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Employers Liability Insurance

Volume 406: debated on Wednesday 11 June 2003

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11 am

Over the past six months I have become increasingly aware of the current insurance crisis that is affecting small and medium-sized businesses and consumers in my constituency. The businesses that are most directly affected are those that operate in the construction industry—in particular, specialist contractors of the type that consumers and other small businesses use regularly, such as roofing contractors, who mend, repair and replace our roofs, window fitters, scaffolders and painters and decorators.

Back in June 2002, business men in my constituency brought to my attention the fact that their insurance premiums were increasing substantially, and to such an extent that on a number of occasions the businesses concerned wondered whether they could continue to trade. At the time, the National Specialist Contractors Council undertook a survey of contractors from its 25 specialist trade associations to identify the extent and impact of the increase in premiums. The results were astounding. More than 600 contractors who belonged to NSCC trade associations responded to the survey. They were mainly from the high-risk trades, such as roofing, steeplejacking and scaffolding. In the case of roofers, 48.8 per cent. of the members of the National Federation of Roofing Contractors responded, demonstrating that not just a problem but a crisis was looming.

In my constituency, S. J. Wilson (Roofing Contractors), a domestic contractor, paid an insurance premium of £3,800 in 2001. In 2002, that rose to £15,000, and this year, S. J. Wilson was quoted £78,000, plus 5 per cent. insurance premium tax. After spending two weeks negotiating, the company managed to reduce the premium to £40,000. That meant that the premium had increased by almost 1,250 per cent., which was a cost that could not have been foreseen and therefore anticipated, and which could not be incorporated within the cost or price of any jobs already committed to. Another company in my constituency is a one-man band that turns over £50,000 a year. This year that man is paying £7,000 for his insurance cover, so his insurance premium is 14 per cent. of his turnover.

In the short term, the effect on such companies can be quite dramatic. Insurers are informing such contractors that in order to reduce their premium they must reduce their payroll. That ultimately means laying off skilled workers, which is something that no MP wishes to see in their constituency and which is surely not a good solution to problems of improving the efficiency of a local business or, in the case of the domestic sector, continuing to offer a good service to the general public.

Also in my constituency is L & M Roofing Company. Not only has the company's premium been increased by £10,000, but the policy now includes exclusions that restrict it from doing certain types of activity. For instance, roofing contractors have been required to carry out their work without using a naked flame. Such a restriction is impossible for many flat roofing contractors and mastic asphalters and therefore not a practical solution at all.

During the early stages of the crisis, those suffering were mainly small businesses of the type that I have mentioned, but it is now the turn of consumers to realise what the effects of the increase in premiums are. Initially, the consumer who required a roof to be retiled, a garage to be re-waterproofed, the external face of their house to be painted or new windows to be fitted found that reputable contractors had to increase costs to account for the rise in insurance premiums. That in turn has increased the likelihood that the consumer will turn to the black economy.

However, we all know the problems of using contractors who operate in the black economy. Not only do they have the advantage of evading VAT, but they now operate without insurance, or with inappropriate insurance, which reduces their premiums and therefore their costs. That leaves the consumer or householder in a vulnerable position. By using an uninsured or inappropriately insured contractor, the householder himself may become liable in the event of an accident, which could result in a personal disaster. I worry that that fact is not sufficiently well known among the general public.

The workmanship carried out by contractors who operate in the black economy is notoriously of a poorer standard and quality than that carried out by a reputable contractor. Unfortunately, with the insurance crisis encouraging or even forcing people in my constituency to use contractors that they would not otherwise use, their homes—the most important material assets of all families—are now more at risk.

On learning of the situation, I was most disappointed to find that insurers often do not differentiate between good and bad contractors. A good contractor who looks after his employees, runs an efficient business, implements good health and safety practices and does his best to trade as an honest and reputable business finds that his efforts are not recognised. Often, insurers reward the good contractor by offering a similar premium to the contractor who cares little for his work force and his clients, has no interest in health and safety and makes no attempt to run a sound business.

What can be done about this crisis now? In the past few days, the Department for Work and Pensions has published the main Government review of employers liability insurance, described on page 4 as an interim report. It sets out key findings and the steps that the Government are planning to take. Likewise, the Office of Fair Trading has published its parallel review of the UK's liability insurance market.

The Department for Work and Pensions review has a ministerial foreword, signed by Ministers from the Lord Chancellor's Department, the Treasury, the Department for Work and Pensions and the Department of Trade and Industry. It is a declaration for swift progress in developing a programme for tackling the long-term issues identified in the review. A further report is promised in the autumn to show progress and any further steps that the Government intend to take.

