Some smaller to medium-sized buyers of employers liability insurance are choosing to go bare illegally because they cant get cover or cant afford it, others are going out of business or laying off employees, while still others are absorbing tremendous rate increases no matter what their claims experience, according to Mike Williams, chief executive for the British Insurance Brokers Association in London.

At the end of July, BIBA asked its members to respond with the kinds of difficulties theyve had in placing employers liability. Within five days, something like 120 brokers5 percent of BIBAs membersgave examples of 250 cases of mostly smaller and medium-sized businesses that had either gone out of business, had to lay off people, or couldnt find cover, Mr. Williams said.

Some U.K. firms had actually opted to trade illegally by not buying EL coverage, which is compulsory, he said. “We have evidence or examples of 60 or 70 firms in that category,” he said.

EL coverage, which is compulsory to employers, covers accidents and illnesses to employees caused by and arising out of their employment. It is a fault-based system in which employer negligence must be proven. (Unlike the United States, there is no workers compensation no-fault system in the United Kingdom.)

David Gamble, executive director of the Association of Insurance and Risk Managers in London, said initial responses from his membership havent shown the same degree of problems in the EL area. Most AIRMIC members are larger companies.

“The majority of them, with one or two notable exceptions, are not finding this a particularly major problem for EL,” he said. “For large companies, theyve got very strong relations with insurers directly, in many cases, and as long as they havent had a dreadful record, they are able to get cover.”

Malcolm Tarling, a representative for the Association of British Insurers in London, indicated that its certainly true that EL premium rates have risen across the board, with increases of 30-40 percent. But “we have no evidence that businesses are going out of business at the magnitude that has been suggested.”

“If businesses are facing problems, we believe its more likely that those businesses have a poor record in health and safety. In other words, those businesses that find it difficult to get affordable EL insurance at the best of times,” he said.

He noted that insurers are making record losses on this type of business and have done so for the past 10 years.

“Were not looking to drive businesses out of operation. By the same token, we have to, as an industry, operate in a commercially viable way,” he said.

“The root of this problem is the fact that, increasingly, occupational diseases are taking longer to surface and, increasingly, links are being made between occupational disease and the period of employment, which may have occurred 20, 30, even 40 years in the past.”

As a result, its getting increasingly difficult for insurers to set premium rates based on information available now “when theyve no idea, in theory, when they could be hit for claims after theyve come off risk, how much those claims are likely to be, and when theyre likely to be” made, he said.

Helen Hatchek, liability underwriting manager for Royal & SunAlliance in London, agreed that the market results for this class of business have been consistently poor over the last 10 years.

“Weve also got the growth of the compensation culture, which has had a significant impact,” she said, noting that claims costs have been inflated by 25 percent.

“Weve had recent law reform, which has had adverse impact on results. Weve had increases for pain and suffering and several changes to the discount rate, which are used in calculating future losses,” Ms. Hatchek said. “The lower the discount rate goes, the higher the cost of the claims. So weve had a couple of those changes in the last two or three years and theyve all had a retrospective impact,” she said.

“There is an inequity there because you dont know how the compensation culture is going to develop,” he said.

“Weve also had an emergence of industrial disease claims. Weve got large volumes of employers liability claims for asbestos in the U.K. market,” she said.

Ms. Hatchek noted that rates havent followed suit with claims costs, and “therefore, we are playing a catch-up game.”

Royal & SunAlliance is of the opinion that the time is now right to change the law, she said. “At the moment, employers liability is a compulsory class of business and it was introduced 30 years ago,” she said. “Every employer is duty bound to purchase it. They can purchase it from one or more insurers, but they are duty bound to purchase it if they want to trade.”

The law was introduced during a time of a different compensation culture, she said, noting that, as a result, there needs to be a review of how that protection is offered. “Perhaps the time is right now for the government to reform the legal system,” she said.

“The current employers liability system is not working for the claimant because, in some cases, their injuries relate to before the time when employers liability was compulsory, so theyre not able to fund or receive any compensation for the industrial injuries that they sustained,” she said.

“Also, its not working for the insurance industry because nearly all insurers are making losses on this class of business,” she said.

“We need to look at what alternatives are available,” she said, noting that there is work going on between the Association of British Insurers and the government to consider alternatives–and to look to see “how we can bring the employers liability compensation system into the 21st Century.”

She said the solution could be in the form of a state pool or some sort of no fault system. “We need to look at how it is done elsewhere in the world and see what we can learn from that,” she said.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, August 26, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.