Straight talking

Earlier this month, Zurich promised to renew all its existing employers' liability (EL) policies with an average increase in premiums of 40%-60%. Brokers representing Zurich's 20,000 commercial clients in the UK heaved a sigh of relief. After all, some clients had not been deemed worthy of even the offer of renewal in the past three months and the fortunate ones faced premium hikes of up to 1,000%.

AXA reacted to the announcement by saying that it could not guarantee the renewal of its EL policies.

"We have to look at why EL is in place in the first place. EL is there to protect the employees.

"If we find incidents where basic health and safety has not been maintained, I don't think we are doing the right thing if we are guaranteeing them cover for EL," says AXA chief executive Peter Hubbard.

It is typical of the AXA boss to take a firm, and not always popular, line on such a sensitive topic. In an industry which has traditionally punched below its weight when the important topics are discussed in public, Hubbard is prepared to speak his mind and speak plainly, without the aid of public relations fog.

Warming to his task, Hubbard says there are moral and ethical reasons for not supporting companies that are injuring and, in the case of the construction industry, killing their employees through lax safety.

Asked what he feels about offering renewals, Hubbard says that the underwriter, and in many cases the insured, must understand the risks of injury and illness.

"We need to ask SMEs difficult questions, but with clarity," exhorts Hubbard.

"We need to say what is in and what is out: what is acceptable and what is not."

He also advocates more active involvement in risk management. AXA has a service called Risk Stop, which is essentially a list of approved risk managers who assess risks so that EL insurance can be offered. Is it free? No. Hubbard explains that losses on the EL book are horrendous and money made on risk management inspection barely dents those losses.

While Hubbard advocates active risk management by insurers, he warns: "There is a danger that we become the safety police instead of the HSE."

He adds: "One of the short-term measures that can be taken is to increase funding for the HSE."

Many critics say it is underfunding of the HSE and environmental health departments that has led to worsening safety standards and the current EL crisis.

"In order to work out what some of the solutions to the current crisis might be, we have to understand why it arose," says Hubbard.

Awarded costs

"The cost of awards has risen dramatically. We have calculated that we have suffered a 15% year-on-year rise in awarded costs over the last three years," he says. That beats that 12% year-on-year rise quoted in older ABI research.

"The Ogden tables changes gave us a bill of £20m overnight," says Hubbard. He adds that NHS bills to AXA and other insurers are rising. Costs have trebled since 1999 and are set to treble again soon.

The cost of the legal system is one of Hubbard's biggest bugbears.

"We reckon 40% of claims costs can be attributed to the legal system and in claims of under £5,000, claimants are receiving 5% of the total cost. It is not fair," he says.

Why has the crisis happened now? Hubbard says it is a combination of two things. One is that investment returns have collapsed.

"Never has there been more pressure on underwriters to contribute to profits," he says. The second factor is the collapse in capacity caused by 11 September.

"We need to start explaining to clients why we are here," he says.

Hubbard explains that it is important to reach a consensus on what has happened with others in the supply chain. It could be more difficult than he expects. Brokers accuse insurers of cashing in on the hard market.

"We're not lining our pockets," replies Hubbard when confronted with the accusation. He explains that even if you consider EL as a loss leader to write more commercial, combined policies, the economics do not work out.

"Say a loaf of bread is used as a loss leader by a retailer to get you in the show, when you walk out of the door it represents a very small fraction of your shop," says Hubbard, "EL is one of the biggest costs of the commercial combined basket."

More mediation

Despite the smart analogy explaining the economics of why insurers are not fleecing the market, it will be difficult to convince sceptical brokers.

Long-term fixes will be difficult to achieve. Hubbard says that the current legal system needs toughening up.

"It's too adversarial. We need to bring in more mediation and enshrine it in the culture," he says.

If the will is there it can be done, says Hubbard. "I was in Australia earlier this year and witnessed a collective will to bring in legislation to cap liability costs in five months. The crisis started around the turn of the year and on 1 May, New South Wales implemented legislation," he says.

While much attention has been focused on EL, Hubbard says that liability is a big issue within the motor market. He adds that if we are not careful, we will miss an opportunity to fix it.

"Personal injury now represents 40% of claims cost in motor," says Hubbard. "The claims frequency is steady but the figure was 30% recently," he says. It seems that the legal and award costs are rising fast.

AXA is attempting to combat the problems of personal injury in motor by forming closer links with its sister company, healthcare provider PPP Healthcare.

"If we form close links with a supplier of rehabilitation, we can improve efficiency and analyse performance and trends more effectively," he says. AXA Insurance has to pay market rates to PPP Healthcare for its services. And these costs are rising dramatically as the costs of medicine and medical technology increase.

Service providers

Hubbard reckons that the FSA has a role to play in resolving the crisis. So far, the FSA has stayed silent on the liability issue.

"There is lot the FSA can do. It has responsibility for protecting consumers and maintaining market stability," says Hubbard.

"There is no doubt that consumers are being hit by the current crisis, insofar as the stability of service providers is being threatened and, while there are still markets for EL, a close watch must be maintained.

Agree with Hubbard or not, you have to admire him. So far, there have been few in the industry willing to talk so candidly in public about liability and how the crisis might be solved.