New approach on the field of the civil protection

Transcription

1 AARMS Vol. 7, No. 2 (2008) MANAGEMENT New approach on the field of the civil protection ROMAN URBAN University of Defence, Faculty of Economics and Management, Brno, Czech Republic The paper deals with possibilities and importance of co-operation between public and private sector in insurance. It describes ways in which insurance can be utilized and its benefits in process of inhabitants provision in crisis situations. Introduction The European population is focused on developing or least maintaining its standard of living. But is it possible to achieve this goal with limited or inadequate resources? This is the reason to look for new directions or partners. As the leading authority of society the government is responsible for its citizens and for insuring that it meets the important needs of its population. One of these needs, for example is to be protected and provided for in times of disaster. But the extent and cost of disasters is increasing and that is the reason why government services are influenced by limited and inadequate resources. The question is what cost will the government assume and what part of the cost can individual citizens cover in the current market. Will the government assume the entire cost in such disasters in order to provide emergency survival measures or pass legislation that will require the private sector to increase its role in protecting society? Increasingly there has been pressure on the private sector for example through insurance companies to take a more active role in this area. The key issue in a free market is what should be provided by the government and what by the private sector. For example on many occasions recently in this area, European insurance companies have demonstrated that they are able to offer enhanced protection and innovative solutions for a rapidly developing society. Global changes require radical changes in thinking about public and private sector responsibility. Insurance companies, politicians and citizens must begin a dialogue that will lead to mutual collaboration and concrete solutions. Received: March 31, 2008 Address for correspondence: ROMAN URBAN urban.r@centrum.cz

2 Insurance a way of prevention Insurance is a specific branch of economy which deals with the protection of life, property and other values. It is based on establishing special commercial institutions whose services are based on providing a system of civic prevention. 1 Insurance is designed to protect the financial well-being of an individual, company or other entity in the case of unexpected loss. It is a promise of compensation for specific potential future losses in exchange for a periodic payment. Agreeing to the terms of an insurance policy creates a contract between the insured and the insurer. In exchange for payments from the insured (called premiums), the insurer agrees to pay the policy holder a sum of money upon the occurrence of a specific event. 2 The essential principle of these services is providing reciprocity. The insurer must be able to create a large group of policy holders in order to diversify risk. The principle is connected with probability and the calculation of the insurers loss and its estimation. Statistical data collecting and information about risk profiles are very important for insurance accounting too. With careful analyses the insurer determines hazards which it is able to cover with an acceptable price. It is very difficult to establish the line between insurable and non-insurable. So it is up to the insurance company alone whether or not to provide insurance coverage. Usually a risk can be considered to be insurable 3 if the probability and extent of potential damage can be established, if the possibility of risk is uncertain and if the risk can be supported by a large group of policy holders. The risk has to be comparable to an insurance company s or that of the insurance sector. Commercial insurance can be used as an additional civil protection system without jeopardizing quality protection to policy holders. On the contrary, competition presses insurance companies to provide better services. An advantage of private insurance is that financing can be arranged through reserve funds. Capitalizing on individual contributions until claim is made means there is less likelihood of a drain of funds for future generations. Thus there is an increase in financial investment, which affects economic development. Private commercial insurance can reach its full potential as an additional or substitute to a public system only when the public system s principles and policies are adopted. The social benefits of insurance for crisis management lead to economic stabilization of companies and public standards of living. In this way, at the same time that corporate and personal liability are supported underlying principles of civil society are protected. 296 AARMS 7(2) (2008)

3 Effects of public and private sector co-operation Public Private Partnership (PPP) is a generally accepted way for public services or public infrastructure to provide long-term contracts between public and private sector. As the result of these contracts partners share benefits and risks. PPP principles support successful projects in most OECD countries. 4 In the case of PPP service means providing global funding (e.g. complete financial security to citizens in the event of a crisis) including the quality and quantity of conditions agreed to in advance. The advantages of PPP are the following: control maintenance PPP allows the public sector to do what it does best and at the same time allows the private sector to realize infrastructural projects without loosing its control; quality the public sector obtains better quality of public services for the same or lower cost; risk transferring PPP transfers significant risk to the private sector according to predetermined contract that covers both contractor costs and controlled risks; effective realization PPP projects are accomplished earlier, faster and without risk or budget overflow to the public sector; transparency allows for only one public tender per project without a need for smaller individual contracts; motivation private sector is driven by the possibility of long-term income profit which depends on quality maintenance; bilateral advantages with the PPP advantages must be assured for both public and private sector partners. Cooperation between the private and public sectors has strengthened in the last decade. The reason for frequent use of PPP is not only due to the above mentioned advantages but also to the frequency and extends of consequences from recent events such as floods (the 1 billion EUR in2003 in Europe) and terrorist attacks (50 billion US dollars in damages to the World Trade Center). In practice the success is obviously different for each PPP project. It is important to evaluate all circumstances related to a particular event before deciding on effective protective systems for the private sector. The social state is under increasing pressure of risks that are difficult to insure. These two trends change the social rate of insurance in society. Insurance is not a miraculous cure-all for all of society threats but offers financial security which requires open constructive dialogue with insurers. AARMS 7(2) (2008) 297

