Alarm bells ringing

The employers' liability sector received some very negative press attention during the last hard market, with headlines pointing to worrying rate rises for higher risk industries. Much has changed since then of course, with prices stabilising and insureds generally setting risk management measures higher up the agenda. However, the problems are not over for EL insurers. The compensation culture continues to present a significant challenge, and new legislation may well send alarm bells ringing for underwriters.

In November last year, Marsh's Liability Insurance Buyers Report Europe 2005 found that while the EL market had stabilised over the preceding 12 months in the UK, some businesses, particularly in the small to medium-sized enterprise sector, were still battling against increasing premium rates.

Marsh's research indicates that costs vary widely from sector to sector (see table). So, which professions are proving the most risky currently for EL insurers? John Jones, Aon's technical director, casualty, explains that construction-related trades - particularly roofing, scaffolding, demolition and asbestos removal - continue to attract the highest rates and have the most restricted choice of markets.

Of course, if a business becomes 'uninsurable' for EL, it must cease to trade. However, Jones observes that this is more likely to arise from a bad claims record and poor standards of risk management than merely because of the trade itself. "Insurers will always support businesses that can demonstrate they are making a real effort to control workplace injury risks, whatever the trade, and will always turn away those who show no inclination to get a grip on this," adds Jones.

Kevin Pallett, executive director at Fusion, asserts that there needs to be a greater focus on prevention, and on linking the health and safety and risk management aspects with the insurance. "Getting the health and safety measures properly identified and in force to prevent problems in the first place is vital. A lot of it is about documentation - because that will help not only to prevent claims but also to defend them," says Pallett.

Insurers certainly continue to be keen to encourage good risk management practice among businesses. Ian Calder, Allianz Cornhill's casualty and construction manager, believes that insurers have become much better at encouraging their insureds in this area. He believes that some professions have responded better than others to the risk management concept and that the higher risk trades have recently been particularly active in stepping up their efforts. Pallett observes: "There is certainly an upward movement. There is still a long way to go but there is definitely more awareness of health and safety issues."

Graham Prior, underwriting director for, Zurich, believes that the price rises of a couple of years ago helped to concentrate attention on the issues at stake, observing: "A couple of years ago there was a price squeeze and life became more difficult for the high-risk trades. Brokers and insurers have worked hard to get the risk management message across."

Simon Collings, EL practice leader for Marsh, believes that it is no longer necessarily a question of identifying which type of industry is particularly problematic: "EL is not about what a client does, it is about how a client does it." He adds that the people that are most susceptible to becoming uninsurable are those that are doing least to manage their risk - the purely transactional buyers who are only interested in driving down their costs.

Well managed high risks

Collings believes the issues at stake have changed, as the traditionally high risk companies have become more aware of the importance of good risk management practice. "If you look at the historically highly exposed people - such as asbestos contractors, roofing contractors and chemical companies - they have had to be so good at how they do their business to survive that while there is undoubtedly exposure there, it is very well managed exposure and that's not a problem for the insurance market. Well managed high risk is what the insurance market thrives on."

The compensation culture continues to be an issue across the EL spectrum. A decline in the number of claims related to compensation has fuelled suspicions that it is more myth than reality but the fact is that the costs of awards for compensation payouts are increasing. Philip Tracey, a litigation partner with Beachcroft Wansbroughs, agrees: "While the number of claims may not be increasing, the costs of the claims are."

Collings points out that there are several initiatives currently underway to try to tackle the claims culture, pointing in particular to the Compensation Bill. There is some concern, however, that the Bill does not go far enough. Two surveys by Aon revealed an appetite for much more ambitious reform on the part of businesses and politicians, and suggested that the impact of the compensation culture is much greater than suggested by official figures.

In a focus on the compensation culture for a risk report, Aon says the Bill could re-open the long-running debate over whether the UK should adopt the system of workers' compensation that is used in the US and most European countries. According to Aon, the key distinguishing feature of workers' compensation is that no blame is attributed in making an award. This might, for example, help to foster a more positive attitude amongst employers towards rehabilitation.

