The word `crisis' has been used lavishly by commentators over the past few months when describing the liability market. There has been plenty of material at hand to use as example.

Employers' liability (EL) rates are stratospheric, up to 700% higher than last year, leaving businesses without cover to comply with legal requirements.

Some have no choice but to trade illegally or close, laying off their staff and leaving work unfinished. Vital development has been halted and small home repairs not carried out because the tradespeople cannot afford cover.

Professional indemnity rates have rocketed.

Small legal firms have chopped the cover they have bought to the bare minimum. Independent financial advisers are selling their businesses because they cannot afford their premiums.

Public liability rates have caused village fetes and church fairs to be cancelled and sports events to be abandoned.

The situation has all the best dramatic elements of a crisis. There was the unstable period, as insurers ascertained exactly how hard the market was going to get. There is the politics and economics, with impassioned pleas to the Treasury and the DTI to cut some slack. There is even the disease, since asbestosis has played no small part in the whole shebang.

Most of the major players agree that we have definitely reached a crucial stage or turning point for the market. So what is to be the sudden change, for better or worse?

High professional and public indemnity rates are regarded as natural, positive results of a hard market, which has allowed insurers to set premiums rather than compete on price alone. When the market goes soft, rates will drop.

However, EL cover has been put in another bracket. The issues behind the hard EL market - put very simply, rising claims costs and the black, shapeless cloud of long-tail disease - will not disappear as the market cycle goes down.

Instead, the EL crisis needs to be tackled in two parts. Providing health and safety guidance for trade associations and gathering data on trade sectors for insurers to use to set premiums.

But Biba chief executive Mike Williams warns: "There is no quick fix."

Biba, the ABI and various trade associations agree that there needs to be immediate action to soften the blow to business. There also needs to be serious thought given to a long-term solution.

Earlier this month the ABI and Biba invited about 100 trade association and government representatives to meet at its London headquarters to discuss what steps could be taken to help the trade association members' obtain vital insurance cover.

The immediate upshot of the meeting was the launch of two working parties, comprising representatives from insurance, broking and business.

One party will create industry-specific guidelines on insurers' health and safety requirements.

"There seem to be some lack of appreciation that compliance with relevant health and safety legislation wasn't necessarily enough to meet insurers' requirements," an ABI spokesman said.

"We need to sit down and hammer out some guidance for the trade associations to give their members."

The other party will collect data to be used by underwriters when setting premiums, as the trade associations say insurers do not have a true picture of which trades posed the greatest insurance risks.

"There were concerns that insurers' perceptions of what were dangerous industries was not matched by reality," the spokesman says.

These two solutions - which the ABI vowed to put into action as quickly as possible - should improve the trades' understanding of what insurers want and improve insurers' understanding of what each trade actually does.

This improved mutual understanding may result in a reduction in rates, but a long term solution is needed to deal with the deeper issues behind the EL crisis. What form that solution might take is still to be ascertained.

The ABI went into the recent meeting having already formulated six key principles it considered imperative to any long-term change to the EL system.

ABI general insurance head John Parker says any change must put the interests of the injured person at the fore.

He also calls for more legal clarity.

"The law should be clear in what circumstances a person should be compensated and for how much," he says.

"Legal fees should be kept to a minimum. Currently 40% of EL claim costs are taken up in legal fees."

Parker says responsibility for compensation should rest with the employer who caused the illness wherever possible and that cases where responsibility is not clear should be dealt with as they arise, a response to the lack of direction offered by the House of Lords decision on Fairchild.

"Greater emphasis should be placed on health and safety," he says.

"Firms with poor health and safety records should expect to pay more for their insurance."

Parker is adamant that any changes should be retrospective.

Will such principles work in practice?

Some states of Australia suffered a similar crisis in 2001. In response, New South Wales passed the Workers Compensation Legislation Further Amendment Act [2001].

The new Act sets a high threshold for access to damages, at 15% impairment. Physical and psychological injury cannot be combined to make 15%, but assessed separately.

Damages are limited to economic loss due to loss of earnings and future economic loss, which is calculated only to age 65.

Damages recipients have no recourse to statutory benefits and must repay any benefits received before the damages were awarded.

Before filing any claim for damages, the claimant must serve a statement setting out his case and any supporting evidence on the defendant.

Unless the claimant can satisfy the court that new evidence has come to light after the statement was served, he is not allowed to introduce any more evidence.

A similar Act could be seen to solve many of the UK's employers' liability troubles. But it was not introduced easily.

Trains stopped and building site staff walked out in protest against the proposed Act. At least 100,000 workers belonging to several unions went on strike in a bid to convince the NSW government not to introduce the changes. Another 1,000 blockaded the NSW parliament in Sydney in demonstration.