We can all appreciate the reasons for the Government's cautious approach to the crisis and the need for not aggravating an already serious situation through ill-thought-out changes to legislation and attempts to alter the market's operations. However, some of the options for change mentioned in the Department for Work and Pensions review can be progressed quickly; they include, for example, the Government's undertaking to reform enforcement arrangements on contractors to hold employers liability insurance.

Present reliance on the Health and Safety Executive's inspectors whenever they visit a site to check that all contractors and subcontractors on that site hold valid employers liability insurance cover is clearly inadequate. The proposal made in the Department for Work and Pensions review for an active enforcement system based on an annual notification of policies cross-checked against an enforcement database may only work for contractors already trading legally.

It is that percentage operating in the black economy, which is so hard to quantify and affects the domestic market, that worries me. Can we use some simple system of recognition to inform domestic users whom they are dealing with when they call for reliable help when repairing or renovating their homes? I suggest to the Minister that this issue and the holding of employers liability insurance by all contractors, whatever their size, go hand in hand.

I gladly note the recognition in the Department for Work and Pensions review that the most suitable way to tackle employers liability costs is to reduce the number of workplace accidents and injuries and to link that to the forthcoming strategic plan of the Health and Safety Commission. I also note the support given by the Association of British Insurers in its press release of 3 June for businesses to be given credit for good health and safety practice leading to affordable premiums.

I trust that the Minister will confirm today the Government's support for the ABI's declared policy, because the issue of lower premiums in return for sound health, safety and risk management is something that can be achieved now, given sufficient determination by insurers and insured alike to address the issue.

There are two issues in the Department for Work and Pensions review that seem to be either inadequately covered or plainly misleading and on which I ask the Minister to comment. The first concerns the point that, until 1999, employers liability insurance premiums were low. That is factually true. However, it was also the preferred policy of insurers to secure from businesses other forms of insurance business and to invest the proceedings in the stock market to cover against losses. That policy was a disaster in the making and was in no way the fault or responsibility of the insured.

The second point concerns the advice given on page 11 of the Department for Work and Pensions review:
"Businesses…should be more ready and more prepared to shop around for the most effective broker and the best insurer."
That comment is laughable in the opinion of many reputable contractors within the trade associations of the National Specialist Contractors Council. How could they be expected to take such action while service standards on the part of the insurers have been less than satisfactory? I refer to numerous reports by businesses of short renewal periods given by insurers for employers liability insurance policies. Shopping around was neither possible nor practical in such circumstances.

I therefore trust that due attention will be given in the long term by the Department for Work and Pensions and the OFT to my first point about the market's future operation and that the Government and the ABI will follow through to quickly establish minimum standards of service to provide proper notice of renewal terms—a point acknowledged in the ABI's press release of 3 June.

Furthermore, I ask the Minister to examine insurance premium tax. I am not asking for insurance premium tax to be abolished but the Chancellor has had a windfall through the rise in insurance premiums. If the Minister looks at the figures from the National Federation of Roofing Contractors, he will see that the insurance premium tax on £7 million of premiums is £350,000. That has increased now to £1 million for the members of the NFRC alone.

Contractors ask that the windfall be used effectively to help those small businesses, whose insurance premiums have risen. They suggest that, if it were invested in a fund to compensate those who suffer work-related diseases, and invested wisely, that would bring some stability to the insurance market, which would not be required to anticipate work-related diseases and ill health 10, 20 and 30 years ahead. I ask that my point is related to the Ministers' undertaking in the foreword to the Department for Work and Pensions review to further evaluate the evidence for separating long-term occupational disease risks from accident risks.

I and many other hon. Members are aware of the work of the Department of Trade and Industry and the appointment of Mr. Paul Haywood by the Minister of State for Energy and Construction to help contractors in liaison matters and negotiation with the insurance industry. Furthermore, it is pleasing to note the work of the National Specialist Contractors Council, the National Federation of Roofing Contractors, the Flat Roofing Alliance, the Mastic Asphalt Council and the National Access and Scaffolding Confederation to provide more insurance capacity through new insurance schemes.

In conclusion, can the Minister assure the House that speedy progress will be made on matters pertaining to enforcement, lower premiums for good health and safety practice, and improved service standards on the part of the insurance industry? I accept that long-term issues require a more cautious and thorough approach, but I ask that such issues receive continued, coordinated attention from all Departments involved, working with relevant agencies outside the Government. I welcome the further report that has been promised by the Minister in the autumn and I look forward to his reply today.

11.13 am

I congratulate the hon. Member for Broxbourne (Mrs. Roe) on securing this debate on such an important issue. It gives me a chance to explain to hon. Members the current situation in respect of employers liability insurance and to set out the steps that the Government are taking in partnership with employers, insurers and other stakeholders to improve the outlook for everyone.

