As the debate on employers' liability drags on, Mike Jones suggests some strategies that could work together to provide long-term stability in the sector
The issues facing today's UK employers' liability (EL) insurance market stem both from difficulties experienced by insurers in predicting, pricing and reserving for unknown exposures and from changes in the social environment.
Claims costs have increased; injured employees expect ever-higher awards through a growing culture of compensation. Not enough attention has been paid to good risk management practice for accident prevention and rehabilitation.
There is far less competition for EL business as insurers have moved capital away from what many see as loss-making classes to those promising a better return.
Lower investment returns, weak stock markets and increased losses have persuaded the remaining insurers to impose large premium increases in an attempt to return their account to profitability.
The current situation has created major issues for employers, employees and insurers. The key question is how might it be improved?
As the situation in the EL market reached crisis point at the beginning of 2003, there was widespread publicity about the threat the cost of insurance posed to the future of many commercial organisations. The government's reaction was to encourage a wide-ranging debate on the future of EL insurance, initiating a review and seeking suggestions from interested parties.
Many organisations from the insurance and other industries responded, including Marsh, with most commentators taking the view that some changes are required if stability and capacity were to be restored to the market.
Marsh took into consideration the experience of its clients over the past few years and, in particular, this year. Its view is that the market has the potential to be viable, but changes in approach, and possibly legislation, may be required to reduce the overall cost of claims and increase competition.
It has seen some support for moving from the current adversarial negligence basis to a no-fault system. However, it is impossible to predict whether savings in legal costs would outweigh the resulting increases in claims settlements.
A no-fault system also removes some of the incentive for employers to manage risk, which we view as contrary to the direction in which organisations should be encouraged to move.
Another alternative might be to move to a form of workers' compensation, with fixed benefits and/or a cap on claims.
However, such a system could be administratively intensive and tends to result in a lower level of awards. We are not convinced that such a system would find favour with UK employees or their trade unions.
Health and safety
Most EL insurers now recognise the importance of post-injury management with case management and rehabilitation. The stumbling blocks are delayed reporting of claims to insurers and the tax treatment, which sees a claim as a benefit in kind of private medical care. Creating a new British standard for excellence in health and safety could help here, together with removing taxes on private medical benefits for employees injured at work.
Effective EL risk management systems improve health and support for employees and lead to greater productivity, higher retention of quality staff, and reduced operating costs. They can also reduce accidents and claims and enable insurers to differentiate between risks. Companies with well-managed risks pay lower premiums.
Most EL claims relate to musculo-skeletal disorders, which respond favourably to rapid treatment and case management. However, GPs and the NHS generally give such conditions low priority.
Establishing new specialist treatment hospitals would help here.
We believe that several other areas are worthy of debate.
Traditionally, insurers provide cover on an occurrence basis, that is, the policy must have been in force when the event occurred before a claim can be made.
It might be worth investigating the feasibility of alternatives, such as claims made, manifestation and losses reported. These are the trigger points that activate a claim. A considerable amount of technical work would need to be carried out, both to establish whether any of these options would, in fact, result in the improved management of long-tail claims, and to put in place clear market protocols should any be taken forward.
How might risks that are not readily placeable fare in a different EL insurance regime? Establishing an assigned risks pool is one answer, with EL insurers required to underwrite such risks in the same proportion as their book of business relates to the whole. Businesses placed in such a pool would have to comply with risk management procedures and improve within a given period or face withdrawal of cover (see box).
Clearly, the issues raised here will require the input of all stakeholders in order to achieve solutions that can deliver long-term stability.
But while we await the result of the government's review, it is at least encouraging to see a public debate on the EL market, which is having such an acute impact on so many of our clients. N
How a pool scheme could tackle long-tail claims
The single largest problem for EL insurers is the uncertainty caused by long-tail claims from industrial diseases and other injuries that occur over time.
Isolating disease claims within a specially created pool could remove this uncertainty, allowing underwriters to focus on insuring other injuries and increasing market competition.
Such a pool would need to define 'disease' carefully in order to cover conditions that manifest themselves over an extended period, rather than those immediately following a sudden event.
The best approach might be to list the conditions covered at the outset, with the flexibility to incorporate any new diseases that emerge.
We envisage the insurance industry and government working together to establish the pool. Each EL policy would include two sections, one handling disease, the second all other exposures. The former section would be ceded by the insurer to the new pool in accordance with the rates set and agreed by the pool.
The pool would handle all future risks and could also possibly be adapted to provide a portfolio transfer facility allowing insurers to pass on their own long-tail exposure. Specialists nominated by the pool and supported by the original insurer would handle any claims under the pool arrangements.