Public Liability Insurance
Analysis for Meeting of Ministers 27 March 2002
CONSULTANTS & ACTUARIES MELBOURNE SYDNEY
Trowbridge Consulting Limited
ACN 092 651 057 Level 39, 140 William Street Level 38, 1 Macquarie Place
Melbourne VIC 3000 Sydney NSW 2000
Tel: (03) 9269 4000 Tel: (02) 9324 9000
26 March 2002
Ms Lynne Curran General Manager
Financial Institutions Division The Treasury
Langton Crescent PARKES ACT 2600
Dear Ms Curran,
Public Liability
It is our pleasure to deliver this report on the public liability issues in Australia in accordance with your brief.
The report presents a base of information designed to assist Ministers of the Commonwealth, States and Territories with their meeting to consider public liability on 27 March 2002. It also gives a framework to aid analysis and consideration of possible solutions.
We look forward to the 27 March meeting. Yours sincerely,
Contents
Executive Summary
i
Part A - Introduction
1
What Public Liability Covers 1
How Claims Emerge 3
How the Insurance Market Works 3
Do We Have a ‘Crisis’? 4
Part B – Analysis of the Public Liability Insurance Market
6
Drivers of the Current Crisis 7
Trends in Claims 12
Premiums and Availability 24
Insurer Profitability 31
Availability of Data 39
Part C – A Framework for Looking at Solutions
43
Government Responsibilities 43
Major Directions of Response 44
Appendices 58
1. The Consultancy Brief 58
2. Sources of Information 60
3. APRA Data 63
4. ISA Data 68
5. Statutory Schemes and Examples of Reform 71
6. Insurance Cycles and Crises 74
7. Public Liability Policy Exclusions and Reinsurance Exclusions 76
8. NSW District Court Information 83
Executive Summary
This report has been commissioned by the Commonwealth Treasury to assist the meeting of Ministers on 27 March 2002. This Executive Summary is deliberately brief and should be read in conjunction with the report as a whole.
The Context
Public liability insurance is insurance for claims by third parties (the public) for personal injury or property damage caused by or attributable to the negligence of the insured. Public liability insurance is used by owners and operators of commercial and non commercial activities, including use of property, to protect them against the risk that a member of the public suffers injury or loss that is attributable to these owners and operators.
Other types of liability insurance which are not public liability insurance are – motor vehicle third party (covered compulsorily under State legislation) workers’ compensation (covered compulsorily under State legislation) professional indemnity (for professional services offered by the insured)
products liability (for losses attributable to products manufactured or sold by the insured).
The Problem
There is a crisis today in public liability insurance. The crisis is that there are many people seeking insurance who either can find it only at very high prices (compared to prices during the last 5 years) or cannot find it at all.
The nature of the crisis is that there are fewer insurers than ever before accepting the business and these insurers are generally charging much higher prices than previously and are also being very selective in their acceptance of risks.
While this phenomenon can be regarded as the peak (or trough) of an insurance market cycle, it is nevertheless likely to persist for another year or two at least unless there is some external stimulus to or intervention in the market.
Investigations reveal that there are two sets of issues to deal with – Increasing cost of claims
than 10% a year on average – and have probably been going on for 20 years or more)
o note that claims can be very large (occasionally) and they have a ‘long
tail’: they emerge slowly due to delays in notification and delays in resolution
An insurance market crisis
o we can now see clearly that insurers under-priced the business during
most of the 90’s
o insurers are generally not very comfortable with this business due to the
difficulty of assessing risks and estimating future claims costs at the time they quote for the business
o insurers are now determined, in the interests of their shareholders, not
to under-price or to insure risks that do not meet their criteria
o prices in 2002 are likely to average 30% more than in 2001, with many
individual premiums several times higher than last year
o the attitude of insurers and the recent change in the market in Australia
have been heavily influenced by the fall of HIH, which was acting as a “cut price” insurer.
Hence the problem that now exists is the consequence of –
Continuing increases in claims costs for personal injury claims (a 20 or 30 year phenomenon that currently shows no signs of abating)
An insurance market dominated by defensive pricing and underwriting by insurers (a recent phenomenon and part of a severe insurance market cycle).
Both of these phenomena are clearly observable from available data, despite some gaps in the data. The evidence is indicated in the graphs at the end of this summary. It is documented and explained in Part B of the accompanying report.
And yet these graphs do not depict the full story. For example –
claims: while average claim costs appear to have been rising for many years at around 10% per annum (and that is a great difficulty in itself) it is likely that some segments of the market are worse than this while other segments do not suffer the same problems.
prices: although 2002 prices are expected to be an average of 30% higher than 2001 prices, we will find that –
o 20% increases will be common
o increases of 50% to100% will not be uncommon
o some policyholders will be denied cover altogether.
Framework for Solutions
In our view it is helpful to consider possible responses to the crisis specifically in terms of the two groups of causes:
Underlying cost of claims – long term increases in the overall cost of claims in public liability, particularly in the bodily injury area
Insurance market crisis – the extreme insurance cycle that has resulted in short term availability problems and some very high premium increases.
In the case of the underlying claim cost issues, the possible responses in turn fall into two groups:
Targeted – aimed specifically at problem areas such as community groups, sporting organisations, tourism and leisure
Broadly based – aimed at all segments of public liability claims.
The next two pages outline the range of possible responses suggested in submissions and during our research.
The many submissions and the public discussion indicate a strong desire for consistent and nation-wide co-ordinated action. Following our research and analysis for this report, however, we do not under-estimate the difficulty of forging appropriate solutions. Our proposal for a framework to examine these possible solutions is that the following should be addressed:
What are the objectives of the reforms?
o Cost reductions
Individually Community-wide
o Ensuring current availability of cover
o Achieving future stability of premiums and access to cover o Review of social policy
What responses best target achievement of the objectives?
What issues can and should have a quick response and what timeframe should apply overall?
Range of Possible Claim Cost Responses
Targeted to specific industry problemsChange the rules for determining what constitutes ‘negligence’ in certain situations Exempting certain volunteers and organisations from negligence actions
Promote compliance with industry-specific standards as a valid defence in negligence actions.
Cover volunteers and contractors by workers’ compensation rather than liability insurance
Allow valid contractual waivers of liability for participation in inherently risky activities
Broadly based across all public liability claims
Re-write the tort law to bring the standard of negligence back to a reasonable person’s approach and away from strict liability
Tort reform to reduce the amount of compensation available: threshold for general damages
caps on general damages, earnings loss or medical
restrict certain heads of damage such as care provided by family members.