I can give the hon. Lady the assurances that she sought in the last part of her remarks, but I need first to set out in detail how the Government intend to resolve the problems. The aim of the employers liability insurance system is to ensure that workers who are injured through the fault of their employer can obtain suitable redress. We are fully committed to the principle, which is not a party matter; previous Governments have been committed too. It is right for employers to be held to account for any harm that they do. Equally, we are committed to ensuring that the system is fair for employers, and that includes doing what we can to keep costs down.

Many companies are concerned about recent rises in insurance prices, from motor insurance to property insurance. The reasons for this general increase are complex. Insurance markets are typically cyclical: the last peak was in about 1993, and the bottom of the cycle seems to have been in 1999 or 2000. Since then, prices have risen. The rise might have been exacerbated by the effects on global reinsurance markets of 11 September 2001. The price of reinsurance rose and so, therefore, did that of insurance. Certainly, it seems to have been rapid. Concerns about increases in the price of liability insurance, and particularly employers liability insurance, must be seen against that background.

The Office of Fair Trading attributes cost increases in liability insurance to factors including
"An expansion of liability, 'loss shocks' such as those arising from the World Trade Centre, increases in legal costs and damages awards for personal injury, and reductions in the investment returns insurers set against underwriting losses."
However, changes to costs have not been the only source of increases. The OFT also says:
"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."
In response to the specific concerns about employers liability insurance, the Government committed themselves in the pre-Budget report last November to review the employers liability insurance system and to report on options for change. We also discussed the issues with the OFT, which undertook a fact-finding study into the liability insurance market, including employers liability insurance. Both those studies have now reported; the OFT review's conclusions were published on 3 June, as was the Government's first stage report. The OFT study did not find evidence of a misfunctioning market or a widespread lack of availability of liability insurance cover, but it concluded that the price of employers liability insurance increased by some 50 per cent. in 2002, following a six-year period during which liability insurance premiums fell in real terms by about 14 per cent.

I welcome the fact that the OFT will continue to monitor developments in the market and its announcement that it intends to revisit the issues next year. I also share its concern about the costs associated with resolving liability insurance claims, of which legal costs are a large part. The OFT is considering whether to investigate that further. I would welcome that, alongside our work to reduce costs and improve outcomes for all parties.

The Government's report on employers liability insurance reaches similar conclusions to that of the OFT. The market seems to be operating and cover is almost universally available. We found a handful of examples in which it was not available, and the Federation of Small Businesses was particularly helpful in that respect. However, there does not appear to be any basis for reports that there is a widespread inability to obtain cover. Similarly, there have been suggestions that large numbers of firms were trading illegally, without employers liability insurance. On the basis of the evidence that we have, it seems that compliance levels remain high.

Our review lays out an agenda for action to provide both short and long-term help to businesses. That was widely lauded by the CBI, the TUC and others. Our report, the first of a two-stage process, examines the factors driving recent premium increases and considers the case for potential reforms to the employers liability insurance system. The Government are committed to improving the outlook in difficult market conditions. The standards of the insurance industry will be put firmly under the spotlight as we go forward to ensure the fairest deal for all concerned.

The programme of action that we announced on 3 June will work on two fronts by aiming to make the market work better and improving the overall system. In the short term, we support current initiatives in the market while working towards a fairer system by developing a basis for more risk-related premiums. We will move swiftly with business, the insurance industry and employee representatives to develop a programme to address issues raised in our report. Matters of legal costs, rehabilitation, long-term occupational disease risks and enforcement action lie at the heart of our agenda. In the autumn, we will report on progress made and on any further steps that we intend to take.

In the short term, the Government will scrutinise the market to seek raised service standards, including minimum notice periods for policy renewals so that businesses can shop around for employers' liability cover—an important point that the hon. Lady raised. We will work with the insurance industry towards fairer risk-related premiums to reward companies with a strong health and safety record—in particular, small and medium-sized businesses—and we will reform enforcement to ensure that cowboy companies dodging insurance cover cannot gain advantage over law-abiding businesses. We will also develop with insurers self-assessment packages to enable firms to provide insurers with better information on how they manage health and safety risks.

In the longer term, the Government will focus on legal costs, maximising the benefit of existing initiatives and considering faster and more cost-effective dispute resolution arrangements. We will make rehabilitation play a more central role in the UK compensation system and engage with business, insurers and other stakeholders to further evaluate the evidence for separating long-term occupational disease risks from accident risks. More evidence would be needed to assess whether a radical separation is justified, but that is nevertheless under active consideration.

