Insurance Times gathered together brokers, insurers, clients and lawyers to discuss the problems of liability and some of the solutions
Andy Cook (chair) - editor, Insurance Times
Mike Williams - chief executive, Biba
Stephen Sklaroff - deputy director general, ABI
Stuart Reid - Stuart Alexander
Lord Huntof the Wirral - senior partner, Beachcroft Wansbroughs
Peter Hubbard - chief executive, AXA
Mark Coffer - Marrs Insurance Brokers
Paul Howard - group risk and insurance manager, Sainsbury's
Vic Thompson- Thompson Heath Bond
Chris Fletton- speciality lines underwriter, QBE
Mike Williams: Since 11 September we've been receiving occasional inquiries from our member firms, about one or two a month, saying: "We are having difficulty finding homes for certain risks", almost entirely liability. Then, rather suddenly, towards the end of June, it was as though somebody had turned on a switch and we were getting four or five inquiries a day.
We carried out a quick survey among the Biba membership, asking members to identify the trade, renewal date and class of insurance, and tell us what had happened in respect of risks where they had problems getting renewals from insurers, 130 of our members replied.
Their information broadly broke down into three categories: clients for whom they simply could not find cover at any price; clients who were being offered terms that they claimed were unaffordable; and clients who were either on extension or being held covered and desperately trying to find markets.
Within those first two categories, they gave us lists of clients who had either ceased trading or, more worryingly, were trading without employers' liability (EL) insurance.
They were either laying off people, changing their business activity, shutting down branches or doing something entirely different, a roofing contractor becoming a general builder, for example, to try to stay in business.
Once we had received this information, we began to approach the media. The national and trade press took an interest, and the next thing that happened was we received a call from the Treasury and the Department for Work and Pensions saying: "We would like to talk to you about this because we are getting information from other sources that there is an issue, it's on our horizons now?" The results of that meeting have been fairly widely published.
So, there are two strands to this. There's a shortish-term issue, and almost all of the problems that have been brought to our attention are in the SME sector. The bigger companies - squeal as they might about the terms and the prices - by and large can obtain cover and stick it out and hope that next year things will not be quite so problematical. There's a hump that we have to overcome now and that's a short-term issue.
The longer-term issue relates to the environment in which you work, and we have talked to the ABI in some detail. The longer-term issue relates to legislation, such as unlimited liability for companies, ambulance-chasers, inefficiencies in the claims courts systems and so on, and there are a variety of solutions there that need to be explored.
Stephen Sklaroff: It is quite important to distinguish between short term and long term and I would define them like this. There are clearly issues in the marketplace now and for the foreseeable future, which is short term.
There are also longer-term issues which go actually way beyond insurance into what society expects out of compensation: How much for what? Is it fault-based? Do you deal with disease differently from the way you deal with accidents and so on? That longer-term agenda has arisen for a variety of reasons, not least, as Mike alluded, because things have changed rather dramatically over the last 20 years.
When the existing system of liability was put in place, the law was different in a number of very important ways, in particular with regard to what is now the long tail problem. It was not possible to come forward with claims for things like asbestosis and long tail occupational diseases after a certain rather restricted number of years. The courts and successive governments have reinterpreted that and the position is now very different indeed.
At the same time, as we all know, there has been considerable inflation in the level of compensation awarded. All of this is putting pressure on a system that was really built to deal with a different set of circumstances, so it has to be sorted out.
Also there are issues here which are nothing to do with insurance, they are to do with changes, social changes.
There are issues here which are to do with insurance, but all kinds of insurance, not just liability insurance, the effects of 11 September the insurance cycle and how it works, underwriting losses generally in the industry, there's all that going on.
Then there are liability-specific issues, which we're all aware of, in particular underwriting losses in that sector over recent years.
And then you have rather acute short-term issues, including the one that Mike just mentioned. This is that for EL you have the added bonus of it being legally required, which means that the difficulties facing companies who are finding it hard to get the right kind of cover are more acute because there's a prospect of them actually trading illegally.
