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New E.U. members face huge increase in liability exposures

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New E.U. members face huge increase in liability exposures

The recent accession of Bulgaria and Romania into the European Union means companies in those countries are now facing an increased threat of liability claims--a risk some companies may find financially difficult to fully manage, experts said.

The risks are greater, particularly for companies increasing exports to the E.U. because of exposure to product recalls and liability lawsuits, brokers said.

Domestic companies--which in the past typically purchased only about e100,000 limits ($129,000) for general third-party liability coverage have been told by their brokers to increase that to e500,000 ($645,000) or higher, brokers in both countries said.

"They are starting to consider this, especially all these companies that are going to increase their exports to the European Union," said Dimo Markov, chief executive of Aon Bulgaria in Sofia. He believes a half million euros of coverage is necessary to fall within "good practices" in the European Union.

In the period leading up to E.U. accession, major Bulgarian and Romanian companies were asking for higher liability limits and for more sophisticated insurance products that cover product liability and recalls, brokers noted.

There's also increasing awareness of the need for directors and officers and professional indemnity insurance, brokers and insurers said.

Litigation risk

"It is not only for exporters, but it is also for the local market because people are starting to become more aware about their rights to sue if somebody did something wrong or sold them a product which created problems," said Karina Rosu, CEO of broker Aon Romania in Bucharest.

"We are already seeing that happening for the last two years in Romania, where claims on liability policies started to become more frequent and larger," she said.

But broker recommendations on managing the increased risks are not always heeded.

When discussing liability risks with risk managers or insurance buyers, Iulia Osman, executive manager of Raiffeisen Insurance Broker in Bucharest, said she's accustomed to hearing, "This could never happen to me."

Turning a blind eye may be perhaps the easiest--and most affordable--option for some. Ms. Osman believes small and midsize companies will have the hardest time bearing the costs of managing these risks.

"If they want to go into business with partners in the rest of the European Union, they will definitely need to have the insurance at the same level as their partners," she said. "I don't think that they will have the financial strength to bear this insurance cost.

"From what I have seen, it is quite a problem for small and medium-sized companies," Ms. Osman added.

In Bulgaria, the local risk management association has also noticed a "wait-and-see attitude" among some local companies.

"Companies are increasingly seeking and hiring expert advice to get them through the vast areas of compliance they have to cover," said Stoian Lilov, chief executive officer of the Bulgarian Risk Management Assn., based in Sofia. However, "some small businesses have declared openly they will not bother and see how things happen for them."

While joining the European Union was heralded with much fanfare, he said both international companies and local businesses are "wary of the changing market situation and new fierce competition is expected."

"Generally, local businesses see the opening of borders as a threat, rather than opportunity for them," he added.

Those who manage financial risks see a host of other challenges, particularly in the banking sector.

"Credit risk is a big challenge in our new E.U. environment," said Sorin Vlad, a risk manager with Finansbank (Romania) S.A. in Bucharest.

The Romanian banking system is not experienced in making credit granting decisions in "new, possibly turbulent economic conditions" influenced by "increased competition, and external macroeconomic shocks of monetary and fiscal policies from other E.U. countries.

"There is not a mature risk management culture in the organizations capable of quantifying the different risks," he continued. A derivatives market needed to hedge risks is also underdeveloped, he added.

"Maybe the biggest risk management issue is the excessive optimism about the growth prospect of the Romanian economy," said Cãlin Rechea, banking expert, risk management and control, of Banca Comercialã Carpatica in Sibiu, Romania.

"There are few domestic companies that have in place proper risk management frameworks in order to evaluate, for example, currency or commodity risk," he said.

As to the ability of local insurance companies to provide adequate coverage, brokers and risk managers noted that product offerings from domestic carriers can be limited.

Directors and officers insurance, up to now barely known in company boardrooms, may be getting more attention, but is not easily attainable from local insurers, brokers and risk experts said.

Andrew Redman, American International Group Inc.'s London-based regional liabilities manager for Central Europe and the Commonwealth of Independent States, said international insurers with domestic operations in Romania and Bulgaria do offer "products and services to prevent the need for clients to seek cover outside local markets."

For major risks, AIG expects "a further drift of business into global programs," Mr. Redman said.

Otherwise, to meet increased general liability limits, the major multinational insurers normally have no problem providing coverage as high as e10 million ($12.9 million), said Orlin Penev, executive director of Allianz Bulgaria, a Sofia-based unit of Allianz A.G. Holding. He said Allianz was has insured the largest local pharmaceutical producer for several years for a very high limit of liability.

"We may say that, in respect of introducing E.U. standards and practices, as well as risk management activities," pharmaceutical companies are one of the most well prepared, he said.