In recent years a crisis has emerged in employers' liability, with many firms being unable to find cover. Ian Jerrum explains why EL is such a complicated area for underwriters
Huge rate increases and problems for firms in finding cover have put employers' liability (EL) insurance under the media spotlight in recent years. . EL is a socially necessary (and compulsory) class of business that ensures compensation is available to employees injured at work - even where the employer has ceased trading or lacks the funds to settle the claim. In common with many other countries, the UK operates a fault-based system. To secure payment of compensation, claimants must establish a breach of duty of care (or statutory duty) on the part of the employer that has led to the employee suffering injury, death or disease. In 2002 insurers reacted to heavy underwriting losses by massively increasing premiums, becoming highly selective, or pulling out of the market altogether - making cover virtually unobtainable for some trades. With heavy losses from business written many years previously (such as asbestos-related claims), and new diseases continually emerging, the market's readiness to write EL came into question. Recent losses have certainly focused underwriters' minds, separating the serious players from the rest. Talk of a crisis persists, but a number of market initiatives have begun to address some of the key issues and market conditions have eased somewhat. The ABI's Making the Market Work initiative aims to help businesses understand the health and safety practices insurers are looking for and to help underwriters reflect good health and safety management in premiums quoted. Meanwhile, an agreement between claimant lawyers and insurers on success fees applying to all EL accident claims came into force on 1 October.The UK government is working to help business by reviewing the EL Compulsory Insurance Regulations (and whether 300,000 of the smallest single owner-employer limited companies need to insure). The government is also committed to proposals to evaluate the evidence for separating long-term occupational disease risks from accident risks by engaging in discussion with underwriters and other stakeholders. Zurich and Norwich Union are working with government on a pilot to fast-track low-value claims of £10,000 or less.There are also moves afoot to shift away from an adversarial approach to a more partnership-oriented model - with particular emphasis on rehabilitation. There is increasing recognition that getting people back to work as quickly as possible is in everyone's best interests. This is something the government is specifically promoting with the publication of its new Framework for vocational rehabilitation due imminently. ' Ian Jerrum is managing director of Searchlight Solutions
Why is employers' liability such a problematic field?EL policies provide indemnity against the employer's legal liability for both damages and claimant's costs (and generally defence costs) within the policy limit. Legal costs and expenses are a significant factor in premium calculations - accounting for as much as 40% of total EL payments, according to some estimates. The policies cover injury or disease caused during the period of insurance (that is, occurrence basis as opposed to claims made). This gives rise to one of the greatest concerns over EL: latency. Experience has shown that diseases like asbestosis can take many years to develop. New and previously unsuspected occupational diseases continue to emerge. So the challenge for the underwriter is how to allow for the potential development of new disease claims in future.There are a number of perfectly understandable reasons why underwriters should be wary of writing EL. The long-tail nature of the business, due primarily to latency, leaves the insurer exposed to claims for many years to come and complicates premium calculations; EL also requires highly specialist claims handling expertise; past underwriting results have been poor; and the supply of reinsurance capacity has become restricted as reinsurers too have suffered losses.For those still willing to write EL, the first consideration is to classify risks and determine which types to accept. Typically, underwriters classify risks by trade, although some now use health and safety practices as their main criterion. The character of the regulations governing EL insurance leaves underwriters with very limited discretion on altering the terms and conditions of the policy. This makes the simple decision as to whether or not to underwrite a risk all the more critical. Considerations such as claims experience, the inclusion of high-risk activities (such as builders working at heights), and health and safety management standards are key here. EL underwriters are already familiar with a long list of diseases that includes: asbestosis (caused by inhaling asbestos fibres) and silicosis (inhaling silica sand), both of which can lead to the incurable condition pneumoconiosis; byssinosis (caused by textile fibres); deafness; vibration white finger; cancer (due to chemical exposure); dermatitis; repetitive strain injury; passive smoking; stress and occupational asthma. The underwriting challenge going forward is to stay ahead of the game in identifying future problem areas.Underwriters typically keep statistics on a trade-by-trade basis, monitoring hazards within trades, and use this data to apply a trade rate to payroll. They may adjust this rate to account for claims experience, health and safety and loss control measures - and to allow for specific high-risk activities carried out (such as builders who do a lot of roofing work). It is common practice to apply different rates for different job roles, such as for manual and clerical staff.The long-tail nature of many EL claims complicates the consideration of claims history in relation to particular trades - or larger individual risks. Underwriters normally extrapolate from historical burning costs to calculate the premium required for future years - adjusting to allow for claims cost inflation, the effect of future legal changes and new diseases that may emerge, underwriting and claims expenses - and also for any changes in policyholders' business practices that may expose them to additional liabilities.In the case of EL, this entails considering a huge range of legal environmental factors. These include: personal injury claims inflation, legal costs inflation, Law Commission reforms, Civil Justice Reforms (Woolf), conditional fee arrangements (no-win, no-fee), rules on the recovery of NHS charges, Odgen Tables, discount rates for future loss, and structured settlements. These combine to make EL one of the most challenging classes of insurance business to underwrite.
Test your EL knowledge1. What must claimants do to pursue a successful EL claim?2. What factors might deter underwriters from writing EL business?3. On what basis do underwriters typically classify EL risks?4. Name five types of disease of which EL underwriters need to be aware.5. What are the chief variables for which underwriters need to allow in adjusting burning costs to calculate premiums?6. Name five factors within the legal environment that may affect future EL claims costs.Space limitations dictate that we can do little more than skim the surface here of a complicated subject. The full text of the source training module within e-learning resource TICK is available online free to Insurance Times subscribers for a limited period. Go to www.tick.uk.com and enter your surname as Insurance and password as Times. ' Ian Jerrum, managing director, Searchlight Solutions
AnswersQ1. What must claimants do to pursue a successful EL claim?A: Claimants must establish a breach of duty of care on the part of the employer – or in certain instances a breach of statutory duty – that has led to injury, death or disease to the employee.Q2. What factors might deter underwriters from writing EL business?A: 1. The long-tail nature of EL business leaves insurers open to newclaims for many years to come2. This makes premiums hard to calculate3. EL requires specialist claims handling expertise (and therefore additional cost)4. Underwriting results have been poor historically5. Reinsurance capacity for EL business is in short-supplyQ3. On what basis do underwriters typically classify EL risks?A: Underwriters normally classify EL risks by trade, although some now use Health and Safety management practice as their main criteriaQ4. Name five types of disease of which EL underwriters need to be aware.A: Any five from the following list:1. asbestosis2. mesothelioma3. silicosis4. pheumonoconiosis5. byssinossis6. deafness7. vibration white finger8. cancer9. dermatitis10. repetitive strain injury11. passive smoking12. stress13. asthma14. …and many more!Q5. What are the chief variables for which underwriters need to allow in adjusting burning costs to calculate premiums?A: 1. claims costs inflation2. the effect of future legal changes3. the emergence of new diseases4. underwriting and claims expenses5. changes in policyholders' business practices that may expose them to additional liabilitiesQ6. Name five factors within the legal environment that may affect future EL claims costs.Any five from the following list:1. personal injury claims inflation2. legal costs inflation3. Law Commission reforms4. Civil Justice Reforms (Woolf)5. conditional fee arrangements (no-win, no-fee)6. rules on recovery of NHS fees7. Odgen Tables8. discount rates for future loss9. structured settlements