Encourage or mandate the use of structured settlements for catastrophic injuries Reforms to the legal system to reduce the cost and/or amount of litigation:
control legal advertising regulate legal fees
change “no win no pay” arrangements change uplift fee arrangements
increase the risk involved in unsuccessful litigation through costs arrangements mandate alternative dispute resolution systems
An education campaign to change the increasing litigiousness of our community.
Range of Possible Insurance Market Responses
Facilitation of the Market:Group buying by affiliation and industry groups, perhaps with government support Arrange market access through local government
Develop and promote specific products with help of brokers/insurers Publish data to help set and evaluate prices
Publish an advisory underwriting and premium rating guide
Increase the use of personal accident insurance as an adjunct to public liability insurance
Supplementing the Market:
Allow pooling of risk outside the insurance regulatory framework (eg local government does this now)
Government underwriting of some risks (eg certain events on crown land) through existing government insurance schemes
Subsidies to insurance buyers in critical segments to ease problems (could be grant or loan)
Start a new Government Insurance Office
Regulation of the Market:
Mandate improved industry data collection and dissemination Make supply of insurance compulsory for insurers
Set maximum prices that can apply
Indicative Average Claim Size
Writs lodged – Preliminary Figures for Sydney District Court
$0 $5,000 $10,000 $15,000 $20,000 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 Accident Year Av erag e C laim Size Source: ISA AWE 12% p.a. 0 500 1000 1500 2000 2500 1996 1997 1998 1999 2000 2001 Year Nu mb er of W ri tsPremium Rate Index
Indicative Insurer Profitability by Accident Year
0 20 40 60 80 100 120 140 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Renewals at June 30 In dex ( 1993 = 100) Fcst Source: JP Morgan/Deloitte -60% -40% -20% 0% 20% 40% 60% 1992 1993 1994 1995 1996 1997 1998 1999 2000Accident Year ending 31 December
% Pre
m
ium
Part A - Introduction
This report has been commissioned by the Commonwealth Treasury to assist the meeting of Ministers on 27 March 2002. The brief is shown in Appendix 1.
The report gives a quantitative and qualitative analysis of the current situation in public liability insurance. It concludes that the circumstances can reasonably be described as a ‘crisis’ and discusses the drivers of the crisis. It does not propose solutions, but gives a framework within which proposals to deal with the crisis can be developed. It does present some options identified from our research to this assignment and from our long term insurance industry observation.
In preparing the report we have been aware of the varying knowledge levels of readers. While we have attempted to give relevant background and explanations, the amount of detail is necessarily limited. Users of the report should consult with the authors before drawing conclusions on any issue in doubt.
The report has been prepared for the purpose stated above and should not be used for any other purpose or disclosed to third parties without the permission of the authors. The data analysis and projections in the report deal with items that are inherently uncertain. While we have attempted to give a fair and unbiased interpretation of the data it is possible that more detailed analysis of new data might give a different picture.
What Public Liability Covers
Public liability covers the insured’s legal liability to third parties for bodily injury or property damage. An insurer indemnifies the insured against claims by a third party for bodily injury or property damage resulting from negligence by the insured.
The public liability policy does not cover:
Damage caused by a motor vehicle – covered separately by motor insurance (property damage) or compulsory third party insurance (bodily injury)
Bodily injury to the insured’s employees – covered by workers’ compensation insurance
Loss arising from professional services offered by the insured – covered by professional indemnity insurance
Loss caused by products sold by the insured – covered by products liability insurance (although as noted below public and products liability are usually treated together).
Appendix 7 gives an example of the exclusions (ie items not covered) from a typical policy document.
In most industries, and especially for smaller businesses, public liability and products liability have been sold as a combined product with a single premium amount. Usually, therefore, statistics are only available for public and products liability combined. Each policy has a limit of indemnity selected by the insured, which in public liability applies to each individual claim for property damage or bodily injury. This limit would rarely be less than $5 million, with $10 million or $20 million being common. Larger businesses, or those with high risk exposures, would buy higher limits of indemnity sometimes into hundreds of millions of dollars.
Many insurance policies also have ‘excess’ provisions whereby the insured pays the first part of the cost of a claim (referred to as the “excess” or “deductible” amount). The size of any excess is usually selected by the insured and depends on the financial capacity of the insured and their strategy towards managing risks. It may be as little as a few hundred dollars up to several hundred thousand dollars for each claim.
The policy covers legal liability but the liability does not have to be proven in court. Many claims are settled by negotiation and agreement, even when legal representatives are involved, without resort to court determination or even formal litigation.
The policy also covers the cost of defending against a claim provided that the policy would cover the claim if it is successful. Some claims are successfully defended, and if they proceed through litigation would usually result in a costs order against the plaintiff. If costs were unable to be recovered, defence costs only would be incurred by the insurer. Many successful defences do not progress through litigation and in these cases defence costs are not recovered. In practice most claims that are successfully defended result in the insurer incurring some or all of the defence costs.
Comparison with Statutory Schemes
In looking at public liability, comparisons are frequently drawn with workers’
compensation and compulsory third party insurance, which cover most other bodily injury claims. These are referred to as “statutory schemes” because insurance is made
compulsory by legislation and the statutes define many aspects of the schemes including benefit entitlements and how claims are handled.
Appendix 5 gives some more background on statutory schemes and in particular the type of reforms that have occurred in these schemes over the last 20 years. It is inevitable that the community and government in each jurisdiction will look to these schemes for some models of how public liability might be handled.
WorkCover Queensland
In Queensland, in 1996, workers with an injury which causes less than 20% work-related impairment must make an irrevocable election between pursuing common law damages or statutory entitlements. This reform was introduced as a cost-saving measure in response to steep increases in the number of common law claims.
TAC Victoria
In the motor accident scheme in Victoria, in 1986, common law costs were blowing out, so the Government instituted control over access to common law by restricting it to only those injured parties with a 30% threshold level of impairment.
How Claims Emerge
Public liability insurance is categorised as long tail insurance (as are the other liability classes) because the time period from occurrence of claims to their finalisation is often many years. There are often delays in the reporting of claims (for example, while an injured party awaits the injury stabilising) and usually extended periods before the settlement of the claim due to investigations, negotiations and legal processes. It takes three to five years before a reasonably accurate estimate can be made of the cost of claims from a given year of insurance. This is due to the combination of factors of delay and the inability to value accurately the likely cost of individual claims (outcomes from injuries change or develop; some “facts” emerge late in the process; courts provide little consistency in verdicts). It is not for many years (3-5 at least) after the year of insurance covering the event that there is adequate experience to be able to determine with confidence the result for the “accident year” concerned.
