Between 1997 and 2003, the average size of a public liability claim soared from $11,000 to almost $17,000. Naturally, this development was not ignored by the insurance industry, which responded by more than doubling the average public liability insurance premium over the same period, from $600 to $1400.
But, thanks to tort reform, the decade after that has featured vast improvements in the public liability market, with almost every sector finding it easier and cheaper to find cover than previously. The current high levels of capital have helped continue the trend, with the average premium in public liability and professional indemnity falling around 5% over the past year.
Jardine Lloyd Thompson Senior Account Executive David Hodges says appetites are high. “There is currently significant local and global capacity in the Australian general liability market which in turn is putting pressure on rates,” he says. “Underwriters are keen to retain quality risks and this is reflected in their pricing. Underwriters are also increasingly prepared to offer greater coverages and deductible options to sweeten the terms and differentiate their value proposition,” he says.
Mark Sbaglia, Allianz Pacific Liability Manager, says this was demonstrated in the lead-up to the end of the financial year. “Business was shopped around but not much changed hands because insurers are keen to hold onto the business,” he says. “They will match quotes within reason as long as the business is still profitable.”
On the up
So what changed? At the turn of the century, the liability insurance market was unstable. HIH had collapsed, claim costs were skyrocketing and many risks were extremely difficult to cover.
Bad end to good intentions
Ansvar Chief Underwriting Officer Richard Wyatt says much of the problem stemmed from the lack of tort legislation to cap payout costs.
“Changes to legislation have helped balance victims’ right for compensation and the stability of the market,” he says. “These changes have included limitations on certain types of claims and capping of damages. Over the ensuing years the tort regulations have positively affected the claims environment and over time premium began to reflect that improvement.
“Although, in recent years we have seen a reversal of these positive trends and we are seeing a return to more litigious times, which are beginning to put pressure on the profitability of the public liability book.”
According to David Hoffmann, Suncorp Corporate Chief Underwriting and Portfolio Manager, in the 1990s, Australian courts – particularly the NSW courts – imposed an increasing duty of care upon businesses. This coincided with a massive lift in the value of claim payouts by the courts.
“The diminishing profitability of public liability insurance reached a crisis point in 2001. This was exacerbated by the collapse of HIH Insurance in the same year.”
He explains in response to the crisis, the states implemented tort reform legislation. NSW was the first state to introduce reforms, with the introduction of the Civil Liability Act 2002 and the Civil Liability Amendment (Personal Responsibility) Act 2002. By 2004, similar legislation had been introduced in all Australian jurisdictions.
“The intention of the legislation was to limit the frequency of minor and opportunistic litigation for negligence and improve the affordability of public liability insurance,” says Hoffman.
He says overall, tort reform has been a success story in improving affordability of public liability insurance. “APRA’s National Claim and Policy Database confirms the affordability and take-up of public liability insurance have increased since the introduction of tort reform.”
But there are still challenges. Hoffman says: “There is a trend in Australia for greater use of labour hire and contractors. This has coincided with increased recovery actions against host employers and principals of worksites where those labour hire staff and contractors are injured. The result is a transfer of some losses from workers’ compensation insurance to public liability insurance.”
In addition, certain industries are still hard to insure. Hodges says: “Certain imported and manufactured products continue to be difficult to place namely toys, quad bikes, critical auto parts, high risk occupations and businesses that rely heavily on manual labour hire and sub-contractors. But having said that, with the number of markets focusing on niche areas eager to grow, capacity availability even for such risks is the best it’s been in a long time.”
According to Wyatt, within a number of sectors the business services, the market generally is cautious about any risk that involves fundraising or volunteer activities or caring for vulnerable people.
“Awareness in this area has been raised significantly in recent years with the parliamentary inquiries and now the current Royal Commission into Child Abuse,” he says. “So obtaining cover for historical exposures can prove to be extremely challenging.
Further, liability cover for products that are new or untested and that have potential to cause injury will always be difficult to place.”
Undoing comes at a cost
It is worth noting Ansvar operates in a limited number of sectors, many of which are categorised in the high-risk area. These include care, community service organisations, education, faith and heritage.
In terms of the need to go overseas to place high-risk cover, Hodges says the local market can usually write most hard-to-place risks. “Having said that there are a lot of underwriting agencies based in Australia but with overseas capacity such as Lloyds that can step in.”
Despite the breathing space tort reform delivered the industry, there has been ongoing debate as to whether these reforms have reduced the number of litigated personal injury matters.
Sip-and-slip cans company
“When non-litigated personal injury matters are also considered, the overall number of minor and opportunistic claims has reduced. This was a stated aim of tort reform and the improved affordability and availability of public liability insurance is testament to its success. Serious injuries were not the target of tort reform and a large injury claim pre-tort reform is still a large claim today,” says Suncorp’s David Hoffman.
It’s also worth noting the trend in class actions and litigation funding has continued. JLT’s David Hodges points out there has been a number of high profile product liability cases in recent times, ranging from soy milk products to hip implants. This is one of the signs of local consumer laws now placing more obligations on suppliers and manufacturers, for instance mandatory reporting of product recalls, and this trend is likely to continue.
On another front, he notes the recent $300 million settlement of a Black Saturday bush fire class action takes the total compensation for that event to $800 million and is a stark reminder of the public liability exposures many businesses face.
In that situation, a power company and the Victorian Government were sued by victims of the catastrophic fires, which was believed to have been triggered after a powerline failed and fell onto a fence, causing a spark.
“Based on APRA statistics, falls and impact dominate the cause of losses for liability claims; exposure by industry and state has remained fairly constant over the past five years and although CPI inflation is under control insurers will continue to keep a keen eye on superimposed inflation,” he says.
JLT’s David Hodges says anecdotally, worker-to-worker, slip and falls, defective products, product recall and fines and penalties are all areas in focus. “Prudent underwriters are pricing [risk] according to the individual risk exposures and businesses with sound risk management practices and low claims activity should, all things being equal, be able to secure competitive premiums,” he says.
“Because of the diverse nature of the casualty portfolio general trends are difficult to make,” Ansvar’s Richard Wyatt says. “The nature and size of some claims we are seeing show an increase in claims and there is no doubt that any trends the underwriting team see will find their way to the premium line.”