Martin Temple on why the EL system needs more attention from government.
The Department of Work and Pensions has announced its views on the sustainability of the UK's system of employers' liability insurance.
The government has confirmed what business has been saying all along - that employers liability insurance is not working. Government must now demonstrate a sense of urgency and provide a clear plan of action to address this issue.
Business is under no illusion as to the complexity of introducing change in this area, but will not be satisfied with anything less than fundamental reform of a system that currently serves no-one well.
However, there are fears that despite the growing momentum in support of change, government may lack the resolve to undertake the radical reform necessary to deliver a better value system for all concerned.
The current system serves no-one well. Employers' liability insurance was not designed to provide an incentive for improving health and safety practice. Indeed for the majority of employers, in small and medium sized businesses, no clear link exists between their health and safety performance and the premiums they pay. Employers with flawless health and safety records effectively subsidise those who are negligent.
Neither do the current arrangements take into account the radical changes that have taken place over recent years in the compensation system. There are many more medical conditions for which damages are now payable, and more may be in the pipeline. With this level of uncertainty in the system, it should come as no surprise that premiums are rising.
And government itself is exacerbating the problem. New government measures, such as the Department of Health's proposal to recover National Health Service costs in compensated workplace accidents will add yet further inflationary pressures to an already overheating insurance system. To add more cost to the failing system is simply a demonstration of the failure of government to act in a joined-up way.
The evidence shows that the current market is unable to provide the solution, and this is an aspect of the issue considered by the Office of Fair Trading. EEF research has shown that companies presented with significantly increased premiums have few alternatives.
Employers Liability insurance is now normally sold as a component of a broader package of insurance products, allowing insurance providers to spread risk, but adding a constraint in the market.
Employers looking to shop around for lower premiums find that, with claims experience not shared adequately among insurers, new providers can load premiums for the unknown risk, meaning that the price offered may be higher than that offered by their existing provider.
For some employers, in sectors with a higher risk profile, there are real difficulties in obtaining cover at any price. While employers' liability is a compulsory insurance, there is no complimentary responsibility for insurers to provide it.
The government's freshly-announced proposals for EL provide a real window of opportunity to address the issue of rising premiums and the effectiveness of the market.
At the heart of any new compensation system should be a greater focus on providing urgent, constructive support for people who unfortunately suffer illness or injury in the workplace.
The insurance industry needs to work more closely with business to ensure that premiums can be linked more effectively to individual business risk - under the existing system most businesses are 'book rated' depending on their sector, with lower risk companies effectively subsidising higher risk companies in the same sector. Separate arrangements for occupational illness and injury could help accident premiums to be more responsive to risk management.
Finally any new arrangements must seek to reduce dramatically the need for litigation. Recent years have seen a marked increase in civil litigation with the number of claims growing year on year. The costs attached to such claims are excessively high and point to major inefficiencies in the system. For every pound of compensation awarded it costs around forty pence in legal fees, a significant factor driving premium inflation.
