The recent increases in the cost of employers' liability (EL) cover prompted a review of liability insurance provision earlier this year by both the UK Department of Work and Pensions and the Office of Fair Trading.
The cause of the situation is well known; it suffices to say that premium rates had been subsidised for many years. This was through a combination of insurers' ability to obtain good returns on investment of premiums received and the inbuilt delays between receipt of premium and payment of related claims. It led to excessive competition between insurers for market share.
The increasing cost of claims, running at between 11% and 13% year on year, much higher than other rates of inflation, was hidden due to these factors. The weakening of the stock market has reduced capacity to write this business. Insurers have now been forced to look to positive underwriting returns, and charge the real cost of insurance.
Government has also played a part by moving expenditure from the public purse to tortfeasors. This continues, as NHS treatment costs are likely to be charged from next year with a maximum of £33,000 per claimant. Insurers will have to start reflecting this cost in their premiums and, since policies are renewable annually, the impact will be felt this year.
With these changes, the dynamics of the relationship between insurers and insured have altered. Instead of insurers seeking premium income, it is now the quality of the risk that is paramount, with insurers being selective in the risks they write.
To be attractive to an insurer, a company must differentiate favourably between the risk it poses and the average risk within the sector in which it operates.
Points of differentiation
So how can your company differentiate itself as a better quality risk, so that it may ultimately be able to contain its EL costs? The following, while not an exhaustive list, describes relevant criteria.
Most of this is good risk management practice. However, my own company's experience of handling claims has shown that while these principles are well known, too often they are not effectively practised.
Oscar Tempest is manager, complex loss & technical services team, Iron Trades Insurance Company. www.QBE.com