EL reforms now may reveal the true extent of insurers' wealth, warns Tony Cornell
In a period of shortage of capital, it is understandable for insurers to use what capacity they have to provide cover for risks that are profitable and predictable. For all the reasons outlined so vociferously over the last few months,the history of employment liability (EL) insurance suggests that this is not such a class.
But there are real risks in asking the government to intervene in a problem that seems to be self-inflicted by the industry and short term.
The facts seem to be that the written premium for EL according to the ABI was £913m in 1995 and dropped to £771m in 2000 before recovering to £885m in 2001.
This is against the background of all the industry protestations over the years of the unfavourable climate for EL.
Insurers must take the blame for reducing premiums in this scenario and one can only assume that they decided to write EL cover as a loss leader and compete aggressively for the business. UK businesses can hardly be blamed for the resultant losses.
The industry made an underwriting loss of £226m in 2001 on EL but, taking into account the substantial investment income from long tail business, the financial loss was probably nearer half this figure. If premiums had increased by 10% per annum since 1995 - not unreasonable when taking into account growth and claims inflation - the industry would have made an underwriting profit with a bonanza to come as the 2001-02 increases worked through as earned premium. Not exactly the crisis position painted.
EL insurance premiums by themselves are not a major industry cost. They represent 0.1% of UK plc. A doubling would only increase costs by 0.1%. Not a major burden. It is less than 10% of the average businesses insurance bill. It is less than 7% of UK commercial premiums and 2% of the total UK general insurance market. Within this context any problems should be manageable by a competent and well-organised industry.
The loss in 2001 is substantially influenced by losses on discontinued business and disease claims from old smoke stack industries. It reflects the sins of the past rather than current business experience.
In the first six months of this year, Norwich Union made a 30% return on capital on UK general insurance business and Royal & SunAlliance made 18%. Both have still to receive the full benefits of the 2001-02 substantial premium increases. Lloyd's is showing its best figures for years. This is not exactly an industry in crisis. This is the best set of results ever and would be the envy of the businesses insured.
One suspects that the industry is being greedy and is trying to create a climate where it can charge existing businesses enough in one year to make up for all the mistakes of the past. It should do this quietly and not cry `foul'.
The government can regard a problem with a class which represents 0.1% of industry's costs only as an irritant. If pressed it might launch an enquiry and this could be a real embarrassment for an industry, which is currently making more profit from businesses than ever before - and probably meeting their needs less.
The current crisis is temporary and will be resolved when capacity returns.
Any review of EL should be sought only in a stable environment when the sector is serving its clients well, not when it could be seen as profiteering and taking advantage of a business' legal requirement to insure.
Tony Cornell is an independent consultant specialising in the insurance industry