The attacks on the US last week showed no one can predict what dangers lie around the corner. Once more, insurers are learning the hard way that they need to build into their pricing a substantial element for unknown risks, and not rely on outdated statistics and practices.

Today there are a range of liabilities facing insurers and, for some, the costs can only be guessed at. The annual cost of private sector compensation claims in the UK is around £5bn and rising, and the Lord Chancellor's decision to cut the personal injury discount rate from 3% to 2.5% will cost insurers over £300m, plus increased annual costs of around £85m.

A report by analyst Datamonitor predicts that, by 2005, third-party claims will rise by a third, with a million Britons a year trying to obtain personal injury compensation.

This is serious stuff and insurers will have to plan their pricing and claims reserving policies carefully if they are to avoid going the same way as Independent Insurance. However, even bigger threats arise from risks that are already lurking in insurers' accounts.

The legacy of asbestos claims is an example. Many thought they had peaked in the mid-1990s, yet the numbers are still rising. Settlements in the US could reach $200bn (£142bn), according to consulting firm Tillinghast-Towers Perrin. The Health and Safety Executive (HSE) calculates that 50,000 people in the UK have died from asbestos-related diseases since 1968 and that it still causes more than 3,000 deaths each year.

Paying for past mistakes
The cost of asbestos claims forced Chester Street into liquidation, while Equitas, the Lloyd's reinsurer, recently announced that it has strengthened its reserves by £1.7bn to cover its expected liabilities. Whether this is sufficient remains to be seen. Many of these claims arose from policies written over 30 years ago, when underwriters could not have known the full implications.

These are some of the types of claims that insurers could face:

  • Passive smoking: Until recently, many firms wilfully flouted the law by allowing employees to smoke at their desks. As with asbestos, illnesses caused by regular passive smoking can take decades to appear. The risks were known, so firms may find they have little defence.
  • Mobile phones: In the US, lawsuits have been filed against mobile phone companies for knowingly selling products that emit damaging radiation. Although research has so far failed to find a conclusive link between mobile phone use and ill health, many experts are uneasy about the manufacturers' assurances.

    “We don't know enough about the real effects of electromagnetic radiation yet,” says professor Henry Lai of the University of Washington.

    “I have a list of about 600 research papers from the past ten years alone, 70% of which show definite effects from exposure to this kind of radiation, but the industry continues to say that there is nothing to worry about.”

  • Stress: According to the HSE, stress is the second most common type of occupational ill health in the UK. The HSE estimates up to half a million people in Britain are suffering from work-related stress, anxiety or depression at levels that make them ill.
  • Workplace violence: The 2000 British Crime Survey revealed that 2.5% of working adults had been subjected to workplace violence in 1999. However, less than half the high-risk employees – such as public transport workers, nurses and teachers – had received any training or advice from their employers.
  • Carcinogenic mineral oils: The former Rover car worker who received £168,000 in an out-of-court settlement after contracting bladder cancer from 20 years' exposure to carcinogenic mineral oils could be the first of many to be awarded compensation. Many engineering firms continued to use the oils for decades after the cancer link was established in the 1950s.
  • Acoustic shock: There are currently 400,000 people employed in call centres in the UK. As many as 20% of these may have suffered from acoustic shock. Sudden loud noises through the headsets can cause headaches, tinnitus, depression and other health problems. A BT call centre worker recently received £90,000 in compensation and a further 83 cases against BT are outstanding. Other firms who require their staff to wear headsets could be similarly liable.
  • Computer use: The problems of repetitive strain injury and back problems are now better understood, but little is currently known about the effects of increased background radiation, particularly for pregnant employees.
  • Road risks: Each year, twice as many employees are killed “at work” on the road as in other workplaces. The HSE is not currently involved in this issue, but this is likely to change. This will lead to more prosecutions of firms who endanger their employees by requiring them to drive for excessive periods or by allowing the use of hand-held communications equipment while driving.

    Need for risk management
    None of this is good news for insurers with substantial employers' liability (EL) accounts, particularly as the next spate of claims is likely to come from the clerical sector, which insurers have traditionally regarded as low-risk.

    Some analysts are even wondering whether EL insurance will soon become uninsurable – at least, in its present form. Many insurers are now trying to reduce their liability exposures, but the question remains; when the claims start to escalate, will there be sufficient money in the liability kitty to pay for them?

    According to the Association of British Insurers (ABI), general insurance business in the UK incurred an underwriting loss of £2.3bn in 1999. Moody's Investor Service estimates Lloyd's will incur a pure-year loss of £1.1bn for the 1999 year (under its three-year accounting rules), which will represent 11.2% of its capacity. Moody's says around 13% of those syndicates trading in 1999 have since gone into run-off.

    Following the dramatic collapse of Cotes-worth, market analysts expect this trend to escalate, as loss-making syndicates struggle to find backing capital. With losses running at these levels, and with the stock market tumbling, some insurers may find it difficult to meet the costs of a further surge in liability claims.

    There are encouraging signs that market rates are hardening, but many inside the industry feel only sustained pricing action and risk management will be sufficient to counter the trend of rising liability claims.

    The president of the US Insurance Services Office, Frank Coyne, warns: “Astute leaders will recognise the underlying dangers amid signs of market improvement and will not be distracted or deterred from executing the fundamentals of solid underwriting. Risk-based pricing and sound risk assessment are the single most important determinants of success.”

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