Any change in the UK that creates perceived difficulties for workers to get compensation for workplace injuries is going to be treated with suspicion.

The government, which is said to be aware of concerns over EL but reluctant to act, would be aware of the political dynamite loaded in any such move. It is likely to want evidence of market failure, as in the terrorism cover shortage.

For insurers, there is going to be no gain without pain.

The changing face of risk

Roger Cottell highlights some key emerging risks that are changing the nature of employers' liability

The risks that we face - as individuals, employees and employers - are changing. As the current debate over employers' liability demonstrates, workplace compensation has evolved over the past 30 years. Originally, claims came mostly from personal injuries, or accidents. Today, a large proportion of claims cover health-related issues, particularly involving exposure to risk over a period of time, rather than a specific incident.

What lies behind the pattern of change? There are several propensities to claim, including increased legislation, advances in medical science and causation of disease, and litigious trends in society. Work patterns have also changed, from manufacturing to servicing and standard employment contracts have moved to more flexible working such as home working.

Work-related stress claims are now emerging and HSE research shows that stress is the second biggest cause of work-related illness in the UK with one in five workers reporting they have been affected by it. Recent research conducted by Zurich Municipal on members from the Society of Chief Personnel Officers showed that while 67% believe responsibility for workplace stress falls equally on both the employer and employee, 38% expect the number of stress related claims to rise.

But work-related stress is challenging to manage. Without always being able to determine the real source of stress, it is extremely difficult for employers to introduce stress management processes in the workplace and for insurers to both identify stress triggers and anticipate them in their EL policies. Occupational road risk is also likely to feature in future work-related stress claims.

It is now estimated that 2% of the working population in the UK is employed in call centres. Here, acoustic shock - the result of sudden, specific loud noises coming over the telephone headset which can cause hearing loss, dizziness and headaches - is emerging as a new cause for EL claims. However, as with work-related stress, it is extremely difficult to quantify the risk as people have different sensitivity levels to noise. Definitions of acoustic shock vary from the above to include length of time exposed.

Environmental pollution is another area where the nature of the risk and the insurers' assessment are far from clear cut. The environmental legislation of the 1990s, driven largely by the EU, increased from one major piece of legislation dating back to 1974 to six, with a host of subsidiary regulations. Both the legislation and the Environment Agency are placing more responsibility on industries not to cause an environmental incident and, should they do so, to clean it up quickly and efficiently. Zurich London, a leading insurer on environmental risk has found that pollution is becoming a major liability - one that did not exist five to ten years ago - for companies spanning all industry sectors in the UK.

So how can we gain a more secure footing in this ever-changing landscape of risk? A chief executive would typically describe a solution as the "no surprises" plan. Legislation standards provide a basic standard, but organisations must establish their tolerance for risk to manage risks effectively. This means understanding potential risks, profiling in terms of scale and severity, leading to a position where control measures are based on defined priorities.

The key is then implementation and demonstration of positive control actions. While nobody can predict the future, we can all be alert to changing working practices and shifting social behaviour, which can, and do, present new risks.

  • Roger Cottell is managing director of Zurich Risk Services

    Partnership in the workplace

    The healthcare and liability markets can work together to prevent sickness and injury in the workplace and return employees to work quickly, says Tim Osborne

    Medical and legal inflation and the increasingly litigious nature of society are not new problems. But add in the effect of market pressures that have held down rate increases over many years and the result is inevitable. Employers and their brokers are desperately scrambling around for limited insurer capacity and asking what more can be done.

    Well, there is actually a lot more we can do. Rate increases, though necessary now, are a long way from being the only answer.

    Limiting loss in the first place is plain common sense, but to achieve meaningful loss reduction we have to stop playing at risk management and develop it in its widest sense across artificial insurance market boundaries

    So what does that mean? It means remembering that, whether we are discussing EL cover, personal accident or private medical insurance, we are talking firstly about people, and protecting those people in or out of the workplace. We also must learn to manage sickness and accident recovery far better than we are doing at present in order to return staff quickly to the workplace.

    Until now, EL loss prevention has been focused almost exclusively on physical business processes. An annual survey - or worse still, surveys after a serious injury - is no way to assist employers to manage risk.

    The answer is for intermediaries, employers and insurers to adopt an all embracing, 365 days a year approach to risk management. They can blend skills within the liability and healthcare markets and incorporate employee absence management and access to medical services.

    In the UK, absenteeism is costing employers £13bn a year. Small companies, where the absence of one or two employees can make a huge difference, are the hardest hit. Managing the wellbeing of employees offers the employer a positive means of reducing costs and motivating the workforce.

