Memorandum by the Association of British
Insurers (HSE 28)
1. INTRODUCTION
1.1 The Committee has requested a memorandum
to be submitted from the Association of British Insurers on this
topic. ABI represents over 440 insurance companies which, between
them, account for over 95 per cent of UK insurance company business.
1.2 The Committee is particularly interested
in the issue of whether the insurance industry can impact on health
and safety in order to penalise bad performance and reward good
performance. It was suggested to the Committee that this could
be done in one of two ways:
(a) by providing financial incentives to
improve health and safety standards by the adjustment of insurance
premia; and
(b) by providing compensation for employees
who suffer injury or harm through work.
1.3 Accordingly, this memorandum will deal
with these issues.
2. INSURERS'
ROLE IN
HEALTH, SAFETY
AND COMPENSATION
2.1 Health and safety at work is of primary
concern to employers' liability, private medical and permanent
health insurers. Of these, employers' liability insurance is the
most significant product in relation to workplace safety. It is
compulsory for all businesses to take out this insurance, and
has been since 1972. The cover indeminifies the employer in respect
of legal liability to pay damages for workplace injury. Personal
accident and permanent health insurance are not compulsory and
tend to pay set benefits if a worker is injured or unable to work.
Private medical insurance can pay for private hospital treatment
if required by an employee.
2.2 Many insurers also offer safety and
risk consultation services which can be used by a client firm
to check whether they are compliant with all health and safety
regulations and assist in their development of a health and safety
strategy.
2.3 Insurers' role in the health and safety
system is widely regarded as complementary to the role of HSE.
International comparisons suggest the UK has performed well in
the health and safety area over the past 25 years and insurers'
contribution to this relative success should not be underestimated.
3. HOW
INSURERS PRICE
THEIR PRODUCTS
3.1 Risk pricing is a commercial tool, used
by insurers to ensure that they receive enough premium to cover
the claims they are likely to have to pay out. It operates on
a sliding scale of standards which allocates higher premiums to
those who present higher risk. This process takes place in a competitive
business environment.
3.2 Insurance premiums can best be used
to effect business behaviour if those premiums represent a significant
enough element of business running cost. This may not always be
the case. Employers' liability premiums can be modest in relation
to the overall costs of running a business—a manufacturer
with a turnover of £4-£5 million might pay a premium
of around £3,000 per year (1997). It is therefore possible
that it would cost more to change business practice than that
change would be worth in premium reductions.
3.3 It must also be emphasised that in the
business environment, risk is not the only factor insurers have
to consider when deciding what prices to charge in order to cover
their costs and make a profit. Different insurance markets behave
in different ways when setting premium rates. The reasons for
this can relate to:
— The size of the business being insured;
— The influence of the market cycle
for the type of insurer's business in question; and
— The way risk is assessed for the
type of business involved.
3.4 The following paragraphs analyse the
way these reasons impact on premium levels:
Size of Business
3.5 The larger the business insured, the
more comprehensive its claims history and internal risk management
mechanism are likely to be. This makes it easier for insurers
to quantify the risks presented by an individual client, and larger
businesses are more likely to be individually rated.
3.6 Small businesses are less liklely to
have risk management programmes, and less likely to have experienced
a broad range of claims in the past. Were inurers to invest in
full risk assessment for individual small businesses, the administrative
cost of doing so would mean a large increase in premiums for most
firms. This means employers' liability insurers use "book
ratings" for businesses of the same type, based on historic
data: so, within certain parameters, all hairdressers, for example,
will be assumed to present the same level of health and safety
risk. It may not also make commercial sense for insurers to provide
small businesses with only one type of insurance. Small firms
may be sold an EL policy as part of a package which also includes
property insurance, public and product liability and cover for
interruption of business.
Risk Assessment
3.7 The factors which govern what losses
different types of business are likely to suffer are not always
the same, and insurers have to take this into account when assessing
risks. The chances of a building catching fire, for example, are
closely related to how well the premises is physically protected
(physical hazard). But insurers also have to take into account
how responsible the owner of the premises is about observing management
practices to help minimise fire risk (moral hazard). Physical
protection measures are relatively easy to identify and quantify,
but assessing the likely impact of moral hazard on claims potential
is more difficult.
3.8 Some insurances find it more difficult
to predict when a claim will occur or how much it is likely to
cost. The risks being underwritten are less immediate; they have
a longer "tail", in that incidents giving rise to claims
on the policy can take longer to come to light. Employers' liability
claims often arise in relation to incidents which occurred a long
time in the past. Insurers' results and premiums in this market
are therefore heavily influenced by past claims as well as current
exposure to risk.
The Market Cycle
3.9 Because insurers compete with each other
for business, the market cycle can have a significant effect on
premiums. Even if it means taking a loss in a particular year,
and accepting a price which does not reflect the risk, an insurer
might choose to offer low premiums in order to attract business
or to hold on to clients who might otherwise go to another insurer.
Competition also means that insurance is not well suited to maintaining
minimum standards, there is always an incentive for companies
who wish to gain market strength to attract businesses by countenancing
lower standards, and charging lower premiums.
4. FINANCIAL
INCENTIVES
4.1 Having made these points, however, it
should be emphasised that some underwriters do have freedom to
load (increase) liability insurance premiums or offer discounts
depending on factors like the management controls of the client
and the risk profile of the business in question. The premium
loading can be as much as 50 per cent and discounts as much as
20 per cent from the book rate, depending on an assessment made
by the insurer. An example of one insurer's Risk Assessment Weighting
is attached as Enclosure B. This clearly demonstrates that, subject
to the commercial realities outlined above, insurers can and do
offer significant financial incentives to improve performance
and penalties to punish poor performance.
5. CONCLUSIONS
5.1 Risk is not the only factor insurers
have to consider when deciding what price to charge in order to
cover their cost and make a profit.
5.2 Insurance premiums can best be used
to effect business behaviour if those premiums represent a significant
enough element of business running costs.
5.3 Insurance is only one element of risk
management: better risk management by business will have many
beneficial effects including improving health and safety. Many
insurers provide risk management services to assist businesses
in this area.
5.4 Insurers continue to develop risk pricing
techniques which include providing financial incentives to improve
health and safety and financial penalties where performance is
poor.
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