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17 Dec 2002 : Column 815continued
The Parliamentary Under-Secretary of State for Work and Pensions (Malcolm Wicks): I congratulate the hon. Member for Twickenham (Dr. Cable) on securing the debate on a subject of growing importance. Employers liability insurance is an essential safeguard for those in work. It provides a means of compensation for those who are injured or made ill at work through the fault of their employer. That measure is well established and has been on the statute book for more than 30 years. The Employers' Liability (Compulsory Insurance) Act 1969 requires employers to insure those liabilities.
The debate is timely because it follows a period of great difficulty for many employers, as the hon. Gentleman said, in securing the insurance, and within a week of the Government's commencing a significant review of the operation of employers liability insurance. I know that hon. Members will not be disappointed if I do not prejudge the outcome of the review and discuss recommendations that have not yet been formulated.
There are two sorts of workplace compensation in the United Kingdomemployers liability compulsory insurance, which we are discussing, albeit briefly, this evening, and state benefits, principally industrial injuries disability benefit. The first is fault-based and the state system is no-fault-based.
An employee who is injured or contracts a disease or has been made ill through work can apply for state benefits. However, an employee who believes that the condition arises at least in part from the employer's negligence has the right to sue. If successful, the compensation will be paid from the employer's insurer, with the state recovering from the insurer any moneys paid out in benefit.
Employers liability compulsory insurance, which is an essential safeguard, requires employers to insure against such liabilities. It is based on two fundamental principles, which the Government continue to stand by: the right of employees to access to justice and the responsibility of employers to fund the cost of their negligence. In a sense, it is the principle of Xpolluter pays."
Although it is compulsory for employers to have the insurance, it is not compulsory for insurers to provide it. There is therefore a need to ensure an effective and affordable market. We are part of the way through the renewal year, and it is therefore hard to be precise about the scale of difficulties experienced in the market this year. The hon. Gentleman has reviewed the evidence in his own way.
Industry sources suggest that, on average, employment liability premiums have increased by about 40 per cent. In some sectors, those increases have been much more acute with reported premium increases of several hundred per cent. That has especially affected sectors that have been perceived as having higher health and safety risks, such as the construction industry, and has been felt in particular by small and medium-sized businesses.
The Government have been monitoring the situation and working closely with trade associations and representatives of insurers and brokers. Our experience suggests that the problems have been largely ones of cost of cover rather than complete unavailability, but it is certainly true that for many businesses affordable cover has become much more difficult to find this year.
Much has been said about the number of firms going out of business or trading uninsured. Here, too, the accuracy of figures is difficult to assess. I have seen reports in a survey commissioned by AXA of large numbers of companies trading uninsured, but the scale of those figures, based on the extrapolation of a much smaller survey, contrasts with our own enforcement evidence and information from other stakeholders.
The Health and Safety Executive enforces employers liability compulsory insurance. Traditionally, that has been a small part of the executive's work, because compliance has been high, but it is important to emphasise that employment liability insurance has been cheap in the United Kingdomabout 0.25 per cent. of total payroll compared with 1.5 to 2.5 per cent. for compensation schemes overseas. Indeed, until recently some insurers were selling employment liability insurance as a loss leaderan attractive part of a wider package of other insurance such as motor cover.
The latest Health and Safety Executive figures suggest that compliance remains high. Between April and September this year, its workplace contact officers contacted 4,366 small and medium-sized businesses, but those contacts required statutory action in just 14 cases. The work of the executive's general inspectors resulted in a further 30 such incidents over the same period.
On average, there have been five prosecutions a year for the past five years, and four so far this year. However, a British Insurance Brokers Association survey suggested that several hundred firms had either gone out of business, citing insurance costs as the reason for the company failure, or were trading uninsured. Trade associations have reported similar figures.
While we by no means accept that there has been a general market failure, we are not complacent about the real difficulties faced by business in tough trading conditions; nor are we complacent about compliance. I must be clear: it is totally unacceptable for any firm to trade uninsured. The penalties are highup to #2,500 a day for failure to insurebut, beyond that, trading in such a manner removes the protection to which employees have a right, throws back the costs of that firm's negligence to the general taxpayer and creates an illegal commercial advantage over other competitors that have decided to act responsiblythe great majority, of course.
I hope the House agrees that, as we endeavour to work through the problems in the employer liability market, we must also be firm about enforcement of the existing law. Stakeholders have suggested a number of factors that may explain this year's difficulties. The hon. Gentleman also outlined his own analysis. May I outline ours?
The traditionally cyclical insurance market has been Xhardening"a process exacerbated by the consequences of the attacks on the World Trade Centre. That has led insurers to look much more closely at the extent to which claims are being covered by underwriting income. Employment liability has traditionally been written at an underwriting loss. Premium income in 2001 was about #1.1 billion while claims totalled over #1.5 billion. Such losses have been offset by returns from investing the premium income on the stock market, so the sharp downturn in stock market performance has compounded the problem, we believe.
The collapse of two leading insurers in this market has tightened the market and caused those remaining to look hard at the risks of their business. The result has been a sharp transition in premium prices as the market has adjusted from its traditionally cheap basis to one that now bears the commercial cost. That has come with little warning, and consequently there has been little opportunity for businesses to adjust to these new and sharply imposed costs. Insurers and brokers have suggested that this year represents a market correction. They do not expect premium increases to be as acute next year, though conditions will remain tough. We will continue to monitor the situation.
There are no short-term fixes, but this year's difficulties have also served to highlight a number of underlying or longer-term questions about the system. The Government take concerns from stakeholders seriously when we hear them. We want to ensure that our system of workplace compensation is efficient, sustainable and fair. For that reason, the pre-Budget report signalled our intention to review the operation of employers liability insurance. The start of the review and its terms of reference were announced in a statement to the House last week by my right hon. Friend the Minister for Work.
We are working closely with those responsible for the review by the Office of Fair Trading. The two exercises are different. The OFT study will encompass public product liability, professional and employers liability insurance, but it will not examine employer liability in the same depth or consider the same range of issues as our inquiry will. The OFT's work will be wider ranging than our review and will complement it. The OFT has discussed its draft terms of reference with our Department, and will remain in close contact with us and other key Departments.
I understand the point about the voluntary sector. We have already discussed this issue with our colleagues in the Home Office, which is the lead Department for that sector. Our review is about employer liability rather than general public liability, but we take on board the important issue about the voluntary sector.
We need to be careful. The system that we have in place has worked well for many years. It has provided cover for employees and, historically, has not been a burdensome cost on employers. The speed of transition this year has been painful, but UK costs remain competitive with those abroad. Many overseas systems, which are also facing difficulties, are beginning to adopt some of the characteristics of the UK approach. However, as I have emphasised, it is clear that aspects of the present system that have been raised by stakeholders and by the hon. Gentleman are well worth examining. A key question is whether employer liability is commercially sustainable in the longer term.
We also need to examine the extent to which the #2 billion per annum going into workplace compensation actively contributes to effective outcomes. Do those costs give employers the incentive to manage health and safety more effectively? Do insurers discriminate between good and bad performers? Does the compensation that is paid do all that it might properly to rehabilitate those affected back into work, returning them to economic and social activity? Those are all important questions.