We have to be clear which of those six or seven problems we're actually going to deal with. Some of them are, by definition, are medium to long-term solutions, which are going to involve changes in the law and government attitude, never mind in the way the industry may choose to do business.
Stuart Reid: You should also understand that brokers have suffered quite a lot with the rate increases, not least in cases they can't write, such as contracted business. But also commissions have been reduced, substantially in certain cases.
Whereas before you would get a standard rate of commissions for a package-type business, now you no longer do so. There is an understanding that has been hammered into brokers over the last two or three years that insurers need to balance their books.
If the risk denotes a certain premium, working towards that is something that we can understand. But you must also understand that a broker's cost base has gone up; professional indemnity and professional liability have dramatically increased the price.
A lot of specialist brokers in areas where EL is high risk are finding it impossible to renew, not only their pieces of business, but their schemes as a whole.
A lot of brokers do not hold much store by [the proposed solutions]. They believe that insurance companies will charge the rates they want to charge, make the profit that they have to make, and the clients and brokers may suffer.
If that's the short term, hooray. If it's the medium term there could be some serious problems.
Lord Hunt: We must not allow ourselves to focus too much on the short term. Soon after I was elected to the House of Commons we had the Pearson report on no-fault compensation. Since then, I've been persuaded that the answer is an across-the-board, no-fault compensation system. So you then cause everybody dissatisfaction by having too low a level of compensation, and the trade unions and the claimant lobby would fight vigorously against that.
EL has a special status because, although it's the same problem as with product liability and public liability, it's compulsory and also there are some solutions that would identify it and enable it to be ringfenced.
As the ABI has pointed out, we currently spend £700m a year on industrial injury benefit, and employers spend £700m a year on premiums for EL, so there is a market out there of £1.4bn. The sad fact is that a third of the compensation claims are legal costs.
Just under a third of the cost of industrial injury benefit goes in administration, so it is possible to conceive that an insurance-based scheme that costs only £1bn and actually provides more compensation.
And if you include no-fault in medical negligence, as the chief medical officer is now discovering, you treble the bill - the £4.8bn NHS bill - and the whole thing falls into a rather serious situation.
When I was in government there was a draft scheme for privatising industrial injury benefit. As I understood it, following the change of government there was interest in the Treasury in pursuing that. It seems to have gone onto the back burner - it should now been brought forward.
Peter Hubbard: We've seen these crises affect other countries and some of the solutions that we might be looking at as long term, I think we could have in place in the short term if there's a will to get some of them in place, even when it requires changes in legislation - and Australia is a good example of that. I think the causes that have built up over a period of years have been all these factors; the increased rate of legal inflation and a huge increase in claims.
These have grown up systemically and we have not had the debate. In fact, if the industry is going to be criticised, one of the factors that I have been looking at over the last few weeks is what's been happening to liability premiums over the last five years. Wow, guys, they've gone down, in an environment where we've seen huge claims inflation.
I think the big one regarding increasing liability claims and claims inflation is more capping, more fixed awards etc, and I think we will, at some point, have to decide as an economy, rather than just within the insurance industry, whether we're going to move towards that.
The other elements, however, regarding how we deal with small claims and proportionate charges for those claims, is another one that we could probably tackle in the short term rather than in the medium or the long term. Indeed, they are the ones that we've seen other economies tackle.
Hong Kong was probably the most radical in terms of the way it tried to deal with liability capping, Australia's changed some of its legislation earlier this year and went through the same crisis in February. Legislation was actually changed within about three to four months, which shows it can be done.
We also have to recognise that liability has actually lost money in the UK for about 20 years and that if we're not careful when we come up with solutions, all we'll do is move losses around the market.
I don't think the market is sustainable in the long term if it continues to make losses and, to a degree, we have to get to a position reasonably quickly where there's a win for everybody.
Reducing commission has, if anything, been a shorter-term reaction to the fact that insurers have lost even more money over the last couple of years. It is not a long-term solution and it can't be a long-term solution.