In Part B we give more information on the types of claims that arise and how claims are handled.
Unlike workers’ compensation or motor accidents, there is virtually no specific legislation governing how claims are dealt with and how any compensation is determined. Claims are dealt with under ‘common law’ principles established through a long history of case law and, if litigated, are made by way of civil actions in the relevant jurisdiction.
How the Insurance Market Works
General insurance, of which public liability is a part, is a competitive market. The relevant parties are as follows:
1. Buyers - Most members of the community who own, control or occupy property are exposed to the risk of a negligence action by a third party for injury or damage. To protect themselves from ruin should such an action be successful, it is customary and prudent to purchase “third party” public liability insurance. This cover is
automatically provided in home insurance products to protect the owner or tenant. Business owners need separate cover to protect themselves from actions arising from incidents in the course of undertaking their business.
2. Brokers - Most public liability of a commercial nature is acquired through insurance brokers, specialist intermediaries whose role is to advise on insurance needs and obtain the best deal (including price) for their clients.
3. Agents – In some cases the intermediary may be an agent, who acts only for one or a few insurers.
4. Insurers - Most general insurers provide public liability cover. Each policy is assessed by the insurer before a premium and terms of cover are offered. 5. Underwriting agents - Some public liability insurance, especially in specialist
classes, is placed with underwriting agents who perform most of the functions of the insurer but do not carry the risk, which is passed to one or more insurers on a bulk basis.
6. Reinsurers - Insurers buy reinsurance protection against individual large losses that they may incur. For example, with liability cover of $10 million an insurer’s own risk retention may be $2 million with any claim above this amount covered by
reinsurance. Reinsurers charge insurers a premium for that cover.
Do We Have a ‘Crisis’?
Insurance markets are renowned for their cyclical nature, with extended periods (say three to five years) of stable or reducing premium rates, followed by a shorter period (usually two or three years) of rapidly increasing premiums. The next section discusses insurance cycles in more detail. While the premium increases are often surprising and concerning to customers, this does not necessarily indicate a crisis.
Occasionally, however, the market cycles are so severe that insurance becomes unavailable to some customers, or only available at prices that the customer regards as unaffordable or unjustifiable. We have such a situation now.
Media reports, submissions received by Treasury and our interviews with insurers and brokers confirm for us that the public liability market is currently in such a crisis. Moreover our insurer interviews suggest that availability of cover may diminish further as insurers progressively strengthen their risk selection criteria.
The hardest hit in the current situation are those organisations that have ‘public traffic’ (large numbers of members of the public on their premises or participating in their activities). This includes:
Hotels and licensed clubs Shopping centres
Event organisers (both community and commercial) Sporting organisations
Tourism operators.
There is no indication at the present time that insurance market conditions are likely to change within the next one to two years in such a way that the crisis will be resolved by market forces alone in that time.
Part B – Analysis of the Public
Liability Insurance Market
In the first part of the report we give our analysis of the public liability crisis and our assessment of the causes. The sections are as follows:
1. Drivers of the Current Crisis – summarises the causes of the crisis, based on the evidence in the subsequent sections
2. Premiums and Availability – analyses available information on premiums and the availability of public liability insurance
3. Trends in Claims – describes the characteristics of claims and looks at the available evidence regarding trends in claims and litigation
4. Insurer Profitability – examines recent profitability of public liability business for the insurance industry, including the adequacy of claim provisions
5. Availability of Data – describes what data is available and, as requested in the brief, comments on the inadequacies of available data.
Drivers of the Current Crisis
From our analysis and interviews, the drivers of the current crisis can be categorised into two main groups:
Underlying claim cost increases – a long term issue occurring over many years Insurance market crisis – a short term issue arising from an extreme market cycle in the insurance industry.
In economic jargon, the current crisis could be described as a market failure. The forces of supply and demand in the market are such that there is no “equilibrium price” at the moment. Not all customers are able to obtain suitable insurance at what they regards as reasonable prices.
In insurance jargon, the insurance cycle is so severe in this class of business that major dislocations are occurring and many customers are unable to find an insurer.
The Increasing Cost of Claims
The underlying cost increases relate particularly to upward trends in bodily injury claims. This is a long term issue, with no evidence of any sudden change in the last couple of years.
Over several decades, and across many types of insurance business, there have been real increases in the cost of personal injury claims due to both:
Increases in the propensity of people to make a claim following an injury Higher compensation to people for a given type or severity of injury.
These underlying drivers are attributed by commentators to a variety of causes including (in no particular order):
Changing community attitudes. The rise in compensation claims is said to have reached a stage where “each of us must be prepared to accept a reasonable level of responsibility for our own actions, rather than a windfall opportunity to line our pockets as a result of some unfortunate accident.”…… “It is argued that there has been a reduction in people’s willingness to take personal responsibility for their own situation and to accept misfortune, being replaced by an expectation that society will look after them and a preparedness to assert their legal rights to achieve this protection”. This was discussed in a landmark speech in 1996 by John Cloney (now Chairman of QBE Insurance) in an address entitled ‘Claim and Blame’.
Specialist plaintiff law firms. There has been growth in law firms specialising in personal injury cases for plaintiffs. These firms are active in soliciting for business
through advertising and other means and are willing to push the common law through running ‘test’ cases. They are well resourced and innovative.
Drift in definition of negligence. Over recent years, “negligence” or a breach of duty of care for the public has moved in its legal interpretation from a reasonable duty of care in all the circumstances towards a “strict” duty of care, such that an occupier has an absolute responsibility for the care of the public on their premises, regardless of personal responsibilities.
In these circumstances, it has become increasingly difficult to defend actions alleging negligence or breach of duty of care in public liability business
Increased levels of compensation. There is a view that, over the years, the amount of compensation for a given type of injury has increased in real terms, driven by court awards and then followed in the negotiated settlements that are used to finalise most claims.
Perceived generosity of courts. Many involved with the defendants’ side argue that the Courts are too generous to plaintiffs, both in determination of negligence and awarding damages. The significance of this issue seems to vary by jurisdiction, with most concern expressed about NSW and Victoria. This is believed to discourage insurers from taking the risk of running cases through the Court.
