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Baroness Maddock: My Lords, I have been lobbied by people working in this area and one of the issues they have raised with me is whether the Government could ensure that that happens. I do not know whether they have any evidence, but I suggest that they would not raise the issue with me if they did not. I shall certainly ask them and let the Minister know. I hope that it is not the case. If the Government were to insist on such insurance they can say to everyone, "Look, we are doing this and ensuring that this happens". It would be quite difficult to leave the issue for the Health and Safety Executive to deal with.
Baroness Miller of Hendon: My Lords, I begin by declaring an interest. I am a former member of the board and a former patron of the Small Business Bureau and my husband occasionally drafts its responses to consultation papers from the DTI and its agencies. I believe that that declaration is relevant to this important debate, which we should be most grateful to the noble Lord, Lord Harrison, for initiating because of the devastating effect that the current situation with regard to employers' liability insurance is having, particularly on small and medium enterprises.
The report in the Small Business News by the FSB indicates that a quarter of employers have found it difficult, or even impossible, to find employers' liability insurance at any price. Faced with the alternatives of paying prohibitively high premiums or closing down, 8 per cent of those surveyed by the FSB are illegally trading without compulsory cover. One in five of the small firms surveyed has laid off employees or put a freeze on recruitment as a result of escalating premiums.
The figures of the Department for Work and Pensions state that Zurich Insurance, the Association of British Insurers and the British Insurance Brokers Association say that the average increase in EL premiums across all types of risk over 2002 was between 40 and 60 per cent. Norwich Union has estimated its own average increase in EL to be slightly lower, at 30 to 45 per cent.
No matter what source one consults, however, there seems to be unanimity about the reasons, as the noble Lord, Lord Haskel, my noble friend Lord Hunt and various other noble Lords have said, such as the compensation culture. There is another reason, which my noble friend Lady Byford mentioned. First and foremost, as the National Federation of Roofing Contractorsan inherently physically dangerous tradehas forcefully told me, is the failure to distinguish between industrial accidents and industrial diseases.
It is relatively easy for actuaries to forecast the risks of industrial accidents. There is a long historical fact base on which they can rely. However, some industrial diseases are impossible to forecast. I am not just talking about physical diseases that only emerge many years after exposure to working environments that had hitherto been considered to be safe according to what was best practice at the time. I mean, for example, illnesses such as work-related stress which has in recent times been the subject of much litigation.
It is interesting that the courts are taking a firm line. Not only is the onus of proof firmly on the claimants but, to be culpable, the employer must positively be aware of the susceptibility of the employee to the problem. But it is not enough for an employeror, rather, his insurersto win a dubious claim, even one for a physical injury, such as a trip or a fall, or where the employee was wholly or largely to blame for his misfortune. That is because of the huge cost of successfully defending such a claim against a litigant who is being financed by a "no win no fee" lawyer, or who is seduced into making a claim he would previously never have considered by the sort of ambulance-chasing adverts which we see every day on the television or hear on the radio. Indeed, my noble friend Lord Hunt of Wirral mentioned them and called them something terrible.
The fact is that the insurance companies find it easier to settle even untenable claims and pay a sort of Danegeld to the lawyers and their clients rather than stand up and fight, which is too expensive. After all, the insurers simply pass on the cost to their policyholders in the form of ever-increasing premiums.
The compensation culture, which we are rapidly importing from the United States of Americaalthough so far without the monstrous damages that the American juries see fit to awardis a major cause of the insurance crisis. Many noble Lords have mentioned this, including the noble Lord, Lord Laird, my noble friend Lord Hunt, and the noble Lord, Lord Haskel.
Let me add another cause which I have not seen mentioned in any of the financial articles I have read or the many briefs I have seen on this subject, although the National Federation of Roofing Contractors has done extraordinarily well at briefing all of us and has therefore had many mentions today.
The law does not compel insurers to provide employers' liability insurance. So with mergers and takeovers resulting in an ever-decreasing number of insurers, their market monopolyas the noble Lord, Lord Laird, mentionedcoupled with the fact that employers are required by law to buy cover or go out of business, enables insurers to name their own price whether related to the risk or not.
One example is the Law Society's ill-fated professional negligence insurance scheme, under which solicitors were required to hold insurance and to hold it with just one firm. Ultimately a rebellion among solicitors resulted in the scheme being wound down and won them the right to go to the market and buy cover which took into account their individual claims recordsanother point that all speakers have mentioned. Insurers often do not look at a company's claims history. However, there is a lesson to be learned from that debacle.
The National Federation of Roofing Contractors discovered as a result of a survey of its members in which nearly half responded that their members' insurance premiums had increased on average by 161 per cent for employers' liability insurance, 121 per cent for public liability and 71 per cent for professional indemnity insurance. That trade association's response was to negotiate its own co-operative insurance scheme with the insurance industry which, it is hoped, will result in smaller, risk-related premiums for businesses participating in the scheme. "Risk related" in this case means that 12½ per cent of the industry will, they hope, benefit from the fact that, in the past five years, they have paid #9 million in premiums but suffered only #2 million in claims.
