Trends from the US do affect European liability issues, but they also develop in their own ways. Alison Craig brings out the highlights of a recent seminar.
The introduction of strict liability for defective products into UK law does not appear to have resulted in any increase in the number of claims. This is not to say, according to Phillip Bell of Royal & Sun Alliance, that claims numbers have not been rising steadily but it is not as a result of strict liability, which is the rule throughout the European Union.
Mr Bell was speaking at a seminar on European liability organised this summer in Munich by Bavarian Re for participants from central and eastern Europe, the Netherlands and the Nordic countries. He told them: "We monitored the situation following the change in law, and I do not believe that we have received a single claim that we would not otherwise have received."
His topic was the question of whether liability insurance trends in the US would spill over to Europe, and his answer was largely that they had already done so. Strict product liability was one example but other factors, some of which have spread from the US, were responsible for increasing numbers of claims. Claims awareness is certainly on the increase, but this is in part due to the media attention paid to large UK losses.
There had been substantial coverage of the levels of compensation paid to victims of such high profile disasters as the fire in Kings Cross underground station and the football ground disasters at Bradford and Hillsborough. "Undoubtedly, this increased awareness of the right to compensation but also more subtly influenced upwards the amount of damages awarded," Mr Bell commented.
Among other factors which have helped increase awareness of legal rights and, therefore, the number of claims being brought is, ironically, the growth in legal expenses insurance, often with the support of helplines provided by the insurers to give free advice.
The development of scientific, medical and technical knowledge which allowed greater identification of links between defective products and their harmful effects combined with an unwillingness by people to tolerate which previous generations would have accepted is another part of the picture.
Mr Bell then discussed law reforms in the UK, including the imminent introduction of a "no win, no fee" which will replace legal aid in personal injury cases. Accompanied by major growth in legal expenses insurance, he said, the effect would be a significant increase in the number of claims, but only a gradual one as public awareness increased.
Rupert Nebauer, a senior liability underwriter with the company, set the general scene regarding the directors' and officers' liability market by observing that in today's soft market conditions, more and more players are entering the class in an attempt to compensate for losses in general liability business.
In the past two years, this had led to a drastic plunge in premiums and broadening terms in D&O insurance, which Mr Nebauer says must be treated with great caution, since the claims potential is rising significantly. In Germany, there were an average of 11 cases per decade up to 1975. This rose to 113 cases between 1975 and 1985 and to 206 cases between 1986 and 1995 in addition to which there are many undisclosed cases and the trend is still on the increase.
In Germany D&O competes with legal expenses insurance. Mr Nebauer estimates that the market premium volume is about DM 70-80 million today, and limits of DM 200 and more are available.
Although there are at least 10 possible instigators of lawsuits against directors and officers, shareholders are the most common in the US (41%) followed by employees (29%) and in the UK, it is employees (31%), followed by shareholders (23%) and customers/suppliers (21%). In Germany, the situation is radically different. In 85% of the cases, it is the company which brings the action. Since German legislation restricts the ability of shareholders to assert claims in their own names, they normally file lawsuits via the company itself.
Claims most frequently arise over issues involved in mergers and acquisitions, insolvencies, foreign investment, management buy-outs, and other changes in the ownership or share structure of a company. They may concern a cut in dividend, allegations of wrongful dismissal or breach of contract or boardroom controversy.
Sabine Dietlmeier of Bavarian Re summarised the various steps involved in assessing risk in D&O underwriting. At the outset she highlighted the various details of financial analysis which need to be taken into account before going on to discuss the soft factors that are important when performing the qualitative risk analysis.
These include the policyholder's length of time in business; in Germany, for example, the greatest proportion of insolvencies in all sectors occurs among companies more than four years old. Other important points include the industry sector in which the company is active and whether or not it has a stock market listing. Ms Dietlmeier concluded with a discussion of how the factors highlighted in the risk assessment can be used to put together insurance plans.
Another of the conference's outside speakers was Gerd Kruse of Siemens Business Services, Munich, which provides services to help make businesses year 2000 compatible. Mr Kruse believes that the problem still has not been given the attention it deserves in most European markets. The likely scenario, he says, is that in the year 2000 some production process will fail to work and infrastructure, such as power supply, transportation systems, hospital, and telecommunications will fail unless measures are taken promptly.
Mr Kruse gives as examples the type of incident which non-compatible systems could produce:
* For warehouse management "first-in-first-out" becomes "last-in-first-out".
* Liquidity problems due to wrong period of payment.
* Equipment, such as lifts, and machines shutting down automatically because maintenance intervals have not been met.
* Power-up times for heating and lighting affected.
* Networks fail because one router has an old chip.
It is estimated, he said, that 180 billion lines of code in 90% of all programmes are data sensitive and have to be changed, but it is virtually impossible to find sufficient programmers to solve the problem. Therefore, it seems very likely that the strain on the financial reserves of companies will be high.
Contributions from participants
The participants also acquainted each other and their hosts with current liability topics in their own countries. Jan Pieter Six from Interpolis in Tilburg gave an overview of the integrated environmental policy (MSV) which has been introduced in the Dutch market, the concept of which took some six years to develop but which has resulted in a revolutionary new product for covering environment risks.
Ole Vidstrup of Trygg-Baltic Insurance Company, Copenhagen, described the introduction in Denmark of the claims-made principle in liability business, and Ms Libuse Dvorackova from (breve)ceská poji(breve)st'ovna, Prague, provided an historical background to the Czech market.
Alison Craig is a financial writer based in London and an occasional contributer to Global Reinsurance. E-mail: 100111,firstname.lastname@example.org