronic trading and virtual companies are fueling the speed of change.

But "fighting today's wars with yesterday's weaponry is unsuccessful," said Mr. Pracy, particularly when a newly consolidated company is vulnerable to loss while it integrates.

"The risk profile of any company changes alarmingly quickly," and insurers have not risen to the challenges these companies face, he said. "How many new insurance products have there been over the last 25 years?" he asked.

Although a handful of liability coverages, such as directors and officers, employment practices and intellectual property coverages, have been developed over the years, Mr. Pracy argued that business risk rather than hazard risk is uppermost in the mind of the financial director or chief executive officer.

For example, a major manufacturer recently lost L178 million ($297.4 million) in exchange rate losses due to the economic problems in the Far East, he said.

As a result, "holistic risk management is becoming a reality," he said. Organizations "have to apply the same risk management and processes to business risk and operational risk."

What's more, as businesses increasingly set up strategic alliances, such as outsourcing arrangements, their risk profiles change.

Andersen Consulting provides outsourcing services for major organizations such as the London Stock Exchange, but it does not take their risk exposures, explained Mr. Pracy, Instead, the consultant works in an environment of partnership rather than "suability," he said.

After all, moves within the British business environment, such as supermarket chains entering the financial services industry, show that all a business needs is a brand name, Mr. Pracy contended. "The rest can be outsourced."

Gordon Crossley, regional and projects manager in the finance services division of Shell International Ltd., pointed out that his organization's risk profile changes almost daily. The Shell Group, with oil, gas, chemical, coal and other energy businesses in 130 countries, is buying and selling parts of its operations all the time, explained Mr. Crossley. The approximately 340 companies that form the group operate on a decentralized basis, he said, but the group insurance program is coordinated in London, providing risk management advisory services to Shell centrally as well as to the worldwide companies.

In an organization the size and type of Shell, risk exposures are very wide and potentially very large. In certain areas, such as exploration, the risks will be shared with another energy company to minimize potential losses. In others, Shell buys conventional insurance coverage.

Shell has a formal approach to risk management, explained Mr. Crossley. Physical risks are minimized or eliminated using risk surveys and learning from past experience. Financial risks are dealt with through three mechanisms:

* Risk retention or self-funding.

* Risk transfer through insurance.

* Risk allocation using contracts.

The level of risk retention is influenced by several factors, including the cost of insurance, explained Mr. Crossley. Also brought into the equation are the relative claims experience between Shell and the rest of the industry, available capacity and shareholder relations. Shareholders may demand that insurance is in place for certain exposures, he said. "Shareholder relations shouldn't be an issue for risk retention, but it has influenced (Shell) in the past," he explained.

"Captives are a very valid way of bringing risks into the center," said Mr. Crossley, and Shell uses its captives to increase risk management awareness in the organization. They also provide a focal point for the group's risk financing strategy, allow tailor-made policy wordings and can simplify the group's insurance programs.

Although Shell buys high levels of liability cover, Mr. Crossley questioned whether the conventional insurance market provides a good solution, particularly for large companies.

"I have reservations as to whether buying high levels of liability insurance is worth it," as it can encourage litigation, he said. What's more, "generally, people buy too much insurance," he commented. "Over time, they will pay more out on insurance than they will get back."

Nevertheless, when traditional insurance is appropriate, buyers are looking for wide wordings and want coverage for exposures such as pollution and financial loss as well. The insurance market has not responded to the needs of the buyer in these respects, said Mr. Crossley. Shortfalls have included providing gradual pollution coverage. Although some facilities have been developed, the limits available, up to $25 million, he stated, are too small to be of interest.

One of the problems facing Shell and many other global organizations is that "liabilities can come from anywhere. . .and it is difficult to estimate potential liabilities in financial terms," said Mr. Crossley. In general, it is not the insurable risks that cause a problem but business risks such as currency exchange rates and oil price fluctuations, and political risk exposures. "A change of political attitude can throw you completely out the window," he said.