Already spiralling employers' liability (EL) rates are set to rise further after next year's renewals.

Marsh's leader of UK retail placement practice Mike Jones said the 1 January 2003 renewals could herald a "substantial" increase in premiums.

"EL is not covered in the government's Pool Re, so there is a void," he said.

"Analysts have suggested the industry has not finished with its problems."

Jones said the price increases were driven by the threat of terrorism and the fact that the EL market was underfunded.

"Premiums have gone up because investment income has dried up or reduced," he said.

He suggested the EL issue was now one of affordability rather than availability.

"The hardening of the market put the portfolio under pressure," he said. "There is no investment income and the problem is how to make best use of capital base. EL is not a good use of capital for an insurer and money can be made faster in other areas.

"With EL, claims inflation is very high. It is a tough class to write."

Jones said the industry needed proper risk management and to look at human capital risk management.

"These techniques are not cheap but big companies are looking at them now," he said.