Tony Cornell says insurers and brokers need to make a priority of safeguarding the good reputation of general insurance if they want to see business pick up

It was inevitable that the shortage of capacity following 11 September and the subsequent weakness of the equity market would have severe repercussions on the general insurance market.

The demand for insurance now exceeds supply and, understandably, insurers want to use their capacity wisely to maximise returns for shareholders. Any business in a similar position would do the same.

Their priority must be to restore the strength of balance sheets so they can trade strongly again. This will be achieved by a combination of rating increases and risk selection.

But the industry has to be very careful not to be seen as greedy and to be taking advantage of UK plc.

This government does not seem to be a friend of the financial services sector and any short-term gain may well be followed by long-term pain especially as general insurance regulation has risen up the agenda.

Returns on capital in 2002/2003 are likely to be the highest for over a decade and insurers must not be seen to be trading so profitably at the expense of small and medium-sized enterprises (SMEs) in the UK. If so, as with the banking sector, government intervention will take place.

The main area of concern is the liability market and more specifically employers' liability (EL). Most insurers have consistently lost money and would probably like to exit the class as few see a long-term chance of making money. However, it is a compulsory class and without it businesses cannot trade. This is where the real conflict lies.

Decline of high-risk liability business has accelerated as the year progressed and thankfully Lloyd's has been able to act as a saviour of the sector. However, it has finite capacity, and this is being exhausted rapidly. Without this, many businesses may not be able to get EL cover and will have to close down. A few high profile cases will quickly put the industry under an unwelcome spotlight.

The fundamentals of the class have not been affected suddenly. Unless there has been a dramatic change in the business, an outside observer will think it illogical that a risk covered last year is uninsurable this year, and it does little good for insurers saying it is someone else's problem. Government action will hit everyone.

The Association of British Insurers (ABI) is working hard to ensure the industry reputation is maintained, but it is essential that every insurer acts responsibly and maintains cover so that any business closure is not seen as an example of the insurance industry's greed.

Brokers have a big role to play. They need to update clients frequently on the situation to prevent nasty shocks.

Above all, if they have any suspicions of a client employing staff without EL cover, they must record everything in writing and arrange cancellation of all the other business insurances.

They cannot in any way be seen as condoning an illegal situation.

The good reputation of the industry must be protected. It is bigger than any one member.

The alternative is government intervention and a souring of relationships where everyone loses.

Tony Cornell is an independent consultant, Cornell Consultants, and can be contacted at tony.cornell@btinternet.comk