Much of the Ogden discount rate commentary has focused on the impact on motor insurance claims but the reduction has equally serious implications for other lines of liability business. There is little doubt that payments relating to significant injury claims will rise, and that rates may need to rise in order to fund this increased exposure.
Estimates suggest that claims, especially for younger lives, could double or even triple in size. The risk of liability underinsurance is all too apparent and brokers have a clear role to raise awareness of how the change could affect their clients’ exposure.
It’s possible that the value of some claims which would have been covered before the discount rate reduction, will increase to such an extent, that the limit of indemnity purchased is no longer sufficient and the policyholder may find themselves under-insured. This will mean that the policyholder must fund a portion of the claim themselves, or potentially seek recourse against their intermediary if they feel that they have failed to provide adequate professional advice.
But it’s not all down to the broker. When it comes to determining the limits for Employers, Public and Product liability, all parties have responsibility to ensure that appropriate levels of cover are in place. It's the responsibility of the insured to appraise their risk and present it fairly so the broker can advise on the level of cover required, and seek appropriate insurance utilising the excess of loss market where required. This should take into account factors such as the industry sector, as this can affect the propensity towards severity injury losses, and the age profile of the potential claimant as this directly affects the size of any settlement.
The size of a business has become less of a guide as to the level of cover required as a result of the change. For example, an SME plumbing firm which employs a young workforce, perhaps including apprentices, may require higher limits of indemnity to adequately cover their exposure to a white-collar company with several hundred average middle-aged workers.
The minimum level of EL cover is determined by the Employers' Liability (Compulsory Insurance) Act 1969. This was increased to £5m as part of the 1998 regulations, but has not been amended since. Over the past 19 years, multi-million pound injury claims have increased in frequency, and the industry has witnessed claim severity inflation levelsof up to 20% per annum.
The change to the discount rate also raises questions about whether the statutory level on employers' liability will continue to be sufficient. Although there are some restrictions, insurers have been providing £10m of cover as standard for some time. But, while the number of £10m+ claims is small, with the potential for some awards to more than double, we expect to see more claims at or beyond this level.
Sourcing higher limits is possible, with available capacity in the market. Many insurers will consider providing up to £25m on a primary basis, subject to underwriting appetite and individual risk features. Where this isn't possible or desirable, excess of loss protection can be purchased. . Whilst increasing limits on a primary basis might provide a cheaper option, opting for excess of loss with other insurers does ensure that the risk is spread.
The promised consultation process has started on time which is encouraging, and the reference to claimants being paid no less than they should be, and no more, by the Lord Chancellor at the beginning of the consultation document is welcome. However, it's unlikely to be a quick change or one that returns the rate to its previous level.
It is essential that all policyholders contribute to the additional rate need. Whilst attritional losses are reasonably easy to forecast, significant injury losses are difficult if not impossible to predict, and can (and do) arise in every industry or exposure group; by their very nature they are ‘one-offs’!
Being a long tail line of business, liability insurance provides cover for losses which may be settled years, or even decades into the future. It is important to consider what limit of indemnity will be required for the claims of tomorrow and not just the claims of today.
Simon McGinn, general manager Commercial and Personal
This blog first appeared in Insurance Times 6 April 2017