The big concern I have about moving in that direction is that if we don't tackle the issue of the profit pool fairly quickly, capacity will actually get worse and we'll end up going into a doomed spiral of non-availability way beyond where we are at the moment. That's exactly what happened in Australia
Mark Coffer: As a broker I'm used to doomed spirals. I think that what we have to realise is that this does not stop with liability, we have massive capacity problems with professional indemnity, D&O is coming round the corner, there are all sorts of issues coming along which are going to cause tremendous problems. What has happened over the last ten months has been something been a knee-jerk reaction to right the wrongs of the last ten years, and probably more.
Insurers know that they will do business with the Mafia if they could make some money out of it because they're in trouble.
They're massively increasing premiums and of course we're at the sharp end, we're not getting backed up with any intelligent help from the insurers at all.
An example is that we had a Railtrack contractor, a two-man band. All they did was inspect rails. They paid £500 last year [for cover], not to us. This year no renewal. They could not get service anywhere. They came to us on recommendation and we got them the only quote they could get, £26,000.
Lots of things need to be done, but alienating brokers, who still command a very big chunk of the commercial insurance industry, is not the way to do it.
Paul Howard: A lot of the services we outsource to various parties, particularly on the construction side, obviously have huge problems. At one stage if you want to contract with us we're saying that we want to transfer an element of the risk to you and if you want to do that we want to see various good housekeeping practices, schemes of work, we want to try to work in partnership with you.
The feedback that we're getting is: "Yes, we will do all of that but we don't appear to be getting any benefit from our insurers for doing that. We're all tarred with the same brush."
The increased premiums get charged on to us because they're not charities and obviously they're either making the business uneconomic for themselves, in which case they might not tender for some of the work, or they'll have to put it through to us so we will end up paying the increased amount.
We did have to retain a lot more risks ourselves this year, we had to pay more for the catastrophe cover that we buy, and that obviously increases our costs and means that there is money we are having to pay out which cannot go elsewhere.
So there's no incentive for us to drag things out, so what we've concentrated on is better accident investigation, on more risk reduction and risk control mechanisms when we're looking at our stores to try and engineer out those problems. In some cases, claims paid on same day.
The problem with pools, and I know this has been looked at in the retail side, is that ultimately you're pooling together with a lot of different organisations which might have very different health and safety and risk management philosophies.
Vic Thompson: There are only two recorded cases where it has been impossible to get a quotation at any price, there have been many where it's been an unacceptable price, but if people look hard enough there are probably very few cases that turn out to be absolutely uninsurable. If we are going to have a sensible long-term solution we have to ensure that it's not just larger firms that take on the risk management responsibilities, it needs to percolate right down to the one-man, two-man band as well. I suspect new capacity will be available at 1 January.
Chris Fletton: I believe there will be increased capacity next year, but I don't think that it's going to be something that is going to be over in a flash, I think it was mentioned 12 months down the line. By August next year I don't think we're going to be much further on than we are now. My own personal view is that it will be at least the first quarter of 2004, if not after that, before we really start seeing a change.
Now, as much as I think you can assign that to greed, it's also commerce, and at the end of the day we are in this to make money. I think Mark was a little unfair to lay the blame firmly at the door of insurers. Having been a broker before, I think it's fair to say that brokers generally have been involved in the process.
We need lots of people at the table working on a solution. But it's important, particularly in this country, that you don't get "cartel" shouted at you.
Lord Hunt: You couldn't be more right. Under the Enterprise Bill, which will be the Enterprise Act later this year, you can go to jail for discussing things like that, the first time ever in this country.
Chris Fletton: A lot of the syndicates at Lloyd's - certainly the insurers - have kept some of their budget back for the last quarter because they have a feeling that rates might go up a little more than they have for the rest of the year.
Most of the one-man bands, partnerships and very small limited companies, are probably paying somewhere in the region of 20% to 25% of their fee income on professional indemnity cover.
Mike Williams: I'm concerned about the sustainability of the market in a couple of areas. I think there is a real possibility that for EL or professional indemnity insurers, a major player will simply up sticks and say: "We can't make money out of this under current conditions for the foreseeable future. We are going to divert our capital into profitable classes of business."