4 Private commercial insurance can be an addition to the public system only when the public system accepts private insurance principles, specific objectives and fair calculation of price based on risk. Open market competitiveness is common to all business practices and indeed need to its successful management. Excessive restrictions and redundant administration could render impossible the meeting of society s expectations. There should be neither strong regulation nor government interference in basic insurance principles. With regard to market rules, it is important to realize that the private insurance market can not replicate public sector s insurance practices and that in order to cover new risk insurers will need sufficient time to adapt to these differences and to proceed using a gradual step-by step approach. The principle factors involved in managing crisis situations lie mainly in prevention. PPP projects should be first of all focus on possible ways to prevent accidents and dangerous events. The second step should be finding solutions when crisis arise. Everyone involved, including insurers, must accept their share of the responsibility when it comes to prevention. Insurer s experience and input are especially useful for companies developing preventative measures and with regard to determining the cost of these measures (for example the IT systems in Great Britain and Austria). Experience indicates that collaboration with the private sector and taking advantage of its know-how with regard to providing for citizens needs offers a foundation and results which benefit all three sides (state administration, citizens and insurers). Scheme 1. Participants in meeting public needs under the PPP structure 298 AARMS 7(2) (2008)

5 A model of co-operation on the field of civil protection Risks which are not able to be fully insured commercially, for example extensive disasters, can be partially covered in cooperation with insurers. In this way, insurers can take a part in covering costs that might not be met by individual citizens or public administration. In Holland for example, insurers held discussion with government with an eye to find solution dealing with terrorism and maintenance of this modern risk in insurance. An agreement has reached by the private and public sector to share in the responsibility in this affair. They created a protection system which could offer 1 billion EUR in coverage (400 million EUR directly from insurers, 400 million EUR from government administration). This agreement acceptable to all three partners and considered the best serves the purpose of covering the risks involved. 5 Insurers are unable to cover costs alone in some cases because the risks are too big and lie beyond the scope of the private sector. In Germany and France, nuclear risk is shared jointly by government and private insurance through a level system. Germany or France shared and covered by state administration and private insurance via level system. Scheme 2. Level system of risk covering Private sector covers only a part of the insured values, while state administration guarantees covering the rest of it up to its maximum limit. Similar ways of covering, e.g., floods by the participation of the state, when the state intervenes and helps in cases of utmost emergency only, are being successfully developed in France and Spain. These ways show that sharing the risk can come to a viable solution when uninsurable risks can be then insured after all. AARMS 7(2) (2008) 299

6 The risk cartography, especially river-basins cartography, is another area of development and cooperation between public and private sectors on the insurance field. For example, in Austria a bargain has been struck between the public body and insurers. The bargain concerns with cartography, landscape planning, and precautionary measures under the terms of the HORA project. 6 Similar bargain can be found in Great Britain, too. Inhabitants of both countries can obtain all information concerning floods, including water course risk information and maps of flood plains via internet IT system. Conclusion Some of the social key issues can be solved by cooperation between public and private sectors. The need of fiscal frugality and system access to the obligation control in public sector evokes PPP projects application. This measure stimulates investments into the area of public services and also increases the range of goods on the field of civil protection. We can expect that insurers experience with disaster consequence settlement will be used in the Czech Republic within the next years, too. The purpose of this article is to explain meaning and options of cooperation between public and private sectors even in the area of civil protection, and to show felicitous use of private insurance sector in the system of financial security under the terms of emergency situations. References 1. URBAN, Roman: Pojišovnictví moderní aspekt diverzifikace rizika v ochran obyvatelstva. In 4th international conference Instituce a zaízení regionu v systému ochrany obyvatelstva. Brno, University of defense, 7th November 2006, page ISBN Parliament of CZ. Zákon 37/2004 Sb. o pojistné smlouv a o zmn souvisejících zákon. Prague, ROŽEK, F., MRÁZ, V. a BRÁCHA, J. Management rizika. Brno: IVBP, Justice-portal. Public private partnership [online]. Available on the World Wide Web: < 5. Comité Européen des Assurances. Between public and private [online]. Available on the World Wide Web: ttp:// 6. Wassernet. Hochwasserrisiko HORA [online]. Available on the World Wide Web: < 7. Environment Agency. Flooding [online]. Available on the World Wide Web: < 300 AARMS 7(2) (2008)