Employers’ Liability Insurance: The ABI Project for Reform Friday 21 May 2004, Staple Inn Hall

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

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

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 Private Provision Experience of UK and continental Europe suggests, if anything, likely to be extended Evidence Based Approach Government receptive provided industry provides robust case for change

Lessons Learned Some key messages emerged from the consultation and review process: Costs Don’t just pass on costs, but work with all key stakeholders to get them down Underwriting & Pricing Accurately, transparently match risk to premium Smooth the cycle ….. and communicate! Explain market trends and what you may need to plan for.

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

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 business’s risks Facilitate market function

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

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.

Liability with Perfect Hindsight Insurers cannot foresee how the law, society and medical knowledge will change: How can I predict here… … what happens here?

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.

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 – >20 years research and no established link to illness…yet? 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?

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 > 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 fund’s establishment)

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

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

Accountability & Efficiency of Fund Fund’s 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

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

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.