Edition 09/2001

This is a Fine Situation We Have Got Ourselves Into

There have been countless stories in the various media outlets regarding the difficulty in being able to obtain liability insurance and the dramatically increased cost of that cover where it can be obtained.  Reports of increases of several hundred percent have not been unusual and we have heard of sporting and community events being cancelled due to lack of insurance supply or inability to pay the premium.

This is obviously of great concern and the problem is not only from the financial perspective.   Even more important is the fact that events and activities that are so beneficial to Australian society are at risk of disappearing.  Sport, recreational activities and other community events that provide such positive returns from the aspects of health and community well being, as well as personal development of the individual, are feeling the pain.  Activities that have become part of Australian tradition and have made valuable contributions to our reputation as a great sporting nation may be lost.

So what has brought about this situation that to the general public almost seems to have appeared overnight?  Certainly insurance premiums for liability protection have spiralled.  Various organisations are conducting research in an attempt to better quantify the extent of these increases, further investigate the movements in the industry and to review what has happened in this regard in other parts of the world. This will all be very interesting, but the fact is that increases in insurance premium for liability insurance is the effect of other factors; it is identifying those factors that have caused the premium increases and taking remedial action on those fronts that is critical. 

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Insurance companies are commercial operations, owned by shareholders who demand return on their investment.  The underwriting losses for the Australian Insurance Industry as advised by the Insurance Council of Australia were $898 million in 1998, $1,473 million in 1999 and $1,783 million in 2000.  In 2000 Public Liability insurance produced a loss of $355 million and Professional Indemnity insurance produced a loss of $123 million.

Whilst administration and reinsurance expenses contribute to an insurers underwriting result, the cost of claims is the critical factor that has the most effect on the setting of premium rates.  From the above figures it is perhaps not surprising that liability premiums have increased to the extent they have.  It also needs to be understood that when setting premiums an insurer will account for claims incurred to date and will also consider trends in regard to the number and quantum of claims, predicting the effect this may have on results in future policy periods.  Trends in litigation provide no incentive for insurers to be optimistic in predicting future claims.  One must also consider that legal judgments on incidents that occur now may be made many years into the future.  Who would like to predict what awards the courts will be making in 10 or 15 years time, remembering that a minor may have many years after the event in which to instigate legal action.

So whilst we would like to point the finger of blame at the insurance companies for these dramatic increases in liability premium, perhaps they do have some justification for the price rises.  If their premium is largely based on claims incurred it seems logical that the only sustainable means to reduce premiums is to reduce either the number of claims or the quantum of claims - or better still, both.

  Continued ....