People injured at work could lose their right to receive benefits from the Government in a move which would create a massive new market for the insurance industry.
Alistair Darling, the Social Security secretary, is drawing up proposals to scrap industrial injuries benefit, introduced in 1948 when the welfare system began. He plans to start a private system.
Companies would be forced to set up their own commercial insurance policies through which they would compensate injured staff.
ABI deputy director general Tony Baker said officials from the Department of Social Security had recently discussed the proposal of insuring industrial injury in the open market. But he said that the proposal had initially been mooted several years ago and was unlikely to be introduced until after the next election.
He added that insurers would need complete access to data on industrial injury if such a move were going to be successful.
"There is a lot of undetected fraud in the state system which insurers would want to combat," he says.
Industrial injuries disablement benefit is paid to 282,000 people and costs £712m every year.
Claimants are eligible for up to £108.10 a week.