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

2. 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

3. 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

4. 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

5. 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.

6. 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

7. 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

8. 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

9. 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.

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

11. 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.

12. 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?

13. 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)

14. 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

15. 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

16. 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

17. 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

18. 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.