    Monitoring absence and identifying reasons for it can often address issues such as poor morale, stress, bullying, poor systems of work and ergonomic factors at an early stage and before they become an issue to which EL or healthcare insurers have to respond.

    In addition, healthcare solutions, such as private medical provision and rehabilitation programmes, can ensure that employees are quickly returned to work.

    At Groupama, we identified this growing trend towards promoting wellbeing some time ago. We are developing a more rounded customer proposition focusing on wellness and lifestyle management.

    By creating programmes of healthcare solutions to successfully manage the risks of absenteeism, sickness and stress, risk management can then be viewed as an investment rather than a cost.

    Against a backdrop of reducing state provision for ill-health and ever increasing court awards, customer needs can be more closely met by shifting focus to a solutions-based approach. This includes a broader range of services ranging from absence management and private medical insurance to physical factors in the workplace.

    Integrated risk management is a job for brokers and insurers working in partnership and encouraging employers (SME employers in particular) to understand both qualitative and quantitative risks and the benefits of implementing controls. Brokers who are not experts in healthcare can begin to move into risk management by working with an insurer who can offer the solutions the client needs.

    Such programmes lead to direct and indirect cost savings for the employer including improved productivity of employees (who are healthier and less prone to take time off work), as well as stability in healthcare and liability insurance premiums.

    Justifying integrated risk management plans, not only on a recruitment level, but also on a business level would seem to offer opportunities to employers, brokers and insurers - a true win-win for all concerned.

  • Tim Osborne is director of healthcare at Groupama Insurances

    Businesses need a health check

    Health and safety are key to obtaining scarce cover, and there are some cheap ways to get advice, says David Williams

    One of the problems of a soft market is the reluctance to go to a client and ask them to spend money on risk improvements. Fortunately, in a hard market, the industry is much more likely to make those requests.

    With the losses that insurers have been making on liability business recently, the only cases they will want on their books are those with a genuine commitment to health and safety. Many of those that have had difficulty getting renewal terms have shown a flagrant disregard for health and safety issues and have not taken steps to deal with problems already highlighted.

    From a wider viewpoint, it must be asked if anyone that doesn't take these issues seriously should be allowed to continue to trade. The statutory view leaves no room for doubt. They shouldn't. But, sadly, the Health and Safety Executive (HSE) often doesn't get to know about smaller offenders‚ until a serious accident has happened.

    I am not suggesting that insurers should become the regulators in this regard, but refusing cover to an irresponsible employer may help provide a safer future for employees.

    Insurers should be much more focused on health and safety and encourage good practice in this regard, by clearly stating those requirements at renewal time.

    It can be difficult for a small business to know what to do, as they are experts in their business, not in insurance or health and safety. Not surprisingly, there are numerous specialist consultants out to fulfill exactly this need. But what can a smaller company with less of a budget do if consultants are out of their reach? Let's begin with the cheapest stuff - so cheap, in fact, that it's free. The HSE provides a number of really useful publications. In addition to the statutes, they provide punchy and simple leaflets as well.

    The HSE's pamphlet on workplace assessment is essential minimum reading for all small businesses.

    The internet is another good source of information. That includes the HSE website ( ), as well as a multitude of general or specialist sites.

    Many trade bodies and unions that operate in a specific trade or business sector can often bring special expertise to the table.

    Insurance companies will carry out surveys to make sure the risks they are taking on are up to standard. Small businesses should not view these as potential problems, but effectively as free advice‚ that can help to improve things without running up professional fees. Insurers often also produce useful guidance notes and manuals.

    While a complicated, detailed manual may include everything you need to know and more, nobody should overlook the value of simple, to-the-point leaflets on specific issues.

    A DIY simile applies to this - the Readers Digest Guide to DIY, with its hundreds of pages, is the accepted authoritative guide on all things DIY. However, if all you want to know is how to put up a fence, a free B&Q leaflet will tell you in two pages how to put up a fence. Why confuse yourself with hundreds of pages?

    For that reason, AXA produces both - a really comprehensive guide to risk management for small businesses, and a range of smaller leaflets targeting specific areas of concern.

    Liability business is still being written and competition still exists at the smaller end and the SME market remains important to insurers.

    The knack is, therefore, for brokers and their clients to make sure their business is one for which insurers want to compete.

    Being proactive about health and safety, and taking a realistic look at the problems around business activities will make that business much more attractive to insurers - not to mention helping customers to avoid unnecessary difficulty in the day to day running of their operations.

  • David Williams is casualty insurance manager at AXA Insurance

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