Liability insurance market

3 June 2003

The UK liability insurance markets could work better, an OFT fact-finding study has found.

The five-month fact-finding study was undertaken in the light of concerns over sharp and often sudden increases in premiums, reported reductions in underwriting capacity and increases in the excesses borne by policy-holders.

Download The UK liability insurance market - summary of key findings (pdf file 288 kb).

Download The UK liability insurance market - the full length report (pdf file 457 kb).

Download the supplemental report An analysis of current problems in the UK liability insurance market (pdf file 787 kb).

Findings

Evidence from the study suggests that in 2002 average premiums for employers' liability insurance rose by 50 per cent, public and product liability by 30 to 40 per cent and professional indemnity by 30 to 60 per cent. This follows a six-year period during which liability insurance premiums fell in real terms by about 14 per cent.

The study found no evidence of a widespread lack of availability of liability insurance cover. However, there appear to be problems obtaining cover for asbestos-related risk and for professional indemnity insurance for independent financial advisers.

The report notes a number of changes which could be made to improve the current situation. Some of these are already in progress. These include:

• lengthened renewal periods – many businesses expressed concern about the limited time they were given to renew their policy or shop around for alternative cover (typically one or two weeks). The Association of British Insurers (ABI) and British Insurance Brokers Association (BIBA) are working on a minimum period of notice of renewal terms which the OFT believes should be at least 21 days
• initiatives to improve information and risk management – for example, the ABI is working with trade associations to see whether good health and safety practices by businesses can be rewarded. It is also considering providing 'best practice' guidance for liability insurance customers (particularly for employers' liability insurance) in the same way that the industry has set standards for customers on issues such as protection against fire and theft
• increasing the use of rehabilitation – this should help to reduce costs by increasing a claimant's chance of securing employment
• improved data collection – to allow claims to be better forecast and to show the differential impact between different classes of risk.

While changes to costs clearly have had an upward impact on premiums, they cannot alone account for the large increases experienced over the last year. Changes in the competitive environment such as major insolvencies and a reduction in capacity – leading to short-term upward pressure on premiums – appear to be contributory factors.

The OFT will continue to keep liability insurance markets under review. In particular, the OFT will look again at:

• premiums during late 2004 by which time, assuming there is no single significant effect, like the World Trade Centre, premiums should have adjusted to take account of cost increases. This also gives time for the various initiatives we have highlighted to be taken forward. If the markets are not working better at that point we will need to consider whether further action is appropriate
• the issue of legal costs to see whether there is any further work which OFT needs to undertake.

In the light of the study's findings, the OFT recommends that businesses:

• check renewal dates for policies and request information on renewing policies as early as possible
• shop around for both brokers and insurers
• examine whether health and safety practices can be improved
• ask for advice from brokers and trade associations on how to improve systems and present their risk most effectively to an insurer.

See press release.

The Department for Work and Pensions (DWP) has also published a report on employers' liability insurance. Copies of the DWP report and press release are available on the DWP website.

Background

The OFT announced its fact-finding study into the UK liability insurance market on 10 December 2002.

The OFT consulted a wide variety of interested parties, including insurers, policy-holders, brokers, the ABI, trade organisations and other Government departments.

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