Employers Liability Insurance: The ABI Project for Reform

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Employers Liability InsuranceThe ABI Project
for Reform

• Friday 21 May 2004, Staple Inn Hall

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• Introduction The Need for Change
• Driver of Change
• Policy Priorities
• Fundamental Reform Example of Separated Long
  Tail Occupational Disease (LTOD) Funding
• Why LTOD is a problem
• Why separated funding is the solution

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Background

• Major adjustment in EL premiums prompted insurer
  Government to review options

OFT Review of Liability Insurance

• No evidence of market failure
• Recognise pressures facing insurers

• Rehabilit-ation
• Legal reform
• Risk-based pricing
• Enforcement
• LTOD
• funding

In 2002, average EL premiums increases 40-50
2nd DWP Review of EL
1st DWP Review of EL
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The Givens

• Before considering options, some things that have
  to be assumed to be fixed

Compulsion

• Society owes duty of care and depending on
  private insurance requires safeguards

• Experience of UK and continental Europe
  suggests, if anything, likely to be extended

Private Provision
Evidence Based Approach

• Government receptive provided industry provides
  robust case for change

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Lessons Learned

• Some key messages emerged from the consultation
  and review process

Costs

• Dont just pass on costs, but work with all key
  stakeholders to get them down

.. and communicate! Explain market trends and
what you may need to plan for.
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Tackling Costs

• Liability insurer costs are both transactional
  related to damages

Legal Process
Rehabilitation

• High incidence of legal costs (40)
• Duplication, over-processing and delays, even
  though 90-95 claims do not go to court
• Non-adversarial approach while retaining right
  to resort to legal representation

• Restitution not just monetary
• Nobody really wins - losses to UK plc,
  individual employers and claimants, Government
  insurers
• Issues to be settled, but Government ready to
  lead

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Better Underwriting

• Insurers needed cost effective means to assess
  risks and risks need to be defined

Trade Association Health and Safety
LTOD Funding

• Long-tail risks with retrospective judgements
• Ring-fence/segregate risks in separate funds

• Too expensive to visit every SME fact
• Use trade bodies schemes as proxy for behaviour
  of members their businesss risks
• Facilitate market function

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• Introduction The Need for Change
• Driver of Change
• Policy Priorities
• Fundamental Reform Example of Separated Long
  Tail Occupational Disease (LTOD) Funding
• Why LTOD is a problem
• Why separated funding is the solution

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Terminology

• Long Tail Occupational Disease (LTOD)
  disease or condition characterised by long time
  period between exposure to workplace hazard and
  manifestation of illness.
• Separated Funding creation of forward-looking
  fund, independent of conventional employers
  liability (EL) insurance and insurers, which
  compensates victims of LTOD where the employer is
  found liable for exposure to a hazardous
  substance or occupational practice.

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Liability with Perfect Hindsight

• Insurers cannot foresee how the law, society and
  medical knowledge will change

How can I predict here
what happens here?
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Development of Liability

• All the stages of development of liability are
  fraught with uncertainty and unpredictability

• Medical Recognition of New Disease
• Either completely new disease or existing
  condition caused (or exacerbated by) an
  occupational exposure

• Legal Recognition of Disease as Compensatable
• Establishment of date of knowledge

Ongoing Difficulty of Determining Number and Cost
of Claims
.. which coupled with competitive
characteristics of market, make it impossible to
price for LTOD.
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Future Liabilities

• Existing research indicates LTOD is not just part
  of the past and attitudes change

• Stress cause of cardiovascular disease?
• Manganese cause of progressive parkinsonism?
• Electromagnetic Fields gt20 years research and
  no established link to illnessyet?
• Environmental Tobacco Smoke cause of cancers,
  etc, but how to separate occupational exposure
  from others?
• .. and when will the courts decide liability and
  on what basis?

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Claims Covered by the Fund

• Simple, clear definition, minimal boundary
  disputes. Periods within which insurers and fund
  can react
• Temporal Definition of Long Tail Disease
  all occupational conditions (accident or disease)
  with gt 5 year latency
• Latency period between first exposure and date
  of claim
• Exposure Covered by Fund exposures after
  establishment of fund (pro-rata split of
  exposures spanning funds establishment)

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Paying for the Fund

• Simple-to-calculate levy to maintain principles
  of polluter pays inter-generational equity.
  Incentives for good health and safety
• Payroll-based Flat Rate Levy cover unknowns
  that could fall on any industry
• Industry-based Levy variable element for
  known risks with known/unknown outcomes
• Employer-based Levy variable element adjusting
  for health and safety performance

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Ensuring Security of the Fund

• Meet short and long term variation in claims
  while maintaining stability in employers levy
• Hybrid funding
• Levy cash flow funding
• Ongoing Stability build-up buffer in early
  years
• Short-term Cash Flow Shortfall short term loan
  facility, similar to FSCS, guaranteed against
  future levies
• Long-term Deficit medium/long term increase in
  levies
• Non-competitive Environment

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Accountability Efficiency of Fund

• Funds operating policies reflect key
  stake-holder priorities. Operation of fund
  minimises frictional costs
• Stakeholder Oversight representatives of
  employers, employees and Government on Board
• Minimised Costs bulk buyer of legal
  services levy collected by fund itself
  non-profit making
• Centre of Excellence collective research and
  information sharing

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Greater Capacity/Competition in EL

• Improve availability of EL insurance, minimis-ing
  risk of market failure
• Rationalise ECR Requirements for Existing
  Insurers free up capital that would have been
  held against long tail risks (up to 4bn)
• Manageable Risk Horizon EL insurers more
  easily able to react and correct
  pricing/reserving errors within 5 year short tail
  and accident horizon

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Conclusion Delivering Reform

• ABI tackling structural problems in EL through
  initiatives on costs and underwriting.
• Success depends on ideas being well thought
  through as much as political receptiveness to
  those ideas and stakeholder engagement.
• Separation of Long Tail Disease funding shows
  the kind of problem we face and the potentially
  exciting solutions we could achieve.