Increasingly staged accidents and a growing victim culture in the UK could be making underwriters' traditional ways of rating business unviable, says Stephen Fitzgerald….
The compensation culture is here to stay. Insurers failed to appreciate the speed with which “claims enablers” would mobilise their forces to generate business streams; now that has caught up with them. The access to justice requirements had a long lead-in time, during which these organisations used all available media and technology to broadcast their message that whenever misfortune strikes, a claim for compensation is on the cards.
To make matters worse, during the same period liability insurers were failing to resist broker pressure and were discounting rates, even though the average cost of settling a claim increased by about 30% after legal changes and reforms. What is more, the insurance industry was singularly failing to get across to the public that a consequence of increased claims is a decreased quality of life. Organisations will face the stark choice of either avoiding the peril of legal liability or paying increased premiums.
This is precisely what happened in the US liability crisis. School trips were cancelled and small-to-medium companies went out of business, crushed by the weight of their liability premiums. Even those companies that could afford to purchase liability insurance were damaged by the increased administrative burden of providing insurers with the necessary information to enable them to negotiate and settle claims.
The same thing is already happening here. There is no doubt that the activities of the “claims enablers” will impact upon the nation's productivity.
Risk is normal
There is, of course, a positive side and if a more litigious society produces a more disciplined approach to health and safety issues, the risks of injury and damage will reduce.
However, risk is a normal part of life that cannot be totally eliminated and some processes are extremely difficult to risk-manage without excessive cost or impairment of functionality. For example, how can an employer eliminate stress from the workplace? The ability to tolerate anxiety and cope with misfortune or distress is a vital requirement of certain jobs.
The much publicised circumstances of Walker v. Northumberland are a clear example of negligence on the part of the employer, but there have been an increasing number of high-profile cases that have progressed to the courts without real merit. This tends to suggest that an employer cannot expect fortitude from his employee.
Furthermore, there has been a recent out-of-court settlement for psychological stress caused by the anticipation of developing asbestos where the disease did not manifest itself in the claimant but had done so in his fellow workers. This is a stunning development.
If we do see a tidal wave of claims, the courts will need to exercise a common-sense approach if we are to avoid a “victim culture”. They will also need to be more adept at spotting the bogus or exaggerated claims.
Various surveys have shown that the concept of honesty is less well defined in people's minds these days and claimants' solicitors will, no doubt, find it difficult to assess whether or not a claimant is genuine.
Temptation
With perhaps some notable exceptions in the motor insurance sector, UK liability insurers have not had to contend with the deliberately rigged accident where several parties conspire to make a fraudulent claim. However, it's now easy to imagine the back injury that “occurs” on a Monday morning in the factory, in front of workmates, which actually happened in Sunday's football match. The TV offer of money for nothing must surely be a temptation in these circumstances.
For these obvious reasons, it is therefore important that the industry unites now and adopts the tools used by the claims companies to get across the strong message that everyone has a role to play in taking a responsibility for their safety and those in their care, that in the end the consumer pays the bill and that bogus and fraudulent claims cheat us all and will be rigorously investigated and payback enforced.
So all is lost? Well, not quite. The intensity of the peril and the frequency of the peril have increased but essentially the challenge for the underwriter is the same, which is to devise a methodology for carrying and pricing the risk to make a fair profit. Insurance is founded on carefulness and foresight and these qualities must now be at the front of the underwriting process.
Rethink is needed
Underwriters must be open to the idea that the traditional ways of rating business might not be viable in the new environment. Certainly the statistics accumulated over many years were not taken from the current legal and cultural environment. Clearly the claims frequencies of individual attritional type risks will change. Logically those businesses that have a transient rather than loyal, well-cared for workforce will be more vulnerable, so perhaps there is an argument for increased rates to be applied to labour-only sub-contractors when rating employers' liability business. Obviously we have to rethink our attitudes to reserving and allowing for “incurred but not reported” incidents.
Perhaps we need to link the premium to the actual claims record of the insured party, rather than to the wage roll, and to write to a defined profit margin with a maximum premium and the potential of an attractive minimum premium in order to encourage risk management.
Perhaps this is an opportune moment to rate separately the accident potential and gradually developing disease potential and allocate premium accordingly and certainly now is the time to begin to charge realistic premiums for the risks being run.
Ultimately our business is about weighing money in against money out and we need to get our sums right. There has been plenty of evidence in recent years of the inevitable outcome for those who don't.
The phenomenon of a litigious society is nothing new. It happened in the US, in Australia and in Ireland. It would be foolish to pretend it is not going to happen here. All this said, these challenges are what make liability underwriting so fascinating and brokers and insurers will no doubt work together to find solutions as they have so many times in the past where the legal landscape has changed. It is vital that we do so. Without doubt it will be an interesting time at the coalface over the next few years.
