Without a trace: ELTO failing to deliver

The Employers’ Liability Tracing Office (ELTO) was created more than a year ago. This might seem enough time to set up a 100% smooth-running operation. In fact, insurers are supplying the data required by ELTO in only four out of 10 instances.

The job of extracting this information, in 80% of cases, is down to intermediaries, meaning the success of ELTO rests as much in the hands of brokers as insurers. So what’s hindering data collection, and what happens if the industry continues failing to deliver? The consequences are considerable, including severe FSA penalties.

Update

ELTO was created in April 2011 to allow people suffering injury or illness related to a previous job – such as pleural plaques disease following exposure to asbestos – to track down their former employer’s insurer in order to claim compensation. The scheme has not been without success. ELTO director Ashton West says the office’s database, which has to record all new and renewed employers’ liability policies under FSA regulations, has “well in excess of 5 million” records. Equally encouragingly, “99% of employers’ liability insurers” are members, and around 4,000 users have registered – primarily solicitors, as would be expected.

West says: “Our target is 100% of new policies and renewals, and we are also encouraging insurers to add historic records,” though there is no obligation to do the latter. The FSA has given insurers until April 2013 to upload all new or renewed policies from April 2011 onwards, as well as policies from before that date where new claims have been made against them. West won’t be drawn on how close to 100% the database is – “No one is non-compliant yet so we don’t know,” he says.

In fact, Biba technical services manager Steve Foulsham believes that data collection efforts are going so badly that “the success rate of insurers supplying ELTO information is only 40%”.

Certainly, the FSA understands that the data collection is taking longer than originally envisaged, because in March 2012 it extended the original deadline for insurers to be fully compliant from 1 April 2012 to 1 April 2013. Foulsham says: “The FSA have realised how difficult this is and they may even extend the deadline again.”

Headaches

The key difficulty is that a particular piece of information is proving tough to extract from customers: the Employers’ Reference Number (ERN), also known as the PAYE reference number, which HMRC issues to all employers.

Towergate head of underwriting Peter Hollingdale says: “At a big company, a secretary can get this number with a click of the mouse.” But, he says, it is difficult getting smaller firms to hand over ERNs, particularly businesses of five staff or below. “These are businesses that barely give much time to insurance as it is, firms that are already struggling with red tape. Just take a look in any builder’s van and see how much paperwork they have lying around.”

He adds that small companies “see this number as part of their tax information, so they are not comfortable with sharing it and don’t understand why they suddenly have to.”

Someone needs to explain to these people why ELTO has been set up and how it could protect them”

Steve Foulsham, Biba

With 80% of commercial business transacted via intermediaries, brokers are at the sharp end of collecting ERNs. A key problem they face is that the smaller the business, the more likely it is that communication happens electronically. “There’s not much human interaction,” says Hollingdale, “so there’s not the opportunity for the broker to explain.” Compounding this is the fact that some broker software has yet to be amended in order to collect ERNs.

Foulsham say that for ERNs to be collected, an education process is needed. “Businesses may be suspicious of their brokers and insurers, so the message now needs to come from organisations like accountants associations and the Federation of Small Businesses. Someone needs to explain to these people why ELTO has been set up and how it could protect them.”

Why comply?

It could be argued that there is little incentive for broker and insurers to collect ERNs. “It’s an incredibly expensive process,” says Hollingdale, “and with employer’s liability insurance notoriously unprofitable as it is, the costs can outweigh the profits.”

But he insists that it is in the industry’s interests to create the database. “There is a moral obligation on the industry to do this,” he says. “There are claims coming in on policies that predate electronic records, so it means a huge amount of manual work searching through dusty files in warehouses. But now we have the opportunity to start fresh with a central register – this is absolutely the right solution.”

These manual searches are costly too, of course, but the industry could face more damaging costs if ELTO fails. Foulsham warns that the alternative would be for the government to set up a “liability bureau” to look after victims who could not be compensated. He says there would be a levy on the industry to pay for running the bureau, similar to the Motor Insurers’ Bureau levy. “If brokers and insurers had to support such a bureau, the cost of employers’ liability insurance would increase significantly.” The knock-on effects, he says, could be small companies going out of business and, as a result, increased unemployment.

We have the opportunity to start fresh with a central register – this is absolutely the right solution”

Peter Hollingdale, Towergate

There is a final incentive for meeting ELTO requirements: the threat of severe FSA sanctions. The FSA has said it will apply the sanctions set out in its Decision Procedure and Penalties Manual and Enforcement Guide to insurers who don’t comply. Under these rules, says an FSA spokesman, “we would first talk to firms to discuss why they are not complying and how this might be addressed, but if there are serious or repeated failures the penalties can go from public censure, bans and fines to closing companies down.”

The enforcement guide makes this clear: “In the majority of cases involving non-submission of reports or repeated failure to submit complete reports on time, the FSA considers that it will be appropriate to seek to cancel the firm’s permission. Where the FSA does not cancel a permission, it may take action for a financial penalty against a firm that submits a report after the due date.”

As for how strictly these procedures will be applied, West says: “If you look at the FSA’s rules around auditing, there is a requirement for insurers to be externally audited on their compliance with ELTO and to produce a declaration by directors stating that they are compliant or not, and if not, why not. This shows just how serious the FSA is about ELTO.”

The very real threat of sanctions, combined with the financial and moral arguments, make ELTO’s success look likely. It just might take longer than hoped. Foulsham says: “If you look at the Motor Insurers’ Database, it took a while to get there but now everyone accepts that drivers’ policy details go on there as a matter of course. In five years’ time hopefully we will be in equally good shape with ELTO.”