In June, the Minister for Work recognised the serious problems to which I referred at the beginning of my remarks. He published a report on the Government's review of compulsory employers' liability insurance. Having laboured for a year, the Government have produced a veritable mouse. What do the Government propose to do? To scrutinise the market? To seek raised service standards? To work with the insurance companies towards fairer risk-related premiums? To reform enforcement against insurance dodgers? To focus on legal costs? To make rehabilitation play a more important role in the compensation systeman issue which many noble Lords have mentioned today? One small ray of light in the report was the recognition that the Government have to engage with insurers to separate long-term occupational disease risks from accident risks, as I mentioned at the beginning.
I can only hope that in her reply to the powerful speech of the noble Lord, Lord Harrison, the Minister will put some flesh on all this government wafflealthough the noble Baroness, Lady Hollis, never uses waffleand announce some practical measures that will prevent small businesses, which are often described as the engine of new employment, from being slowly strangled by regulation and red tapeas my noble friend Lady Byford saideven in an area such as compulsory employers' insurance, which all sides of the House recognise is an essential protection for employees.
Baroness Hollis of Heigham: My Lords, I join all the other speakers in congratulating my noble friend on securing this very timely, well-informed and fascinating debate. I especially thank noble Lords who notified me of their concerns in advance. That is most helpful. I cannot hope to answer all the questions in the time allowed. However, I shall scrutinise the debate subsequently, and I hope that noble Lords will allow me to respond in writing.
Before I talk about the undoubted difficulties that have been shared on the Floor of the House tonight, it is worth reminding ourselves of the reason for compulsory employers' liability insurance. It provides an essential safeguard for all workers, ensuring access
It may be appropriate here to respond to the comment of the noble Baroness, Lady Maddock, which took me by surprise. She said that she had reason to believe that the Government were defaulting on that responsibility in terms of their own contracts. I give the commitment that the noble Baroness asked for. We are working with the Office of Government Commerce to renew our guidance to public sector procurement officers to say exactly what the noble Baroness, Lady Maddock, proposed. Our best understanding is that what she suggested is not the case now. We shall reinforce our guidance. If the noble Baroness has any other evidence to the contrary, I should like to see it as she is quite right that such a situation would be intolerable.
Employers' liability is therefore underpinned by two principles: that the victims of negligence should receive fair compensation for their loss; and that those responsible should fund that compensationa polluter pays principle. Employers' liability spreads that risk across business and the insurance market. In comparison with almost any overseas workers' compensation scheme it has proved sound and cost efficient for over 30 years. However, over the past year in particularperhaps over the past 18 monthsmany businesses have been hard hit by significant price increases in the employers' liability insurance market. The noble Baroness, Lady Byford, identified some tonight. We are committed to playing our part in helping business in this area.
We have been leading a review on employers' liability and we have been working in close partnership with other concerned government departments including the Treasury, the Department of Trade and Industry and the Department for Constitutional Affairs. The department has also been working in close co-operation with the Office of Fair Trading, the Financial Services Authority and our partners outside governmentinsurers, brokers and business representativesall of whom are equally anxious to find shared solutions.
The first stage of the review found that there was no general market failure. There was no pricing collusion and there was sufficient capital to meet market needs. However, we also found that there had been a significant cyclical change in the insurance market and in insurers' pricing policies. This was accelerated and exacerbated by a number of external factors. Our analysis is shared by the OFT and the FSA. Two indicators may illustrate that. The first is to examine past premium prices. Throughout the last cycle of the insurance market insurers sold employers' liability as a loss leaderas has been mentioned by several noble Lords tonightpart of a package of other profitable insurance products. Over this periodsince the early 1990spremiums fell by 37 per cent in real terms compared with wages.
Last year that trend reversed suddenly. The collapse in the stock market and spiralling re-insurance costs combined with steady increases in compensation payments and legal costsall mentioned by your Lordships tonightrendered such pricing "cross-subsidy" unsustainable. Prices rose dramatically. Hindsight suggests that insurers priced short- sightedly in a highly competitive market. They subsidised premiums in a way that proved unsustainable when external factors changed. After many years of cheap cover, companies were suddenly faced with playing "catch-up" in a very short period of time and in an unexpected and uncomfortable way.
I emphasise againas the noble Lord, Lord Hunt of Wirral, saidthat it is still the case that even now the cost to small and medium-sized businesses in this country of employers' liability is still considerably lower than for our European counterparts. My understanding is that on a rough and ready basis EL might nowadays add about #150 to the cost of employing someone on #20,000 a year. In Germany the relevant figure would be not #150 but #450; in France the figure might be #750 and it might be #900 in Italy. It is worth bearing those comparisons in mind.
