Despite the liability market being given the all-clear by the Office of Fair Trading's investigation, questions still remain over after-the-event insurance.

The Office of Fair Trading (OFT) completed its investigation into the liability insurance sector this week and opened a new chapter for the after-the-event (ATE) insurance industry.

Its report ruled out the feared shake-up of the liability market "given the improvement to the markets" (see box). It concluded that increases in liability premiums were "lower than in previous years" and businesses were "more prepared in terms of budgeting for premiums in their own business plans".

The OFT also examined the ATE market following concerns about the impact of legal costs on liability premiums, in terms of both cost per claims and claims frequency.

While it recognised that the ATE market had "inherent problems", the OFT could not come to a clear decision on its effect on the liability market. Instead, the Department for Work and Pensions and the Civil Justice Council (CJC) have now been challenged to iron out the problems.

Addressing issue
While the industry has breathed a collective sigh of relief over the OFT's decision not to instigate further investigations into the liability market, the feeling among many is that it did not fully address the issues.

Allianz Cornhill Legal Protection divisional manager Phil Ruse says he was "disappointed that it didn't say more about the ATE market".

And Rob Carter, head of the costs special interest group at Foil, says the report failed to "add a great deal to the ongoing debate. Defendant insurers are disappointed that not enough has been done."

Long-tail insuranc
A specific area of concern relates to long-tail disease claims. Axa head of liability claims and professional services Matthew Scott says that given the recognition that upward pressure would persist, "it is a little disappointing that the OFT has not commented on the need to consider mechanisms for the effective separation of long-tail insurance issues from the general liability approach".

And Royal & SunAlliance technical insurance manager Phil Bell warns if the problems of long-tail disease claims are not addressed, "the problems of 2001 and 2002 [when liability rates rocketed] will return".

But the OFT's failure could be the CJC's success. Carter says he was pleased that the CJC would be taking a closer look at the ATE markets.

He adds he would like to see it persuade ATE stakeholders to come together to "sort this mess out".

In its defence, the OFT says it decided to limit its ATE research due to the amount of work already under way by the Department for Constitution Affairs.

And the ABI also says it was "sensible" for the work to be handed over to the CJC.

"The CJC's involvement offers a more effective and sustainable alternative way of resolving these issues," it said.

"The ABI and its member companies will play a constructive part in this progress."

A tale of two markets: what the OFT said

  • In 2004 employers' liability rates rose by 7%, while for professional indemnity and public liability prices increased by 4%. The report noted the increases as lower than 2002 levels, but ahead of general inflation.

  • The OFT found "significantly" fewer businesses were denied cover by their insurer. There had been "improvements" in areas identified as problematic in its 2003 report.

  • The legal costs of conditional fee arrangements (CFAs) and after-the-event (ATE) insurance continued to swell in 2004. The report found "more predictability" had been introduced to the costing system.

  • There have been improvements in communications across the sector. Key government initiatives have proved successful in the first year of operation.

  • The report failed to establish whether ATE premiums had contributed to the rising costs of liability premiums and the volume of claims.

  • There are "inherent features" of the ATE market that pose problems. Claims management firms do "very little" shopping around for ATE policies, resulting in inadequate downward pressure on ATE premiums. ATE is imperfect but necessary for CFAs to operate.

  • The Civil Justice Council and Department for Constitutional Affairs will carry out work to pinpoint "crucial issues".

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