Increasing deregulation of legal fees, contingency uplift fees and “no win no fee” arrangements. These factors have led to greater access to the judicial systems by those unable to otherwise afford it (a desirable outcome) but also to a touting for work which would otherwise not be pursued legally (an adverse outcome). In practice, we are advised that the extent of contingency fees is limited to some “uplifting” of scale fees in certain jurisdictions (25% in NSW).
Legal advertising in some jurisdictions is also said to have contributed. Class actions. There have been several high profile class actions in Australia in products liability, mainly involving food contamination. It is argued that this is one of a range of influences in the legal system increasing overall costs and changing attitudes.
Reforms in other types of insurance. Other liability classes in Australia, namely workers’ compensation and CTP, have been progressively enforcing reform in terms of common law access and benefit outcome, since the mid-1980’s. Reforms have included:
o Abolition of the right to sue (subsequently reinstated in two states) o Caps on damages (say, $250,000 for pain and suffering)
o Thresholds for access to common law outcome (minimum 10% bodily
As a result, there is advice that, in particular, a leakage from Workers Compensation coverage to public liability coverage is being sought by claimants (arguing, for example, that they are contractors rather than employees and therefore not eligible for workers compensation) where there are no such access or benefit restrictions, and hence larger payouts.
The Insurance Market Crisis
The insurance industry is notorious for its cyclical behaviour. An overview of a typical insurance cycle is shown in Figure 1.
Figure 1
The playing out of this cycle in public liability insurance in Australia is described in the following paragraphs.
1. Competition – The Soft Market
Insurance is a competitive market, with countless buyers and a number of sellers (though fewer now than several years ago).
Importantly, most organisations buy their insurance through brokers – professional intermediaries who “shop around” to get a good deal for the customer as well as advising on their insurance needs.
All types of commercial insurance, and public liability is no exception, are able to be moved from one insurer to another very easily. Big changes in market share of an insurer
Market may overshoot
Hard Market
(Expensive) (Cheap)Soft Market
Risk selection process rejects some activities / industries Incidents arise – HIH/WTC A Sellers’ Market
Capital and capacity withdrawn from market
Insurer demands profitability
Insurer realisation of losses – prices begin to rise tentatively
Strong profits
Capital flows into market Price competition – prices fall A Buyers’ Market No significant incidents Prices move into “free fall” – may undershoot
Insurer demands premium growth
can occur very quickly based on whether the insurer’s prices are competitive or uncompetitive.
During the mid to late 1990s public liability was very competitive and premium rates reduced steadily.
By about 1998 many insurers were recognising losses from public liability and either:
Increased premiums, with a resulting loss of market share
Cut back the amount and type of business they were willing to write Pulled out of the market or large segments of it altogether.
FAI and HIH were significant competitive forces in the market. HIH, in particular, became the market leader by size and was widely regarded as being one of the main forces reducing premium rates during the mid 1990s and then keeping them low from 1997 to 1999.
2. Competition – The Hard Market
By June 2000 the market cycle had bottomed and rates began to rise. During the second half of 2000, HIH’s market position virtually disappeared:
Small commercial was sold to the Allianz joint venture at the end of August 2000 Large commercial was transferred to Gerling in November 2000 following a rating downgrade of HIH and QBE subsequently acquired renewal rights.
The provisional liquidation of HIH in March 2001 removed the company totally from the market.
Remaining insurers, including those acquiring business from HIH, became very
conservative based on a determination to write business at a profit. This has been part of a move to more cautious financial management by insurers fuelled by poor results, reduced competition and a global drive for better return on capital.
Since early 2001 the market in Australia has not been sufficiently competitive to see insurers chasing after business. QBE, for example, selectively renewed much of the former HIH business even though it acquired the rights to offer renewal to all. The reduced number of insurers in the market has been content to take modest volumes of business at premium rates they regard as acceptable (perhaps even attractive) and, as a result, some business has not readily found an insurer.
One major insurer we interviewed cited, by way of example of its tougher risk selection process, its trend in surveys of public liability risks prior to acceptance: a handful in 1999 to 600 plus in 2001.
Acquisitions and mergers in the Australian market have reduced the number of major insurers and the inevitable disruption this causes has exacerbated the problem. Not only are there fewer insurers, but the merged companies have priorities on consolidation and are naturally cautious about pursuit of different opportunities.
3. APRA Changes
The APRA changes to the regulation of insurers from 1 July 2002 include:
Minimum capital requirements that take account of the “riskiness” of each class of business and result in higher levels of minimum capital than previously
Compulsory risk management systems, which include pricing and underwriting control mechanisms
These changes are not a primary driver of the increase in public liability rates, although they reinforce the more conservative attitude to risk of insurers and a greater focus on profitability.
4. Global Market Forces
Most classes of insurance have moved into a hard market cycle in the last two years. This has followed several years of steadily reducing premium rates in many classes and financial losses being carried by many insurers.
Traditionally in this part of the cycle insurers are cautious about growth opportunities and concentrate on making their existing business profitable.
The terrorist attacks on 11 September 2001 compounded this market cycle. The direct insurance losses (likely to be over $A100 billion), the recognition of a major new risk factor, and greater caution throughout the business world have combined to further reduce the willingness to write business and further increase premium rates.
In the remainder of Part B we work through the information and analysis available on public liability, particularly the quantitative evidence for the statements above.
Trends in Claims
In this section we look at evidence about trends in claims and the cost of claims. The number or frequency of claims appears to be relatively stable overall, although there is evidence of increasing numbers of bodily injury claims in some areas. The cost of claims has been rising for many years due to increasing average size of bodily injury claims, which appear to have trebled in size over the last ten years.
Types of Claim
There are two main types of claims in public liability: Property damage
Bodily injury
A property damage claim can vary from a window broken by a newspaper delivery to destruction worth tens of millions of dollars (one recent example is of a log entering a hydro electric plant and exploding the turbine).
Bodily injury claims likewise vary from a “slip and fall” with bruising or a broken bone to quadriplegia or permanent brain damage.
Understanding the characteristics and mix of these claims has proven during our research to be a critical factor in interpreting trends and statistics.
Indicative figures for the mix of the claim types across the whole of public liability are:
Proportion by
Number Average Size Proportion by Cost
Property damage 75% $5,000 35%
Bodily injury 25% $25,000 65%
Property damage claims make up the majority by number and have a low average cost. While there can be an occasional extremely large property damage claim (tens or even hundreds of millions of dollars), they are rare. Most property damage claims are finalised within a couple of years of occurrence.
Bodily injury claims make up the minority by number but the majority of the cost, because they have a much greater average size. Most of these claims are not finalised until three to six years after occurrence.