Having said that, as noble Lords have emphasised tonight, one problem has been the distribution of those increases, which have not fallen evenly across all sectors. Price increases have been concentrated on a limited number of companies. Nearly half of all companies had no price increase or one of less than 20 per cent. However, between 5 per cent and 12 per cent of businesseswe have heard from roofing contractors, agriculture and so onsaw premiums at least double and often increase by several hundred per cent. Those were overwhelmingly small and medium-sized enterprises, mostly in sectors traditionally associated with high accident risks.
Despite the statement by the noble Baroness, Lady Miller, I do not think that there is any evidence that cover is not available. The question is not whether cover is available, but at what price that cover comes. Although there has been no general market failure, we recognise the problem. Our aims, therefore, are: to help those businesses worst affected; to ensure that we have made the changes necessary to prevent a future market failure during the next insurance cycle; and to structure that insurance in a way which helps prevent the accidents in the first place.
My first message is the most difficult. There are no quick fixes here. Short-term action is being taken to ease problems of late renewal notices, the distribution of premium increases, and access to the market. However, at its heart the problem is one of structural pricing. Significant alleviation of that pricing problem in the short term would require price subsidy, which is exactly the approach from the market that created the problems in the first place, and is not an experiment we would wish to see repeated.
At the heart of the problem is an uncomfortable truth. All the evidence suggests that the premiums now levied by insurers are not over-inflated. They reflect the true economic cost of the accidents that continue
The noble Baroness rightly challenged me on what we sought to do, so I shall very briefly mention our aims. We seek to work with insurers to make premiums more risk-based, as noble Lords have called for this evening, rewarding firms with good health and safety practices. Better provision of information by business will also help companies to gain access to the market.
I want to put in some provisos, however. Insurers cannot inspect all small firms, any more than can the HSE without increasing the cost and therefore the premium that has to be laid on to the companies themselves. Nor is it easy to go down the route of having some tidy connection with a no-claims record, because with a small firm one cannot get a statistically significant risk analysis on that basis. If one employs two, three or four people and one person has a fatality or serious accident, that would completely distort one's record. Statistics cannot be worked with like that.
Many small and medium-sized businesses have been rightly concerned about the book rate issue, and therefore there is no incentive for those firms to improve their health and safety records and so reduce the claims. Let us take roofing, an area that has received some of the sharpest rises. The National Federation of Roofing Contractors is working with the DTI quality-assured national warranty scheme, which we hope will lead to a reduction in premiums of up to 30 per cent. That would give a subset of the book rate based around a trade association where its members meet assured quality standards. That may be a sensible and helpful way forward.
We are actively pursuing the issue of renewal notice periods with the insurance industry. We welcome the joint guidance by the ABI and the British Insurance Brokers Association. Also, we are searching for creative solutions to tackle the legal costs of processing claims. As noble Lords have rightly said, those are up by 40 per cent. We also seek, as urged by my noble friend Lord Haskel and the noble Lord, Lord Hunt, to see whether we can in some cases step outside the confrontational legal process to resolve the most straightforward claims in a simple and rapid way. As the noble Lord, Lord Laird, requested, we are also looking at the disclosure of information by professional advisers. That may also be helpful in this respect.
I was pressed on whether we could assess the case for separating accident risk from long-term industrial diseases. I understand the problem, but we should not forget that we cannot ask, nor should we ask, government to be the insurer of last resort for long-term diseases. Does any noble Lord tell me that firms would seriously engage in reducing their workers' exposure to asbestos if they believed that ultimately
We are also introducing a range of proposals to improve enforcement and to police the cowboy companies mentioned. Critically, we need to change the culture of rehabilitation. As many noble Lords saidand the noble Lord, Lord Hunt, has much more experience of this than Icompared with Europe we have a good record in health and safety, but we have a poor record in terms of rehabilitation. It is important to note the evidence; for example, the Zurich rehabilitation scheme has cut compensation costs by 7 to 10 per cent and ABI believes that even greater savings are to be made.
The number of claims in employment liability has fallen by 16 per cent over three years. However, the cost of those claims has risen in double-digit figures. At the core is the need to use health and safety to analyse risk management to improve standards at work on the one hand, while on the other engaging in rehabilitation. If we can do that, together with working with trade associations so that they can be rewarded for their best practices, we may begin together to address some of the problems.
No one has a magic bullet but I hope that our aims are clear. They are to help business; to prevent a future market failure; and to structure this insurance in a way that prevents the accidents in the first place. We are working with our stakeholders, insurers, brokers, trade associations, businesses and unions in that direction.
It has been a busy summer. When we publish a further report in the autumn, we are determined that not only will it describe a serious programme of work that is being undertaken collectively, but it will also be a shared statement of action and intent from government and stakeholders alike.
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