The insurance crisis is a public liability

During the past 18 months, there has developed a high level of community concern about the provision of liability insurance in Australia. This has been characterised by increases in premiums or inability by some to obtain cover. It has affected small business, and in particular the tourism industry, local government, sporting clubs, volunteer and community groups.

The general insurance industry, as a key stakeholder, is concerned about these developments and wants to work with Government and other stakeholders to find solutions. The problem is a national one and therefore requires a national approach, involving Commonwealth, State, Territory and Local governments. It is affecting vulnerable sections of the community and demands urgent attention.

Background

Public liability insurance covers legal liability claims by third parties for death, injury and/or property damage. (The person who allegedly caused the death/injury/damage is the first party and the insurer the second party.)

Insurance is the gathering of a ‘pool’ or ‘fund’ by way of premiums collected from all policyholders. The pool must have sufficient funds to pay claims, along with the insurer’s operational expenses and profit requirements, to enable them to sustain a viable business.

Insurers first look at two things when setting liability premiums – the previous claims record and estimate of likely future claims. They not only look at the individual policyholder but the particular category to which they belong eg adventure tourism, as the outlook for the whole public liability portfolio. If claims costs rise, the size of the pool has to increase, requiring a contribution from all policyholders. A company or organisation affected by premium increases may not have made a recent claim itself.

Some Identified Pressures on Public Liability

1. The attitude of society in relation to making a claim for injury has changed in recent years. The population is well educated and the media and other sources have helped people to become more aware of their rights to recover damages from third parties. Record awards receive wide media coverage and there is an increased expectation that "if something happens, someone pays."
2. Changes to regulations covering lawyers have led to more active pursuit of class and other large-scale group actions since 1992. Contingency fees where solicitors promote a "no win – no pay" system of remuneration have also encouraged claims where in the past they may not have been pursued. Advertising by lawyers has also contributed to this situation.
3. The courts. There has been a trend towards courts upholding strict liability (ie very limited grounds for raising a defence against litigation). A defendant might be found 1% negligent but 100% liable to pay. There has also been a tendency for more generous court awards which leapfrog each other faster than inflation. This is called superimposed inflation.
4. Increasing number of claims and claims costs. Australian Prudential Regulation Authority figures show between 1998 and 2000, the number of claims increased from 55,000 to 88,000, a 60% jump. (It should be remembered that not all claims reach court, so statistics on litigation alone do not give a true indication of the trends.) Over that period the industry collected premium of $2.527 billion but paid out claims totalling $3.487 billion, resulting in an underwriting loss of $960 million. This figure will continue to rise as claims originating in this period continue to be made many years later. (See next point)
5. Liability insurance is called long tail business, because it can take many years after a policy is written to determine the final result of claims originating in that year. Motor and property insurance claims can be closed off quickly and the results of trading are known shortly after the end of that year. Public liability claims can be made up to 25 years after a policy has expired. A recent example of a typical company’s portfolio showed the loss ratio (expressed as a percentage of the premium collected) in 1994, the year the policy was issued, was only 42%. However, 6 years later, the loss ratio for 1994 had blown out to 121%.
6. Proliferation of higher risk recreational activities. Bungee jumping, tobogganing, adventure trails etc, often undertaken by people who do not have the appropriate level of fitness for that activity.

Other Influences

• Collapse of HIH Insurance. HIH had a large share of the liability market. Its collapse in March 2001, reduced the financial capacity of the industry to provide this type of cover.
• Reinsurance costs: While the underwriting result in Australia influences the premium we pay for a range of general insurance products, it is also linked to the international insurance market. Part of the premium paid covers reinsurance (insurance for insurers) to enable insurers to pay claims for major losses.

What can be done?

Short term measures:

1. Better risk management. Risk management advice is available through insurers, brokers and independent organisations. Establishing a code of practice related to safety measures and administered by a peak body, and formal training in risk management are some options.
2. Advice. Making better use of the service insurance brokers provide for their clients such as information on which companies are prepared to underwrite particular risks.
3. Local councils in most instances can include "casual hirers" conducting one-off events under their liability cover for activities held in facilities they control.
4. Pooling. Groups or associations could collectively approach insurers or insurance brokers and may be able to obtain better premiums for their member groups based on volume business.

Longer term measures:

There needs to be broader public debate on legislation and the legal system, which should not be confined to special interest groups. Below are some options to be considered by the community:

• Tort reform at State, Territory and Commonwealth level together with structured settlements and/or limiting of common law settlements by the introduction of thresholds to discourage minor and non-genuine claims, with awards limited to medical costs only. This would require legislative amendments in each State and Territory.
• Uniform rules for and application of statutes of limitation to introduce some consistency among States.
• A limited liability similar to what currently exists for incorporated clubs and organisations being extended to individuals, community groups and business ie the amount of the claim not to exceed the assets held by the organisation.
• Exemption of volunteers from personal liability.
• State and Territory Governments to reduce taxes on insurance premiums. (See attached figures)
• Education. Community attitudes need to change through education. Many people expect someone else to compensate for any loss, which used to be considered fate, luck or an accident.