Most of the available statistics are for all claims together, and after examining these we show some results for property damage and bodily injury separately.
Number of Claims
APRA collates and publishes statistics on the number of new claims reported each year. Our examination of these statistics indicated they were not sufficiently reliable for inclusion in this report. The numbers, and the reasons for our conclusion on reliability, are shown in Appendix 3.
Insurance Statistics Australia (ISA) data also includes the number of new claims reported for the companies involved. Changing membership of ISA and market share of insurers, together with the absence of exposure data, makes it hard to draw conclusions. Indications from this data are that the overall frequency of claims has been fairly flat, with some reduction in 1999 and 2000.
A small amount of data we have from individual insurers tends to confirm this – no overall increase in claim numbers, perhaps some reduction in recent years.
There are three important reasons why these observations may not (and in our view probably do not) indicate a favourable trend:
The mix of claims seems to be changing, with reductions in property damage claims but increases in bodily injury claims
The introduction of excesses (and higher levels of excess) in recent years may
account for the lower claim numbers. Even a small excess can eliminate many claims by number, but without making a big impact on the total cost of claims
Changes in the number and business mix of the ISA members distort the observed trend.
Figure 2: Estimated Claim Frequency per $100,000 Premium for ISA Contributors 0 2 4 6 8 10 12 1993 1994 1995 1996 1997 1998 1999 2000 Accident Year Clai m s p er $100,000 p re m iu m Source: ISA
Quite a different picture can be seen in the data from a group of local governments. This data, provided to us on a confidential basis, shows a sharp increase in the number of public liability claims being made against the councils in 1996/97 and a continuing upward trend since that time.
Trends in Litigation
It is difficult to obtain data on trends in litigation. Insurers do not record on computer systems the progress of claims in sufficient detail to obtain data on litigation.
Statistics maintained by the various Courts are of variable quality and there is no consistency from one jurisdiction to another. While we have not had an opportunity to check with each Court, it is our understanding that most courts are not able in their statistics to distinguish public liability from other personal injury cases.
Fortunately the District Court of NSW was able to assist. This Court has a good reputation as a leader in list management and has an effective registry system.
This Court was able to respond to our request for assistance by extracting the number of new public liability writs lodged in the Sydney region over recent years.
Figure 3: Number of Claims for a Local Government Group
0 100 200 300 400 500 600 700 800 900 1994 1995 1996 1997 1998 1999 2000 2001
Year Ended 30 June
N
umber of Claims
This graph shows a steady increase in new personal injury litigated matters for public liability in Sydney. The number appears to have doubled over five years, with an average annual rate of increase of about 15%.
We urge the reader to respect the qualification given by the Court in providing the data: “These are raw statistics downloaded from the computer database, and are furnished on the understanding that they have not been checked or verified. As such, they should only be regarded as indicative and not authoritative.”
It is also necessary to consider the impact that the increase in jurisdiction of the District Court may have had where in 1997 its limit was lifted from $250,000 to $750,000 with a resultant referral of outstanding matters from the Supreme Court to the District Court. The numbers are not known. More detail is shown in Appendix 8.
This pattern may not be similar around the country. Sydney is anecdotally regarded as the litigation capital of Australia and trends could well be different in other regions.
Average Cost Per Claim
As with the number of claims, APRA statistics were not suitable for examining the average cost of claims. Analysis of the ISA data shows a trend in average claim cost as in Figure 5.
Figure 4: PL Writs Lodged - Sydney District Court
0 500 1000 1500 2000 2500 1996 1997 1998 1999 2000 2001
Year
Number of Writs
Note that claims are analysed by “accident year” (the year in which the incident giving rise to the claim occurred). The analysis involves projection of the ultimate cost of claims based on the amounts paid to date and insurer case estimates from time to time. This chart shows significant increases in average claim size but not in a steady
progression. The annual rate of increase is of the order of 10% p.a.
Other information available to us from individual insurers confirms an increase in the average size of claims over the 1990s. While it is difficult to get a precise measure of this increase, the available evidence is that the average size of claims has increased at a rate at least 5% p.a. higher than community inflation (taken as being AWE).
For two individual insurance company portfolios we were able to access data on property damage claims and bodily injury claims separately. The two portfolios show virtually identical patterns with:
No major change in property damage costs Very steep increases in bodily injury claim costs.
Figure 5: Estimated Average Claim Size for ISA Contributors
$0 $5,000 $10,000 $15,000 $20,000 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 Accident Year Averag e Cl aim Siz e Source: ISA AWE 12% p.a.
ICA analysis of claim cost distribution
The ICA submission contains a claim cost distribution for public liability claims finalised in each year between 1993 and 2001. The data is sourced from five insurers. Claims costs include insurer legal costs and payments to claimants. They also include both personal injury and property damage claims. This analysis shows –
A doubling of average claim size in this period; this result was similar when the impact of larger claims (over $100,000) was removed
85% of claims by number are settled for under $20,000 (this is down from 95% in 1993); these claims account for less than 20% of the total cost of claims (down from around 30% in 1993). Given our earlier observations that the average size of property damage claims is around $5,000 and that these claims represent around 75% of all liability claims by number, we would expect a large number of claims in this band to be property damage claims
11% of claims are settled for between $20,000 and $100,000 (up from 6% in 1993) and represent 33% of all costs
2% of claims are settled for between $100,000 and $500,000 (up from 1% in 1993) and represent 30% of total costs
less than 1% of claims are settled for over $500,000 and represent 20% of total claim costs.
The conclusions that we draw from this analysis are –
Figure 6: Index of Claims Payments by Type of Claim - Adjusted for AWE 0 50 100 150 200 250 300 350 400 1993 1994 1995 1996 1997 1998 1999
Year Ending December
In
de
x (
1993 =
100)
Bodily Injury Property Damage Source: Claim Data from two Insurers
it confirms the nature of increases we have previously seen in the average claim size for public liability claims
it suggests that the increase in average claim size is not driven principally by large claims but across the claim size spectrum
The small proportion of claims (15% and under) that make up the majority of the claims cost for public liability means also that aggregate claim frequency trends may be misleading.
Insurer legal versus compensation
In GST work that required a split of public liability bodily injury claims between insurer legal costs and compensation, we have used an approximation that –
75% of claims costs are in respect of compensation (which will include party/party costs and the plaintiff solicitor/client costs)
20% of claims costs are in respect of insurer legal costs 5% of claims costs are in respect of investigation costs.