Some insurers have excellent service standards, releasing renewal terms at least 30 days before the date of renewal. However, many businesses have reported much shorter notice periods, leaving them little time to shop around for a better deal or find a specialist broker to help them do it. We are keen to ensure that businesses receive renewal terms early enough to enable them to explore alternative sources of cover if they are unhappy with the quote. We will therefore be working with the insurance industry to review renewals performance and encourage improved standards. The ABI is an important player in that game.

There are other improvements to be made to the existing system. For example, one major concern for businesses is that premiums do not reflect how good their health and safety practices are. That situation can be resolved only if insurers are prepared to reduce premiums on the basis of good evidence of health and safety, and if employers can and do provide that information. Initiatives to improve the process are under way, including trade associations working with insurers to negotiate favourable rates for members, based on their collective health and safety record; and the development of health and safety assessment packages for businesses that enable them to give better information to insurers leading to lower premiums. We will assist in supporting and further development of those initiatives. In particular, we will work to join up the risk assessments of the Health and Safety Executive and insurers to help provide a common basis for advice to business.

The majority of businesses are responsible employers and ensure that their workers are protected from accidents and from the consequences of accidents, but there are still some firms that are not. To tackle the unfairness of competition from such cowboy firms, we will be reforming the arrangements for enforcement of employers liability insurance. Many people are concerned about the impact of legal costs on the price of employers liability insurance. An estimate prepared for the insurance industry put the increase in claimants' costs—legal fees and medical assessment of injuries—at approximately 50 per cent. over three years.

We are currently doing some work on the costs of smaller employers liability insurance claims of less than£15,000 in value, because they typically involve a higher percentage of legal costs. We are considering other options that could reduce costs. An existing scheme that structures costs for low-value motor accident claims might also be appropriate for employers liability insurance, for example. We would like to see whether alternative dispute resolution processes could lead to quicker, better resolution of cases.

I apologise for arriving late. Have the Government given any consideration to the radical change of replacing our litigious environment with an arbitration system? That has been tried successfully in other countries. The Government could add to that some kind of limited liability, underwritten by them.

Yes, we are considering that, and we are aware of the examples of other countries that we might follow.

On rehabilitation, it is right that workers harmed through the negligence of their employers should have a right of redress. However, the current system views that issue largely in terms of financial compensation, rather than concentrating on trying to help the injured person return to health and, we hope, to work. Rehabilitation needs to play a more central role in the employers liability insurance system in order to improve the outcomes for injured employees and employers alike. That is a long-term goal, but we are determined to make real progress towards it.

The hon. Lady mentioned insurance premium tax. We are not convinced of the case for cutting IPT. At 5 per cent., the UK's basic rate of IPT is one of the lowest in Europe, and businesses can offset IPT costs against taxable profits, reducing their corporation tax. As IPT has only a marginal effect on insurance costs for UK businesses, reducing it would not prevent the difficulties that some firms face if their insurance premiums rise. Furthermore, such a change would add administrative costs to insurers. We are not convinced of that argument, although she will have realised that other Departments have a say in the matter, too.

The recent significant increases in the price of employers liability insurance have been a problem for many firms, which is why the hon. Lady is right to raise the issue. There are things that businesses can do for themselves; early communication with insurance brokers can help to establish the information that is needed to make a strong case for lower premiums and in obtaining information about the likely size of any increases. Contacting a good, specialist broker through the British Insurance Brokers Association can help, and trade associations may have specialist schemes or advice for businesses.

I have tried to outline the steps that we are planning to take to improve the function of the market for employers liability insurance and to improve the outcomes of the system, but we will also continue to monitor closely developments in the market and we will consider any new information that becomes available. We will report in the autumn on the progress that has been made and any further steps that we intend to take. However, we cannot do that alone. Insurers will be key to improving the operation of the employers liability insurance system. It is the insurers that set prices and set standards for customer service, and it is their standards that are undoubtedly under the spotlight now. There is pressure on insurers to do their bit to resolve and tackle the problems.

Similarly, business bodies and trade unions have a lot to offer in developing workable proposals for rehabilitation, and in developing with insurers ways for firms to provide better and more pertinent information about their risk-management practices. Ongoing work by the Health and Safety Commission and Health and Safety Executive to cut the number of injuries at work will play a part, as will further work on the insurance market by the Office of Fair Trading and the Financial Services Authority. There are no quick and easy solutions to the problem, as I know the hon. Lady recognises, but we are committed to playing our part in helping businesses to resolve the problems, which have undoubtedly become an obstacle to business competitiveness in the past year or so.

11.30 am

Sitting suspended until Two o'clock.