There is a belief that insurers have a role in influencing health and safety within an organisation. However, the extent to which insurers do influence organisations to manage risk and
to improve standards of health and safety is debatable.
Insurance companies are not charitable organisations but this does not mean that they do not have social objectives. High levels of crime or accidents at work are not in the insurance company's interest because they result in more claims and higher premium levels.
In the field of health and safety, the Association of British Insurers (ABI)' argues that there is an interrelationship in what the government does regarding health and safety and what insurance companies do. Insurers can impose conditions on the insured that will tend to make the workplace safer.
However, the scope for requiring “risk improvements” is tempered by conditions in the market. Research shows that where the insurance company imposes improved safety or security measures, companies are fairly likely to change insurers. The Employers' Liability Act also forbids technical exclusions to policy wordings.
For a small business, employers' liability premiums are relatively small. There is a limit to the services that an insurer can provide within that level of premium income.
This is further exacerbated by the uncertain nature of claims. Even if interventions are put into place to try to minimise accidents and ill health, any actual reduction in accident rates is likely to lag behind the risk management effort. It is difficult to quantify the effects in terms of claims reduction that accrue from assisting the insured to make risk improvements. There may be a feeling by insurers that if they put resources into actually improving the risk, the insured may then be more attractive to another insurance company who will reap the benefits in improved claims experience.
In theory, the insurance premium for a better managed risk should be lower, reflecting the decreased likelihood of a claim. However, to fully assess the risks of the organisation in order to make that judgment takes time and resource that may be difficult to justify. But in the absence of any discount for effective risk management, there is reduced incentive for organisations to make improvements.
Provision of health and safety advice
There is a view in some organisations that the financial consequences of accidents are not significant because they are covered by insurance. In fact research by the Health and Safety Executive shows that the uninsured costs of accidents exceed insured costs by between eight and 36 times depending on the industry. Statistics show that there is a higher risk of being involved in an accident in a small firm than in a large one.
There is a legal requirement that employers should ensure that they have a “competent” person to advise them on assessing and managing risks. Smaller organisations that do not have a full time health and safety practitioner working within their organisations should, in theory, be in need of sound health and safety advice since arguably the burden of demonstrating compliance with relevant legislation falls disproportionately on them. Paying for consultancy advice may not be an option for a smaller company and the role of the insurer or intermediary in provision of such advice should be welcome.
However, the role of the insurer is not a neutral one. One of the purposes of a visit from the insurance company's surveyor is to determine factors at the insured that will influence the way the risk is underwritten. The advice that is given will help the insured reduce theft or accidents, but will also benefit the insurer in that they are then less likely to experience a claim.
There are also other pressures on insurers that may act counter to the impulse to work with clients to improve risks. Many brokers will not allow the insurer direct access to the customer. The broker has traditionally jealously guarded their relationship with the insured. Other than a survey soon after inception there is usually no direct contact between the insured and insurer.
This initial survey is seen as of benefit to the insurer and it has been known for risk management advice to be intercepted by the broker. Attitudes of brokers would need to change for this to be perceived as a service to the client.
Current Pressures on Insurers
The UK Insurance industry has undergone a spate of mergers and acquisitions in recent years at all levels. The general losses suffered by insurers in recent years have led them to seek economies of scale.
Employers liability in particular has operated at a loss for a number of years. A recent study showed that claims for personal bodily injury are rising by more than 12% per year. This is despite the fact that there have been overall fewer numbers of claims due to a reduction in serious accidents.
A number of factors are responsible for this. The Ogden judgement has boosted personal injury award levels. The Road Traffic (NHS Charges) Act 1999 gives the National Health Service the power to recoup medical and nursing expenses from the wrongdoer in a road traffic accident – and the Law Commission has now recommended that this power be extended to other circumstances. Increased payments for pain and suffering and loss of amenity, conditional fees and “success fees” are likely to cause further rises.
The type of claim has also changed over recent years, with claims for ill health conditions now accounting for half of all claims. In the future, the number and type of actions is also likely to increase. A recent spate of claims for stress undoubtedly shows a trend for the future. A recent judgement on RSI and legislation that gives rise to the possibility of a civil action for the tort of breach of statutory duty may cause an increase in the number of claims in the future.
The Woolf reforms have also had an impact in that the absence of documented management actions to prevent accidents makes it more difficult for claims to be defended. This is particularly pertinent as claims for conditions such as stress and WRULDs rise, since both have traditionally been of less concern to managers, viewed as difficult to predict and manage.
Paradigms for the Future
The world of work is changing. In the past decade or so we have seen shifts from employment in manufacturing to employment in the service sector, tele-working, part time working, and new technology continuing to change the basis of work. Management of health and safety and insurance will have to change correspondingly.
The current and likely future costs of employers' liability insurance make the present situation unsustainable in the longer term. Many insurers are looking to risk management solutions to the profitability problems of their business insurance book.
One partial solution is to move from one-year contracts for insurance to three or five-year contracts. This means that insurers can afford to put some resource into risk management without fear that their “investment” in an insured client now less likely to make a claim will be wasted by the contract moving to another insurer in 12 months time. This in itself is not without problems in that if the contract is written in a “soft” market the insurer will be unable to raise the premium as the market hardens. Although a number of insurers do offer longer term insurance contracts, they are not the industry standard, and would require the will from the industry as a whole to become more widespread.
Risk management rather than risk transfer?
Recent research undertaken at the University of Central England studied the perception of risk and the management responses to it in the sub-set of small businesses that are high technology. The findings of the study were that there were significant differences between categorisation of risks by the insurance industry and the way that risk as an issue to manage is perceived within small high-tech companies. Insurers see risks in terms of associated insurance policy elements, and seek to balance their risk exposure in specific risk areas with the totality of claims from different businesses.
The report recommends that when insurers survey organisations they should consider the sophistication of the firm in risk perception and control, and recognise and reward good risk management practice.
It further recommends insurers should consider the facets of risk management that managers regard as important, that is insurance products should be built around the concerns of small businesses rather than the traditional categories of perils. In other words, the insurance company should work with the insured to prevent the occurrence of unwanted events, and to minimise the consequences on the business of those which do happen. Taken to a logical extreme, insurance, as a risk transfer mechanism would diminish in importance compared to pro-active prevention.
The Turnbull report on the Combined Code of the Committee on Corporate Governance is designed to provide guidance to assist listed companies to implement the requirements relating to internal control. The guidance on assessment and control of risks refers to market, credit, liquidity, technological, legal, security of tangible and intangible assets, health, safety and environmental protection, reputation, customer relations; and business continuity issues.
If insurance companies are in the business of helping customers to manage risk then there is little correspondence between these defined areas of risk and the product offerings of most general insurance companies. It indicates that traditional insurance may be out of line with the concerns that organisations have and the holistic approach necessary for effective risk management into the future.
The potential for insurers to exert influence in health and safety within organisations is not a new debate. However, the current pressures within the employers' liability market such as the rising costs of claims and the increasing claims for ill health, WRULDs and stress are likely to result in some rapid changes in the next few years.