These proportions were derived from sampling of claims and there are, therefore, some limitations on their reliability. In addition, we do not have any information to understand how these relative proportions may vary by size of claim. This will be important for public liability since issues of liability would mean that –
there is a greater level of legal work required than for CTP, and
the rough rule of thumb derived from CTP that party/party legal costs are similar to defence costs may not hold for public liability due to the relatively high level of nil compensation claims.
Australian Torts Reports (published by CCH)
The Australian Torts Reports (1988 to 2000) contain outcomes for damages awards to claimants for selected verdicts. It is not a complete listing of all verdicts and thus represents only a small proportion of all claims (given that the vast majority of claims are settled out of court). Over the years 1988 to 2000, 110 matters have been reported that we believe are public liability matters from the “cause of loss” description.
There are too few claims to examine any trends in the size of the various heads of damage over time. However, the listing can be used to provide some indication of the components of awards by head of damage and size of claim. We have grouped claims into the same size bands as in the ICA study, noting that we are aware that this is not a
like-with-like match because the claim amounts from the Torts Reports do not contain either party/party legal costs or insurer legal costs.
The following pie-charts show the components of claims costs for each group of claims.
Composition of Court Awards for Payouts
under $20,000
General/Pain and Suffering 84% Out of Pocket Expenses (including past medical) 10% Loss of Future Earning Capacity (including Super) 0% Interest 2% Gratuitous Care 0% Future Needs 1% Loss of Earnings 3%C om position of C ourt Aw ards for Payouts of $20,000 - $100,000 Loss of E arnings 11% Loss of Future E arning Capacity (including S uper) 21%
G eneral/P ain and S uffering 50% O ut of P ocket E xpenses (including past m edical) 8% G ratuitous Care 1% Interest 5% Future Needs 4%
These graphs indicate that –
for smaller claims, under $20,000 (15 in total in the analysis):
o the major component of compensation is general damages (84%), with
the average amount of general being $10,000
o the remainder of the compensation for these claims is mainly out-of
pocket expenses and past loss of earnings (13%)
Composition of Court Awards for Payouts of
$100,000 - $500,000
Loss of Earnings 16% Loss of Future Earning Capacity (including Super) 44% General/Pain and Suffering 26% Out of Pocket Expenses (including past medical) 5% Interest 5% Gratuitous Care 0% Future Needs 4%Composition of Court Awards for Payouts
over $500,000
Loss of Earnings 11% Loss of Future Earning Capacity (including Super) 28% General/Pain and Suffering 12% Out of Pocket Expenses (including past medical) 8% Future Needs 38% Interest 3% Gratuitous Care 0%o no claim in the listing had an amount for loss of future earning capacity
for claims in the $20,000 to $100,000 range (37 in the analysis) –
o general damages comprises 50% of the compensation amount, with most
claims having a general damages amount in the range $20,000 to $40,000
o out-of-pocket expenses and past economic loss make up a further 19% of
the award
o loss of future earning capacity represents 21% of total compensation
with around half the claims having an award for this head of damage; the awards range from about $15,000 to about $30,000
for claims in the $100,000 to $500,000 range (48 in the analysis) –
o general damages comprises 26% of the compensation amount, with most
claims having a general damages amount in excess of $40,000 and up to around $120,000
o out-of-pocket expenses and past economic loss make up a further 21% of
the award
o loss of future earning capacity represents 44% of total compensation
with almost all claims having an award for this head of damage; the awards range between about $30,000 and $250,000
for claims above $500,000 (10 in the analysis) –
o general damages comprises 12% of the compensation amount, with most
claims having a general damages amount in excess of $80,000
o out-of-pocket expenses and past economic loss make up a further 19% of
the award
o loss of future earning capacity represents 28% of total compensation,
with awards ranging between about $150,000 and $300,000 (the maximum amount shown is $750,000)
o future needs represents 38% of total compensation with large variation
in the amount from claim to claim and a maximum amount shown of $2.7 million
How Insurers Handle Claims
When an insurer receives a claim, either directly or via the insured, it typically undertakes the following steps:
Investigates the allegation of negligence against its insured – usually by factual investigation of the circumstances giving rise to the loss and possibly by technical investigation (by say an engineer) to determine or confirm the agent or cause of the incident
Investigates the alleged extent of loss (the nature of injury and impairment in a personal injury matter) using a loss adjuster and/or medical practitioner, as well as considering the information supplied by the claimant or their lawyer regarding the extent of loss alleged
Formulates a strategy depending upon the outcome of the investigations e.g. settle as quickly as possible at an assessed value through to vigorously defending the matter
May seek to settle internally through its claim staff making offers
May allocate the matter to its (usually external panel of) lawyers to defend the matter and prepare it for settlement or court, especially if:
o the insurer is rejecting the negligence allegation o the claimant issues a court writ, or
o the complexity of the matter warrants external advice
Provides ongoing instructions to the lawyers and receives regular updated information and advice from them
Pays the claim and costs and seeks to provide feedback to the underwriters if the claim has any extraordinary qualities which may affect future selection of insurance risks.
Our assessment, both from our industry experience over the years and from research during this assignment, is that there has been little or no material change to the manner in which insurers have handled claims in recent years. Changes in claim handling can thus be excluded as a possible cause of the increase in the average size of claims discussed earlier in this section.
Some Suggested Causes of Increased Frequency and Cost
In our discussions with insurers and others, a number of potential causes for increasing claim costs were raised. Some consistent messages were:The general move in the economy towards contracting of workforces means that the individual contractors (formerly employees) who would previously claim on workers compensation insurance may now claim on the liability insurance of the principal in the event of a workplace accident.
Restrictions on common law in environments of workers compensation and CTP leading some injured persons to prefer pursuit of a public liability claim if possible (eg against the local council).
An increasing trend for volunteers in community events, not being employees, to bring public liability actions against organisations in the event of an injury. For example, virtually all claims for Parents and Citizen organised events are apparently from and on behalf of the volunteers or their children, according to one insurer. A tendency of the community to participate in riskier outdoor pastimes.
The much quoted increase in the propensity of members of the community to seek redress through “litigation”.
Additionally, the Law Council of Australia advises that the recent move to make public liability cover compulsory for all new incorporating entities could be contributing to the increase in claim costs as the number of insureds to claim against increases.
Premiums and Availability
This section deals with our analysis of premiums and the availability of public liability insurance. It confirms steep rises in premiums in 2000, 2001 and 2002 and that there are current problems with availability of insurance at acceptable prices for some market segments.