In addition to the long running problem of compensation payouts, there are also new and emerging factors that will have an impact. Prior points in particular to medical advances: "As many of the medical techniques improve, they are also going to become more expensive." There is some concern among insurers over the Courts Act 2003, which came into force in April 2005, that allows judges to insist that insurers pay 'periodical payments' to claimants rather than one-off sums. According to Marsh's report: "Given that claimants will be entitled to payments for the rest of their lives, the precise final payment from an insurer is subject to uncertainty. This may force up prices in the EL market."

Many are also looking to predict the impact of the NHS cost recovery scheme. After some delays, this is now due to come into effect in October 2006, and will mean the NHS will be able to recover the costs of treating injuries originating in the workplace. While there is general agreement that this will lead to rate rises, opinions differ on the exact impact it is likely to have. Collings comments: "I don't think this will have a huge impact. The fear would be that this is a test to see whether all NHS costs could be recovered - if that became the case, it would have a very significant effect."

Rehabilitation programmes

Calder asserts it would be beneficial if the NHS were to adopt rehabilitation programmes. "One of the arguments will be that if, as an industry, we're going to be helping to fund the NHS, we should hopefully be able to start influencing the kind of treatment," he comments.

Collings adds that this kind of new legislation is serving to create uncertainty. He explains: "EL is more actuarial-based than almost any other class and the thing that concerns actuaries more than anything else is uncertainty." Phil Grace, casualty risk manager for Norwich Union, also points to the problem of uncertainty in the market, particularly around long tail disease. "There is research going on to separate disease and accidents. There is a feeling that if we can separate the two, we might stand a chance of being better able to price more accurately."

So how do the physical claims compare currently with the claims related to disease and stress? Tracey asserts that slip and trip remain the most common claims, adding: "They are low value but there are a lot of them." He believes that stress claims are becoming less frequent. "Because of the very sensitive nature and the potential for the flood gates opening, they were dealt with very proactively by insurers. Very few claims in stress are going the way of the claimant and it remains difficult for claimants to establish liability."

Grace agrees: "Stress has not really become the problem that might have been imagined. There is a general feeling that the potential for claims is there but it is just not happening."

As far as pricing tends are concerned for the market in general, there is widespread consensus that rates are now stable. Grace observes: "The market has retreated from the heady days of three or four years ago. Things have got better for purchasers. The general insurance market does seem to have a common view that we should be quite steadfast - there is a price for risk and it is unwise to try and retain volume by going under that price."

Insureds will be heartened by comments from Jones, who says he cannot see rates increasing for the foreseeable future. "At the moment, the market is seeing heavy reductions and there is plenty of capacity out there. This is coupled with the fact that the regional markets are offering aggressive packages. Of course there are some heavy risks who are experiencing level pricing but, in general, reductions are the norm."

Jones adds that there are a number of markets that are confident that rehabilitation products will allow clients to benefit from an improved claims experience and, therefore, reduced rates longer term.

Prior feels that rates are 'drifting down' at the moment but adds: "I would hope insurers would act responsibly and not drive their pricing too much. You do have to take a long term view but, at the moment, rates are stable."

There are still actions insurers can take to continue tackling the EL risk head on. Jones identifies the battle against fraudulent claims: "There needs to be more of an effort to weed out fraudulent claims and to defend more robustly those where liability is borderline. The idea that it is cheaper and easier to pay smaller claims quickly rather than defending them, if they are defensible, is short-termist and serves to encourage yet more spurious claims."

Jones points to: "A steady influx of new entrants to the market who do not have the baggage of historic disease claims on their books, and this suggests a perception that it can be written at a profit." However, whether newer entrant or established provider, the EL market remains a challenging one - and new legislation will continue to keep insurers on their toes.