Competition in the employers' liability market has pushed premiums down to unsustainable levels. While some of the more established firms are holding steady on their valuations, an influx of new carriers is causing concern by offering a plethora of long-term deals, low premiums and unrealistic risk assessments. Ed Murray reports
Fears are fast building in the employers' liability market that sliding rates need to be stopped to avert a more painful correction in the near future. Research specialist Datamonitor says that the new-found profitability in the EL market will soon be lost if insurers are unable to curb premium cuts. But an increasing number of new entrants, all fighting for market share, makes this unlikely in the coming months.
EL insurance has never been far from the headlines over the last decade and premium hikes of 200% and 300% were endured by certain sectors in the market during 2001 and 2002. Nobody claims to want to return to those days where clients were faced with such swings in pricing, but controlling the market forces at work is proving to be difficult.
What can the industry do to avoid future problems? Why does it seem so hell bent on writing unsustainable business and just how close is the industry to a situation where rates bounce off the bottom of the cycle?
At a very simple supply and demand level, new carriers coming into the market and the capacity they bring has forced prices down. This is particularly true at the smaller end of the market where there is a gunfight raging for small and medium-sized enterprise business.
Insurers such as Brit Insurance, St Paul Travelers and AIG have stepped up their efforts to target this area along with many others, such as Royal and Sun Alliance, which has signalled its intention to do so in the not too distant future.
It is not surprising then that this heightened competition for market share has brought rates down but, unless it is checked, it threatens to destabilise the market in the longer term.
Losses to come?
As Gary Head, underwriting director at Hiscox, comments: "In all probability, business is now being written at a loss-making level, but the question is how long it will take for the scale of these losses to become evident."
The losses will depend on how well underwriters have understood the risks they are taking on. After the problems of the last EL crisis, Norwich Union for one tightened up its approach to underwriting to ensure it assesses cases better than before.
NU, like many other major carriers, now operates its own team of in-house risk surveyors to help underwriters get a fast and accurate handle on each case they are looking at. By looking to see how it could better differentiate the risks that came before it, NU introduced a 'fact finder' process, which helps to elicit client's information on risk assessment and health and safety procedures.
Bob Donavan, technical liability manager at NU, explains: "Since the EL crisis and the problems with affordability versus availability, one of the things that came out was that we could look to differentiate our risk collection and assessment."
The fact finder approach has now been in place for four years and Mr Donavan says it has made a significant difference to the speed and accuracy with which NU can assess and price its risks for clients.
This approach is all very well at the higher, more complex end of the EL market, but lower down the scale there seems little evidence of it being adopted to any great degree. Given the less complex nature of these risks, this is perhaps not surprising, but there is a worry that the cumulative effect of a large number of smaller risks performing poorly could have a negative impact on insurers' capabilities to continue in this market.
The worry is that, as smaller EL policies are sold on a packaged basis, less attention is paid to them. Also, risks at this level are increasingly being affected by the soft market conditions prevailing across the insurance sector as a whole.
Commenting on this, Gary Chandler, executive director at Jelf Group, says: "At this moment in time there is an increasing volume of packaged business being written, from offices to pubs up to SME businesses with a turnover of £5m or £10m. I am not convinced there is a special focus on employers' liability rates and that they are being swallowed up in the rating frenzy that is going."
Underwriters who have been quick to take on this business need to be aware of the potholes that have erupted in the surface of the EL market, which threaten to trip them up in the future, according to Owen Gorman, director at Sigma Claims Solutions. He says there are a number of issues insurers should be aware of when assessing the sustainability of the business they are writing.
Mr Gorman explains that the introduction of the NHS Charges Recovery Scheme at the start of the year will increase costs in all EL cases where medical treatment has been provided and the effect of this could be profound. Claimants' solicitors costs continue to increase disproportionately to damages and the widespread advertising of "no win no fee" deals is arguably still causing the conversion rate between accidents and claims to rise as a result of increased awareness. Criminal prosecutions are also being pursued with more vigour on catastrophic injury cases and fatalities.
Mr Gorman believes that the market is seeing more speculative claims, with increasing costs for the investigation and repudiation process. As he frankly states: "All in all I can't see any recent developments or changes which would significantly improve the risk in this sector to the extent that it would justify a downward revision of rates."