Premiums – Total Volume
APRA statistics show the total premiums for Australian insurers. The figures are net of stamp duty and net of GST.
The total premium volume has shown a cyclical pattern, with the upward trend slowing in 1996/97 and premiums reducing in 1997/98.
For the year ended 30 June 2001 we have had to estimate the figure because APRA’s statistics did not include the HIH companies. These companies went into provisional liquidation in March 2001 and did not submit returns to APRA.
This premium of just over $1 billion for 2000-01, and the corresponding amounts for earlier years, will understate the total cost of public liability to the Australian community to the extent of:
Any self insurance, including deductibles on policies
Figure 7: Gross Written Premium For Public & Product Liability
0 200 400 600 800 1000 1200 1993 1994 1995 1996 1997 1998 1999 2000 2001 Year Ending June 30
Pr
emium Amo
un
t ($m)
Est
Business placed directly offshore, with Lloyd’s of London, international insurers and captive insurers
Some State and Territory governments and local governments that self insure wholly or partly.
The extent of these understatements is unknown but is likely to be modest (perhaps 10-20%).
Allowing for Economic Growth
Premiums might be expected to vary with growth in the economy and with inflation. Public liability premium expressed per $1000 of private sector GDP is shown in the next figure.
The cost to the community of public liability has been around 0.2% ($2 per $1000) of private sector GDP. This measure, which allows for inflation and economic growth:
increased slightly from 1993 to 1996
declined from 1996 to 1998 as market premium rates fell
by 2000-01 had returned to a level above that of the mid 1990’s
as explained below, is expected in 2001-02 to be around 30% higher than in 2000-01.
Figure 8: Liability Premium per $000 GDP
$0.00 $0.50 $1.00 $1.50 $2.00 $2.50 1993 1994 1995 1996 1997 1998 1999 2000 2001
Year Ending June 30
Pre
m
iu
m
Est
Premium Rate Changes
The JP Morgan/Deloitte/Trowbridge survey shows a broadly similar picture, although it is based on estimates of premium rate changes provided to the survey each year by insurers and brokers.
The survey has the benefit of being up-to-date, and also gives forecasts for up to two years ahead.
The survey indicates significant reductions in market premium rates in 1996, 1997 and 1998. There were large increases in 2000 and 2001 with an even larger increase (over 30%) estimated for the current year.
The 2001 JP Morgan/Deloitte/Trowbridge survey was conducted in August 2001 (before the 11 September terrorist attacks, although it was published after). At that time the expectation was for average premium rate increases of 18% by June 2002 and a further 12% by June 2003.
The survey was updated in February 2002, after the immediate impact of 11 September had been absorbed. In the update it was reported that rates would rise by an average 32% by June 2002, and that most of this increase in rates had been put through by December 2001 renewals.
By comparing the August 2001 estimate of 18% and the February 2002 estimate of 32%, we can deduce that about 14% of the rate increase can be attributed to the direct and indirect effects of 11 September (along with any other market changes in that six month period).
Figure 9: Premium Rates Percent Change
-20 -10 0 10 20 30 40 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 Renewals at June 30 Pe rce nt % Fcs
Source: JP Morgan/Deloitte /Trowbridge Survey
From the estimated market rate changes we have constructed a premium rate index showing the relative level of premiums over the last decade.
This chart is similar to Figure 8, indicating that by 2001 rates had returned to the levels of the mid-1990’s, and shows that by 2002 rates will be higher.
The shape, however, is more exaggerated than Figure 8, which we believe is due to: The fact that it is based on market perceptions which may be slightly exaggerated and ignore large volumes of business placed at unchanged rates
Some timing differences with APRA showing business written in the previous year while the survey describes current market rates.
It is clear that the average premium rate increase in the current year is very steep, and that the insurance industry is expecting further increases next year.
Premiums by Industry Segment
All the above statistics relate, of course, to the whole class of public and products liability business in all industry segments and nationwide.
There is only one statistical source available by industry segment, that is ISA. Even in that data, with about 100 industry classifications, the segments are not very finely divided.
Figure 10: Premium Rate Index
0 20 40 60 80 100 120 140 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Renewals at June 30 In de x ( 1993 = 100) Fcst
We examined this data but it could not tell us anything useful about the level of change in premiums by industry segment because:
There is no adequate measure of exposure to compare the dollars of premium with The member companies of ISA provide data for only about 20% to 30% of the total market
The composition and market share of the companies changes over time.
We are left then, with anecdotal evidence from our qualitative research. This evidence indicates that all segments of industry have faced increases in public liability premiums, but with extreme increases for organisations with high exposure to personal injury claims:
Any organisation with a high level of public traffic Shopping centres etc (referred to as “slip and fall” risks) Those with participants in dangerous activities (eg horse riding) Local governments.
This evidence indicates that premium increases of: 20% are routine
100% are not uncommon 500% to 1000% have occurred.
Those largest increases have typically arisen following a change of insurer (HIH collapse or another insurer no longer covering the event) where the basis of calculating premiums is different between insurers particularly if the risk is unusual.
How Premiums are Set by Insurers
Insurers set premiums in public liability business by:Assessing the risk potential of each policy from information supplied by the client or their broker, or by undertaking its own risk assessment, using its experienced
surveyors (one major insurer will now only accept risks where the potential client has formal quality accredited systems in place and uses quality surveyors to undertake such risk assessments)
Establishing a set of base rates for each industry segment (more science has gone into this process in recent years using technical analysis of an insurer’s own database, ISA data and overseas, particularly US experience)
Placing the client’s risk in the appropriate industry segment and size category to which the base premium rate applies
Multiplying the rate by the selected exposure base – typically turnover of the company concerned
Varying the premium or indeed denying or limiting cover on the basis of specific attributes of the risk – risk management systems in place; corporate attitude to risk and housekeeping; claims experience from the past.
Recognising the market realities of the price that can be charged (this is particularly pertinent during a soft market phase when the insurer is typically also interested in the premium that a prospective client can achieve in the market. It is not so important during a hard phase where the insurers can charge their ‘technical rate’ regardless of the market attitude).
There is always some combination of a quantitative approach (formula rates based on classification, sizes etc), a qualitative approach (the judgement of an expert underwriter based on all the available information) and a commercial approach (what the
competitive market will accept).
At a portfolio level insurers may reject whole industry or activity groups based on their past poor performance or perceived riskiness. Reinsurance restrictions on covering certain types of risk can be an issue, as described in Appendix 7.
