The government-sponsored reviews of the employers' liability market has proved disappointing for insurers. Mike Noonan summarises the main points and suggests that mandatory rehabilitation should be introduced to employment contracts
The publication of the Department of Work and Pensions (DWP), employers' liability (EL) review has been met with a sense of disappointment. Stakeholders were hoping either for urgent action or a promise of radical change that would transform the face of EL and most of all serve to contain cost.
Radical new approaches such as no-fault schemes, amalgamating state benefits with common law damages were considered, but crucially ruled out as too expensive for industry to bear.
In the absence of any significant law reform to curb claims potential, the report is left to study measures that concentrate on improved financial management as a means of containing premium levels, or to comment on reform already underway.
By contrast, in Australia , nearly all states have legislated to curtail the scope of public liability for defendants, to reduce damages payable and to limit legal costs, so reducing overall claims spend.
This reform was passed in the face of fierce opposition from the legal profession.
In the Republic of Ireland, a bill has recently been raised to set up a Personal Injury Assessment Board (PIAB). All injury claims are to be referred, but starting with EL.
The board will propose a settlement figure which the parties will be invited to accept where liability is not in dispute. Cases settled on this basis will not be subject to legal costs.
Call for work
New initiatives that strike directly at claims inflation, a root cause of premium increases, are totally missing from the DWP report.
Instead, the complexity of the issues has caused the DWP to reflect that more work is needed. Publication of that review coincided with the release of the Office of Fair Trading (OFT) liability report. Minister for work Nick Brown has described the DWP report as "an agenda for action".
So what are the findings from the reports?
The report relates premium increases to more expensive reinsurance costs, rapid claims inflation, poor investment return and the volatility of risk posed by the threat of latent long-tail exposures. The EL market has until recently operated at an underwriting loss. ABI figures for 1999 indicate that an unsustainable £1.67 was spent by insurers on claims and operating costs for every £1 of premium received.
The insurance cycle has turned, with insurers charging solidly commercial rates now unable to rely upon investment returns to make up for losses. The DWP says that insurers and brokers could have done more to signal pricing increases to customers to allow them to prepare financially. Lessons have to be learned by insurers and brokers.
Affordability is particularly an issue for small and medium size enterprises, which may suffer from high levels of minimum premiums and less impact from a good claims experience. Little evidence for non-availability of insurance was unearthed, however.
Action is being taken already by trades associations which are protecting members' interests by negotiating package deals with insurers at preferential rates and providing self-assessment and other health and safety support to improve risk profiles. Businesses are encouraged to plan for premium increases and pursue early renewal terms.
Insurers say that further rate increases are on the horizon, ironically as government- sponsored inflationary law reform is proceeding, with NHS treatment cost recovery imminent despite business protests.
Later in 2004, amendment of the Damages Act will allow for larger claims to be settled on a periodic payment rather than lump sum basis. That will give insurers further headaches in financial planning.
Insurers' service standards are also to be examined. In its separate report the OFT proposes a minimum 21-day renewal term notification for the holding insurer presumably to allow the customer to obtain competitive quotes.
This must be studied, but would disadvantage holding insurers with competitors using the early quote as a benchmark. Superficially attractive increased rates of client turnover may result in extra administrative expense, and turnover would militate against long-term relationships that encourage investment by the insurer in risk management initiatives, training and support to improve the health and safety risk. Short termism would discourage insurers from committing to such risk improvement.
What is proposed? Of the matters on the agenda for action three are of most interest.
First, the separation of future long-tail from short-tail claims funding as advocated by the ABI. This comes in to the category of enabling better financial management. Short-tail claims are those arising from contemporary exposure, whereas long-tail claims may manifest very many years after exposure ceased. No change in compensation levels is proposed and historic exposure cases would be handled as now. Two systems would operate in tandem.
The benefit for insurers and insured would be the reduction in volatility in the EL short-tail only account. Risk would be more capable of accurate assessment and underwriting.
The pooling of long-tail exposure would provide greater certainty. It is hoped that the aggregate of any levy to cover long-tail exposures and new EL rate would be less than current premium levels. The government or the private sector may manage the long-tail fund with appropriate security.
The DWP points out that much work is to be done to demonstrate feasibility, to iron out the operational detail and to devise fair methods for funding. The proposal is at a very early stage of development, but has merit and deserves further study.
Second, the DWP supports existing Civil Justice Council moves to extend the new motor claims legal cost tariff to the EL arena to produce more predicable and contained costs. This is a process that is underway despite negotiations currently being stalled.
We welcome the DWP enthusiasm, but believe they have understated the impact of legal costs, in particular conditional fee agreements (CFAs), in driving claims inflation. In lower value cases costs may be more than half of the overall spend. More decisive action is required, imposing costs caps or ceilings, reviving the defence of proportionality and reform of CFA liabilities.
Practical measures could be taken, such as increasing the quantum limit on the small claims track to increase the number of cases captured in the associated fixed costs regime. CFAs could be reformed to allow defendants and their insurers to make admissions within protocol timescales without incurring such liabilities.
Third, the DWP want to see rehabilitation at the heart of the claim process. Much publicity has been given to rehabilitation over recent years – regrettably not matched by similar levels of activity or acceptance in the claims process. Cultural barriers must be broken down which would b best achieved by revisiting the cost benefit to all parties of early and managed intervention. Early reporting of accidents to allow intervention and support is crucial.
Our view is that the DWP should consider a requirement for employers to include a rehabilitation process in contracts of employment in respect of work related accidents to include:
This may be supported by a related insurance contract providing funds for rehabilitation services either as a stand-alone product or extension to EL covers.
Should purchase of such a contract become compulsory?
As a sub-issue, the DWP is looking at ways to better ensure purchase of EL to include overhaul of sanctions for non-purchase to extend to directors' personal liability.
The DWP is to report further in the autumn of 2004. While there is no reform now we hope that a series of practical proposals for implementation will emerge. In the meantime employers can best contain premiums levels at renewal by self help measures such as demonstrating:
This is good risk management practice but will also make businesses more attractive for insurers to insure.
Mike Noonan is manager, complex loss team, at Iron Trades Insurance