Having an effective loss prevention programme in place within a company can have a significant impact on controlling insurance costs and has never been more important as risk managers face spiralling premium rates.

Maurizio Castelli, group risk manager of Italian tyre and cable manufacturing company Pirelli, highlighted this point at the 7th annual ALARYS Conference on Wednesday.

In his presentation to delegates Mr. Castelli discussed his company's experience in developing loss prevention processes over a ten-year period and the resulting fiscal and operational benefits that ensued.

"Preventing a loss is better than managing it," said Mr. Castelli, who is also chairman of the International Federation of Risk and Insurance Management Associations (IFRIMA).

"At Pirelli by 1993 we had reached a point when we needed to look at that very seriously after a series of bad losses."

He said that management decided to implement a formal loss prevention programme after seeing a continuous trend of premium increases, rising deductibles and retentions and steadily increasing non-insured costs within the Pirelli group.

This was a huge undertaking - Pirelli has 79 plants in 24 countries on five continents - but Mr. Castelli said it was necessary to create "a loss prevention mindset" at all levels worldwide to reduce group insurance costs.

"Our approach was to get guidance from consultants who were independent from the insurers on developing the programme," Mr. Castelli said, "but also, most importantly, to combine this with our own internal resources to ensure the programme was built to work within our structure in a practical way."

He told the delegates that Pirelli's programme contains certain core elements, which he referred to as a "fundamental tool box", which act as instructional, monitoring and reporting mechanisms for the loss prevention processes established by the company.

These elements also allow management to communicate the company's level of commitment to the programme, which Mr. Pirelli said is of the utmost importance.

"Our Statement of Loss Prevention Policy for example is a clear declaration showing the commitment of the company towards property conservation," he said.

"It is signed by our president and CEO, which might not sound like anything that special now, but at the time we started to develop the programme in 1993 was unheard of in Italy."

The policy statement is the introduction to Pirelli's loss prevention manual, which sets out standards and operational targets for all manufacturing plants in the group.

The standards cover everything from the controls in place at a plant for handling hazardous materials, to fire protection and other emergency systems, to human resources policies to inspection and maintenance procedures.

Mr. Castelli said that regular inspection reports are another core "tool" within the programme, checking and making recommendations on a variety of issues that impact insurance costs, including property damage assessments and the frequency of business interruptions for whatever reason.

He added that Pirelli uses the inspection reports along with the rating system established within the programme as mechanisms to monitor progress among plants with respect to their loss prevention efforts and to incentivise them to maintain high standards.

The rating system encourages each plant to seek what is known as 'highly protected risk' or HPR status which gives them certain fiscal benefits.

"The HPR rating is a key parameter for insurance premium allocation for each plant," said Mr. Castelli.

"Implementing a loss prevention plan brings to the plant immediate benefits in terms of insurance premium savings.

"As a further incentive, HPR plants also receive discounts on the fees for special engineering services offered to them by the group." According to Mr. Castelli the knock-on effect of this is that as each plant has sought to improve their individual HPR ratings over the ten years of the programme's existence, Pirelli has been able to improve its risk profile with insurers and reduce or at least maintain group insurance costs.

"The HPR concept has been widely accepted by the insurance market," he said.

"As one example, after receiving original quotes from brokers for our PDBI [property damage and business interruption premium renewals that showed a potential average increase in the premium rate of 153 percent, we actually ended up with just a 20 percent increase.

"We have also managed to come below the PDBI benchmark insurance requirements since we implemented the loss prevention programme.

"The loss prevention programme has definitely had a very good impact on our worldwide insurance programme, and, among other results, has been a critical factor in our improved renewal rates."