Premiums are established by insurers with the intention of making a profit, but premiums must be set before the cost of the product (particularly the claims cost) is known. This need to set the price without knowing the cost of the product makes the insurance business unusual; it introduces the potential for an insurer to unwittingly take business at a loss and is one reason for the market cycles.
The main components of the public liability premium from an insurer’s perspective are:
Typically for Public Liability
Cost of claims 65%
Commission/brokerage 15%
Administration expenses 22%
Investment income credit* (10%)
Target profit margin 8%
Premium to insurer 100%
GST 10%
Stamp duty 11%
Premium to customer 121%
Availability of Insurance
The submissions and media reports frequently cite examples of problems with availability of insurance.
In our view it is helpful to recognise that there is a difference between:
Availability – whether or not adequate insurance can be purchased, regardless of price
Affordability – whether or not the price for the insurance is seen as acceptable given the buyer’s previous premium history and ability to pay.
The qualitative evidence indicates that the main problem appears to be affordability rather than availability. Most of the case studies refer to situations such as “we could only get insurance at an outrageous price therefore we cancelled our event”. On the other hand, our interviews with insurers do indicate a continuing trend towards selective underwriting, indicating that there may be some true availability problems.
With the amount of dislocation in the market it is likely that some customers who say they have been unable to get insurance have in reality not had access to all the markets where it might be available. We have been advised, for example, that one local insurer and the London Lloyds market are active in hard to place risks.
Information we obtained from submissions, media reports and our interviews indicated that affordability problems are widespread including in:
Community events Sporting events
Tourism and leisure operations Retail industry
Local non-government community groups that operate under the umbrella of local government.
Insurer Profitability
In this section we examine the recent record of profitability of insurers in the public liability market. In addition to helping understand the current crisis this analysis helps in taking an informed view about the adequacy of current premium levels.
A Key Definition
The most suitable measure of insurer profitability for the public liability class is the Insurance Trading Result:
Insurance Trading Result or (ITR):
Profit or loss from underwriting (premiums less incurred claims and expenses) Plus Investment income on insurance funds
Expressed as a percentage of Premium revenue.
As indicated in the Insurance Council of Australia submission an ITR of 6% to 10% of premium is needed to achieve a reasonable target return on capital for public liability business.
APRA Statistics
APRA statistics do not show the ITR directly, but give us enough information to estimate the ITR for public liability for the total of all insurers in Australia. The results are shown in Figure 11, with the detail in Appendix 3.
It is critical to understand that these figures are based on the financial period in which the business is accounted for. It does not relate to the “pure” outcome for the year of insurance concerned. In particular, the claims incurred in any period include increases or decreases during the year in provisions made for claims from prior periods.
The figures thus do not reflect the profitability of the business being written in a given year. If insurers have under-reserved and then later corrected this under-reserving, the ITR will be overstated in earlier years and understated in later years.
This is in fact what has happened with public liability. The ITR for years up to 1996 appeared to be very favourable. Insurers believed the business to be profitable, because they (presumably unwittingly) understated the outstanding claim provision and therefore the cost of claims.
Late in the 1990’s insurers needed to increase claim provisions for prior years as the past under-reserving became apparent. This led to very large financial losses for these years as shown in the graph, more than wiping out the profits from the first part of the decade. At the same time that the large losses were being recognised, premium rates began to increase. Note that the 2001 figure excludes HIH and would be much worse if it was to be included.
The very poor financial results for 1999 and 2000 are, therefore, not representative of the profitability of the insurance business being written in those years, but more a reflection of past years’ outcomes brought to account recently.
We would expect, therefore, the average premium rate increase to restore profitability to be:
Figure 11: Insurance Trading Result from APRA Returns
-80% -60% -40% -20% 0% 20% 40% 1993 1994 1995 1996 1997 1998 1999 2000 2001
Year Ending 30 June
ITR % P
remium
less than indicated by the apparent 2000 and 2001 profitability more than indicated by the apparent 1996 or 1997 profitability.
ISA Statistics
The ISA statistics allow the cost of claims to be allocated back to the year in which they occurred (referred to as the “accident year”). In many ways this gives a more helpful picture of the true profitability of the business, even though it will not match the timing of recognition of profits (or losses) in an insurer’s accounts.
The ITR by accident year for the ISA members is shown in Figure 12 (again the detail is in Appendix 4). Note that these statistics only cover 20% to 30% of the industry.
This graph shows:
Healthy level of profit for 1992 and 1993 business Marginally unprofitable business in 1994 and 1995
Severe losses from 1996 through to 2000 with 1998 representing the low point in trends of profitability.
On the basis of this data, which we regard as currently the best available indication, premiums would need to increase by around 100% from 1998 levels to give adequate profitability. Referring back to the premium rate index in Figure 10 on page 22, this is broadly what is likely to have occurred to premium rates by June 2002.
Figure 12: Estimated Insurance Trading Result for ISA Contributors
-60% -40% -20% 0% 20% 40% 60% 1992 1993 1994 1995 1996 1997 1998 1999 2000
Accident Year ending 31 December
% P
remium
Of course, these indications are relatively broad, and apply to the public liability class as a whole. Individual insurers and individual business segments might (and indeed do) vary quite markedly from the average.
Profitability Indications by Segment
Analysis of the ISA data was able to produce some indications of relative profitability by selected segments. Unfortunately reductions in ISA membership and immaturity of the claim data mean that the data is relatively old. It is also worth noting that while ISA has segmented data according to industry activities, the segmentation is still relatively coarse.
Figure 13 shows the loss ratio – ie claims divided by premiums – for selected industry segments for the ISA members. Figures are averaged for the accident years 1994 to 1998 to give some stability of results given that many of the segments have only small volumes of data.
The bottom bar shows the total data – all industries – for the ISA members with a loss ratio of close to 150%. This highlights the poor overall profitability of public liability, noting that the loss ratio needs to be significantly less than 100% for an insurer to be profitable after allowing for expenses and other factors noted in Section B.
In broad terms, industry segments with a loss ratio higher than the average would indicate a need to increase premium rates more than the average, and vice versa.
*Ratio of claims to premiums. After taking account of expenses, results below about 90% are “profitable”; above 90% “unprofitable”.
This chart shows the “unlicensed club” and “hotel accommodation” segments as having
Figure 13: Estimated ISA Loss Ratio
*
1994-1998 by Industry Segment0% 50% 100% 150% 200% 250% All Industries Building Special Trades Food Stores Welfare / Commmunity Hotel Accom. Sports and Recreation Unlicensed Clubs