There has been an awful lot of talk about risk management and occupational health and safety. If we just go back to the SMEs or the smaller professional practices, we all know the problem is that it has not been in anybody's interest to invest money in these areas within the insureds for very many years. It hasn't been within the interests of the carriers to differentiate between different types or different businesses in a given industry or commercial sector, because at the levels of premium we've been talking about, it's just not economic.
There has to be a sea change, if we're going to get over the hump we're talking about. Insurers are going to have to be persuaded to underwrite individual risks in a way that they haven't been used to doing for quite some time.
They are going to have to differentiate between risks of a certain type of the same sector, the insureds are going to have to commit to practical risk management and occupational health and safety.
We have evidence of whole swathes of examples, particularly in the construction industry, where good risks - firms with good effective health and safety policies, no claims over the last 20 years, relationships with the carrier going back decades in some cases - are being told: "Sorry, we're not writing any more for your trade, end of story, go away."
Lord Hunt: Isn't this exactly the sort of situation where action should be taken, and if there were a case that was made for terrorism, aren't we at the same position now with big projects being threatened?
What we need at the moment is the health and safety people to be strengthened in their responsibilities, which then enables an insurer to be less of a policeman.
Mike Williams: If you were to make, over a reasonably short period, continued provision of cover conditional upon a commitment to, and demonstrating adherence to, occupational health and safety requirements in that particular sector, you could actually begin to nibble away at the issue and achieve something in a relatively short space of time.
Chris Fletton: The problem is introducing lots of bureaucracy. For example, teachers these days spend more time filling in forms than they do teaching children.
From a solicitor's professional indemnity standpoint we've actually instigated a risk management system this year where all our insureds have actually completed a fairly comprehensive risk management questionnaire. It's been remarkably helpful in analysing how good firms are in terms of their business practice. It's not really a great distance away from applying the same rationale to health and safety, it's just a matter of firms applying the will to do that.
Peter Hubbard: There has been a rise in the number of players in the marketplace seeking out potential clients and then substantially increasing the cost of each claim.
There are two ways to tackle this. First, by changing the system which Lord Woolf started, but to which nobody has given the impetus that we should have. This is that under the pre-action protocols you should not incur the cost of commencing proceedings until you have exercised every possibility of reaching an amicable compensation settlement. Indeed, Woolf had in mind that before you were allowed to issue proceedings you had to show you had gone through mediation.
The second area, in which AXA has pioneered a number of very interesting initiatives, is rehab. Graham Plumb, in particular, has pioneered Rehab Suffolk, whereby you place somebody in the hospital after an injury and have somebody on hand to manage the case so that the injured peson can get back to work and back to a normal life as quickly as possible. The bill for whiplash could be slashed if only we had rehab in hospitals at an early stage and through GPs.
What's happening at the moment is they get into the hands of a claims specialists and suddenly the claim is escalated beyond belief.
Mike Williams: Deny liability, do not accept responsibility, do not negotiate, do not admit anything, do not do any more than exchange the details that you have to by law, immediately report it to us. For 20 or 30 years on the Continent there has been an agreed statement of facts about a motor accident. All [drivers] have this [form], kept in the glove compartment, if you have an accident you fill it in, they [the other party] fills it in and you hand it over.
Peter Hubbard: The big one for me is improving risk management at the front end, I agree with Mike on that bit. The important thing is protecting employees when we're talking about EL cover. In protecting employees we might need to start addressing the issues such as, is the employer in a position to employ people in a safe way? The only way you're going to tackle that is to look at the employer. In terms of consumer protection, that may be one of the ways you can get the FSA involved. It's one of their four core objectives.
Mark Coffer: We have formed our own health and safety company, a separate entity. The clients end up having to pay for that, but I don't see why the insurance companies with all their resources can't do more in that area, although I know you said that AXA do that.
Chris Fletton: The biggest problem we' have at the moment is getting a greater understanding of why we are even here in the first place. I don't think a lot of brokers in the market appreciate the insurers' perspective, I don't think insurers, to be quite fair, appreciate some of the broker perspectives.
Perhaps we are creating a rod for our own backs, insofar as a great deal of experience which was in the market, in the market, is no longer there because of rationalisation by large companies, which is a great shame.