Product-claim insurance puts squeeze on European industry
New York — Doctors, child-care centers, and cities have been wrestling with the problem of higher insurance costs. This has been well publicized. But now European manufacturers are also crying ``Uncle.'' The scarcity and high cost of product liability insurance is forcing European companies to rethink plans for new plants, new products, and acquisitions in this country, insurers say.
``There may come a time when some British companies will consider the risk of carrying on business in the US is too high,'' says Adrian Gregory, a managing director of Willis Faber, a British insurance concern.
Higher premiums on subsidiaries in the United States are ``having a serious effect on continental European and German corporations,'' says Christian Dahms, general partner at Jauch & Hubener, a West German insurance broker. ``They are finding either that no insurance protection can be found or that the price is so high that their profit margin is erased.''
Drug, chemical, sports equipment, and medical supply companies are being hit the hardest by product liability suits in the US -- and therefore, the highest premium increases. Large West German companies, such as Mercedes or BASF, can absorb these costs -- at least for a while, says Mr. Dahms. But some medium-size machinery or component producers cannot afford the higher premiums. On the other hand, they cannot afford to go without insurance.
Dahms cites the folding of a Swedish supplier of ball bearings to US aircraft manufacturers. The firm had to close up shop because costly insurance premiums made operations unprofitable, he says.
These concerns were voiced in a meeting this week of executives from 11 European insurance brokerages, sponsored by Johnson & Higgins, a large international insurance broker in New York. Insurance firms stand to lose even more money if large product liability awards continue.
Moreover, because of the worldwide nature of the insurance industry, the tightening capacity in the US is felt abroad as well -- particularly in the area of reinsurance, in which only a handful of firms participate. Reinsurance is basically insurance coverage for insurance firms; Lloyd's of London is an example of a reinsurer.
``In the end, their reinsurers are our reinsurers,'' says Kenneth Seward, director of international operations at Johnson & Higgins.
``A foreign manufacturer looking at the US market is concerned by the growing multiplicity of ways he can be engaged in a lawsuit,'' confirms Donald L. Jordan, a senior consultant at Temple, Barker & Sloane, a management consulting firm in Lexington, Mass.
Mr. Jordan notes that many products assembled in the US are made up of components manufactured overseas. ``Recent class-action suits have gone right down the product chain -- from manufacturers to wholesalers to retailers,'' Jordan says. Some retailers now require manufacturers to include them in insurance policies before they agree to carry a new product.
Economist David Wyss of Data Resources Inc. says higher liability insurance costs do inhibit foreign development here. This may curtail job growth. ``It's by no means a major problem, but it does tend to increase imports, because a lot of companies that might otherwise manufacture here would turn to importing,'' Dr. Wyss says.
Some economists say that ultimately, the rising premiums get passed on to consumers, and that means a higher inflation rate.
What solutions are insurers advocating?
To stem their own losses, they are offering less insurance at higher prices. And they're advocating that businesses bear more of the burden. ``[Corporations] have got to start assuming more risk. They can't expect to transfer all of it to the insurance industry,'' says Derek Martin, deputy chairman of Willis Faber, a British insurance broker. Indeed, many of the larger US companies have already been doing just that.
Checks with several major pharmaceutical manufacturers show self-insurance has become relatively common. The result, observers say, is that management looks a lot more closely at potential safety problems if it may end up paying for a mishap.
In the US, state and federal legislation may also open up alternative insurance sources. In the works are joint-underwriting associations, and industry groups are already pooling funds to cover potential claims.
Insurers complain that the US legal system encourages lawsuits and huge payments because lawyers' fees are based on a percentage of the awards. ``Until the tort system is revised, you will see little change in what's happening,'' predicts Robert V. Hatcher Jr., chairman of Johnson & Higgins.