Loreal 2011 Annual Report Download - page 25

23REGISTRATION DOCUMENT − L’ORÉAL 2011
Presentation oftheGroup
1
Risk factors
1.8.7.5. Risks with regard to the assets
hedging employee commitments
The assets used as financial hedges for employee commitments
are, by nature, exposed to the fluctuations on the markets on
which such assets are invested.
Pursuant to the provisions of the
Charter on the Management
of assets dedicated to the hedging of the Group’s employee
commitments
, the allocation by category of assets is subject
to limits aimed in particular at reducing volatility risks and
correlation risks between these different categories of assets.
However, a large, lasting fall in the financial markets could
have an impact on the value of the portfolios set up (see
note21
Post-employment benefits, termination benefits and
other long-term employee benefits
on page125in chapter4) .
Furthermore, the Group adopts a conservative policy for
the choice of insurers and custodians for these assets (see
counterparty risk in paragraph1.8.4.).
1.8.7.6. Risk relating to the change
intaxregulations
The Group is exposed to risks of an increase in existing taxes
or the introduction of new taxes, concerning in particular
corporate income tax, customs duties, and import taxes, the
repatriation of dividends or social levies, which could have an
adverse impact on the Company’s results.
1.8.7.7. Core commodity risk
The production of cosmetics depends on the purchase of
raw materials, at fluctuating prices. These raw materials or
components enter into the composition of products or their
packaging. The main core raw materials are polyethylene,
polypropylene, aluminium and vegetable oils and their
by-products. An exceptionally large increase in the price of
these raw materials or energy prices on the world market could
have a direct effect on the manufacturing cost of the cosmetics.
It is nevertheless estimated that the impact of this rise on gross
margin would remain limited.
In order to anticipate the effect of these fluctuations and as a
preventive measure, L’Oréal negotiates price indices with its
main suppliers of raw materials and packaging items. The Group
therefore does not use hedging.
Also, in order to offset market volatility, L’Oréal makes ongoing
efforts by carrying out purchase actions and actions to improve
industrial productivity. Furthermore, the pooling of responsibility
for purchases initiated in2008 makes it possible to reinforce
these measures.
1.8.8. Insurance
1.8.8.1. The Group’s overall insurance policy
The objective of the Group’s policy on insurance is to protect the
Group’s assets and property from the occurrence of identified
material risks that could adversely affect it. This risk transfer forms
an integral part of the Group’s risk management process. This
policy is applied at two levels:
♦at parent company level, the Group has negotiated
worldwide insurance programmes to cover its main risks
after reviewing the cover available;
♦in a local context, subsidiaries have to purchase insurance
cover to meet their local regulatory obligations and
supplement the Group’s worldwide programmes for any
specific risks.
The financial solvency of the insurers chosen is an important
criterion in the Group’s insurer selection process. Each
insurance programme subscribed by the Group involves the
participation of a pool of insurers. Overall, the main global
insurance companies are involved in one or more of these
Group programmes.
1.8.8.2. Integrated worldwide programmes
Third party liability
The Group has had an integrated global programme covering
all its subsidiaries for several years. This programme covers the
financial consequences of the third party liability of Group
entities. In particular, it covers operating liability, including
sudden and accidental environmental pollution, product
liability and product recall costs.
Claim activity under this programme has historically been low,
which shows the extremely high quality requirements and safety
standards applied by the Group in managing its operations
and in designing and manufacturing its products. The health
and safety of consumers and employees is a constant priority
at all levels of Group operations.
Directors’ liability
Group companies benefit from a Directors’ and officers’ liability
insurance programme.
Property damage and interruption of operations
The Group has set up an integrated global programme to
cover all the property (fixed assets and inventories) of all its
subsidiaries. This programme also covers operating losses
directly resulting from a business interruption and/or insured
property loss or damage. The level of insurance cover has been
selected to cover the maximum reasonably foreseeable loss,
taking into account the scale of the prevention and protection
measures implemented at the Group’s manufacturing sites
together with the business continuity plans.