Insurers can, however, take some solace from the fact that better claims handling processes in the market have been coupled with a better overall approach to health and safety as well as risk management across the commercial landscape. Rehabilitation schemes are better than they have ever been and the somewhat controversial practice of securing direct access to the injured party is helping insurers keep costs at bay.
Indeed, the switch away from manufacturing and industrial activity in the UK to more service-led businesses is also reducing some of the claims that have been seen in the EL market. As Richard Nicholls, head of EL at Zurich, says: "Loss ratios have improved and there has been a reduction in the claims frequency and severity. There is also better health and safety and risk management procedures, particularly in the corporate sector. We also see a shift away from the manual, labour intensive industries in the UK, which reduces the more severe types of claims we have seen in the past."
However, before anyone gets too comfortable, Mr Nicholls also believes that the EL environment is going to become increasingly difficult. He agrees that the potholes mentioned by Mr Gorman will be difficult to navigate around, and he says that "the only certainty we have is that claims inflation will remain".
Despite improvements, the overall outlook for EL claims is that the total bill will continue to rise for the insurance industry. Set against a backdrop of falling premiums, this is far from encouraging and begins to put a question mark over insurers' decision to rush headlong into writing EL business.
The truth of the matter appears to be that carriers have increasingly found themselves in a position of being cash rich, on the back of a particularly benign number of years for the industry.
Jamie McNab, casualty underwriting manager at Zurich, is in no doubt that this is driving insurers to get a slice of the EL market. He says: "I believe 2006 was the third most benign year for the insurance industry in the last couple of decades and, with so much money sloshing around, there is no great incentive on some insurers to discipline themselves."
He adds that this has prompted insurers to buy market share and tie themselves into what he describes as "suicidal" deals, a view Mr Head agrees with. "Rates have dropped because the global insurance industry is emerging from a period of record profit with no significant natural catastrophes last year or so far this year," says Mr Head. "Many companies are looking to re-deploy this capital quickly and an easy way to do this is to undercut prices in the long tail market."
In such an environment, it is not surprising that brokers are looking to tie clients into long-term contracts, based on prices. Some insurers are prepared to do this, but a number of the major carriers are turning their backs on such deals, unless they are for the very best risks and at a rate that is sustainable.
Phil Bell, group casualty director at RSA, says that the insurer has put its foot down on offering anything other than annual rates, believing it does not work to anyone's advantage. He comments: "Long-term deals are not available from RSA and we do not believe they are in the long-term interests of anyone. If any customer is tied into such a deal, the effect on premiums could be even more acute when the agreement expires." Indeed, he goes so far as to say that the insurer is "happy to see business leave if we cannot achieve adequate rates".
While brokers are obviously looking for the best deal they can get for their clients, many argue that price is not the overriding factor and that, while they are keen to investigate the possibilities available, they do not necessarily believe long-term deals offer the best solution.
The ability of an EL insurer to pay out in the long term, the claims handling process it has in place, and the support it can offer throughout the insurance cycle should all be factors in a client's decision.
David Frankland, account executive at Cooper Gay, explains: "We also try to build clients' relationships with insurers. And, where there has been significant emphasis on risk management and the insurer knows how the client manages and runs their business, it should be possible to minimise rate increases with an underwriter who will help you through the difficult times."
While most would agree with his point of view, the decision is ultimately the clients' and getting them to look past the bottom line may be tricky.
Looking to the future, it is difficult to see past the fact that new entrants to the EL market are bringing extra capacity and driving premiums down. No matter how much of a stand the bigger and more established players make, the end result is that they will lose market share unless their brokers can sell the entire package they offer.
While the situation has not yet become desperate, there is no doubt that many in the market are becoming more and more nervous. As Malcolm Smith, commercial manager at Groupama Insurances, concludes: "Premium rates for employers' liability need to rise - that's a certainty.
"New entrants into the market are creating a more competitive environment. Combined with better results on this class of business, they have succeeded in pushing rates down by around 15% over the past couple of years. This situation cannot be sustained if we want to avoid a recurrence of the position the market found itself in at the start of the millennium."
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