Liability is unattractive for businesses looking to make a profit, says Andrew Holman
I have followed with interest discussions on underwriters' unwillingness to accept certain classes of liability business; and comments from various quarters of underwriters `profiteering' from the increased rates and hardening market. This is the case with employer's liability (EL), being a compulsory purchase by virtue of the Employers Liability Act [1969]. But, despite the apparent iniquity, it is wrong to blame underwriters for the state of affairs.
Underwriters and insurers are in business to make a profit, just like everyone else. For anyone to force them to underwrite a class of business or interfere with pricing would be unfair and unlawful and would impede the dynamics of a near perfect market.
The EL environment has changed dramatically because insurers have finally appreciated that compensation for claims is increasing much faster than inflation and premiums. Figures also show the number of claimants is increasing. So underwriters pay out more per claim and have more claims to pay. Closer analysis shows this trend is exponential.
In itself this would present no problems to underwriters - if they could model the projected claim curve for the policies they write today. Unfortunately, due to the long-tail nature of liability business and the increasingly extreme deviations from forecast results, pricing is moving from science to conjecture - hence the withdrawal of markets.
Additionally, those underwriters brave (or foolish) enough to stay writing EL have to be compensated for the increasing risk by an ever increasing return (rising premiums and/or investment income), suggesting things will only get worse.
So what can be done? By the industry, in the current environment, not a lot. Underwriters will only be tempted back when they can display a case for making a sustainable profit to their capital providers. The only way to get `unattractive' business written is to make it more appealing - and, for a given unit of risk, that means reducing either the incidence of claims, or their quantum, or increasing the price to a level at which a sustainable profit can be made.
There's not much the government can do either - unless it takes the radical step of limiting statutory EL cover to slips and trips and perhaps removing industrial disease from its scope. Do not expect there to be much appetite for this from a Labour government with the unions as financial backers. But at issue here is a profound point; is society as a whole prepared to pay for compensation to injured parties through taxes (as it used to) or would it rather force employers to pay via the insurance industry (the `polluter pays' principle). The polluter pays view is popular on both sides of the political spectrum as it involves a free market, while ensuring employers in hazardous trades must bear the brunt of any claims - even if they are ultimately transferred to insurers.
But there must be a limit to this, or society becomes worse off as the benefits to individuals are outweighed by the cost to the population as a whole. No matter how many people fall off building sites we still need a building trade; and demolition contractors, and skip hirers and, and, and... How far the government is prepared to allow market forces to dictate the availability of cover will be an interesting conundrum.
In the US and Australia there are serious government-led attempts to limit certain classes of liability claims (such as dentists and doctors) because there is a very real concern that vital professions will cease to function - with a very obvious and real harm to society as a whole. How long it will take the government here to `wake up and smell the coffee' is anyone's guess, but one thing is for sure; premiums will continue rising with high-risk trades being excluded, until something changes the present dynamics. Would you want to underwrite EL business when all the alternative classes are so much more attractive?
