23/12/2002 - Liability Insurance Costs Survival of the Fittest

What is going on?

The overall capitalisation of Insurance Companies in the market directly influences the amount of risk that the market as a whole can accept.

There are a number of interacting factors that in combination make the investment of capital into the insurance market less attractive. These factors can change over time or suddenly as a result of a specific event.

These changes can be observed with:

  • Premium rates

  • Terms & conditions

  • Coverage availability

The various factors that make up the prevailing conditions are often collectively described as ranging between ‘hard’ and ‘soft’, reflecting the expansion and contraction of the market’s capacity.

It has been said by many observers that the current market cycle is the hardest that has been experienced in living memory and that the consequences are being most acutely felt by the building industry in terms of the availability of liability and professional indemnity insurance.

A number of insurers have withdrawn from providing liability cover for building contractors and ancillary trades. Those insurers who continue to offer cover are demanding significant increases in terms of both the premium rates and deductibles applied.

Contributing Factors

The factors contributing to a greater or lesser extent to the current cycle include the economic climate, retrospective legislation and claims inflation. The events of September 11th certainly accelerated change however, problems in the liability insurance market were already apparent.

Economic

  • Lower interest rates have led to lower investment returns. It is no longer viable for the insurance market to doggedly pursue market share relying on investment income to compensate for poor underwriting results

  • Falling equity values leads to a reduction in the level of shareholder assets or funds available to support the insurance operations

  • Demand for insurance coverage is exceeding supply. Important insurers in the Lloyds and London market have withdrawn from writing certain classes of insurance particularly for the construction industry. The collapse of the Independent Insurance in the UK in the summer of 2001 caused shockwaves as they had simply not raised enough in premium and had been overwhelmed with claims

Legislation

  • Falls in discount rate applied to the Ogden Tables, which are actuarial tables of life expectancy

  • Conditional Fee Agreements (no win/no fee) that increase the propensity to claim

  • Law commission reforms extending the scope and level of damages for pain & suffering, liability for psychiatric illness and claims for wrongful death

  • Civil justice reforms including timetables for settlement of claims with penalties and the potential to settle earlier at a higher figure

  • Recovery of the medical costs of treatment by the NHS for people injured at work

Claims

  • Increases in the frequency and cost of claims, such as employers liability claims which are up by over 100% in the last 5 years

  • The continuing concerns with Asbestosis. Exposure to asbestos is the greatest single cause of work related deaths in the UK and the HSE expects cases to peak at 3,000 per year by 2020

  • New or emergent occupational health risks e.g. stress

  • World Trade Centre terrorist attack led to unprecedented losses felt most acutely by re-insurers whose influence has since grown significantly, dictating terms and conditions on placements

Paradoxically, regulators and others measure capacity in terms of premium income and consequently increasing premiums in a hard market quickly absorbs that capacity and exacerbates shortages.

Despite the influx of new capital into the insurance market, hard market conditions are expected to continue beyond 2003 well into 2004. Indeed, it is questionable that the premium rates and terms for contractors will ever return to previous levels as much of the new capital is directed to ‘short tail’ risks rather than liability or professional indemnity.

Flight to Quality

The UK Government and the insurance industry are examining options to deal with the difficulties being experienced by businesses, for example legislation limiting the exposure faced by employers for industrial disease or a Government reserve to fund remote risks. However, a significant improvement is not expected in the near term and is likely that market forces will be left to handle the crisis.

The contraction of the insurance market has lead to a ‘flight to quality’ therefore any action taken to improve the perception of an insurance risk by an insurer will prove beneficial.

It is a question of survival of the fittest or rather, survival of the best.

What can contractors do?

  • Be pro-active

  • Do not adopt an adversarial approach towards your Insurers

  • Allow at least 2 months before your renewal date to start negotiations

  • Ask your Broker for an accurate summary of your five years claims experience and run through each incident, so that you are fully conversant with the information that has been passed to your Insurers and carefully consider if you have addressed and dealt with the reasons for these claims and have taken appropriate action to prevent a recurrence

  • Comprehensively review your existing Health & Safety policy and Risk Management systems to ensure that all hazards are properly assessed and establish that adequate precautions are in place or if more can be done to reduce the risks identified. Health & Safety consultants can provide important assistance in this area

  • Make sure that you are clear about the wageroll and turnover figures you have disclosed to your Insurers and that they fully understand your activities and the proportion of your turnover and wages split between these activities

  • Above all, seek professional advice from your Broker about the presentation of your renewal, as this will make a difference to the premium quotation you receive from the market. Insurers are now thoroughly underwriting risks and the better understanding they have of your business and the Health & Safety and Risk Management systems in place, the more likely that the best terms available would be secured from the market

For those businesses that are professionally run with strong risk management, the opportunity to differentiate themselves from the rest is an important advantage as premiums would be in relative terms lower than competitors and the opportunity to obtain insurance cover for the more complex projects would be easier.

In short, quality will out and the poorly run contractor will most probably collapse under the weight of the growing insurance burden placed upon them.