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PI INSURANCE DOES THE CLAIMS EXPERIENCE EXPLAIN THE INCREASED PREMIUMS? A talk given to the AGS Members Day by Charles
Hayward Griffiths & Armour Recent press cuttings all testify to an increase in premium rates:- "Indemnity cover to soar by 50%" "Professional Indemnity premiums are soaring for consultants, hitting the biggest on their bottom line and threatening the viability of smaller firms." "PI rates soar by 600% for high risk contractors....premiums for surveyors civil and geo-technical engineers are seeing rate rises of several hundred percent" Where "It" = the increase in PI premiums. Why is It? · What is It ? · How can you deal with It? Why has it come about? 1. Claims
2. Speed of Settlement 3 developments all with the same broad and worthy intention - to speed up justice and the resolution of disputes
Overall these developments have been beneficial - claims which once were taking 4/5 years to settle are now being settled in maybe a year with a consequent reduction in defence costs. However there have been some adverse consequences namely a quicker outflow of cash for insurers which, combined with ... 3. Lower Interest Rates and Investment Returns .. ..has served to increase underwriting losses. Whereas previously we were in a position where underwriting losses were made tolerable by investment income earned over the 5 years it took for a claim to settle, we are now in a situation where there is nothing to subsidise the bad underwriting results. Insurers used to be able to aim for an underwriting loss knowing that investments would then steer them into profit - that is no longer the case. 4. Changes in the Insurance Market Direct The withdrawal (either voluntary or enforced!) of some PI insurers - Cox - HIH - Independent - London and Edinburgh - SEPIA - AXA - Colonia - Admiral (effectively by withdrawing "each and every" cover), - a number of Lloyds syndicates. Few if any major newcomers to fill the gap. The litigious nature of society, a general increase in claims, some adverse court decisions, highlighting deficiencies in policy wordings and difficulties in reinsurance arrangements have all made PI insurance a less attractive proposition to underwriters. Of those that are left even they are reducing because of the forces of Market Consolidation
Amongst those insurers who are left, there is a renewed determination that they want to write for a profit. There is no sentiment for loss-making classes of business. It would be disingenuous of me to tell you that your insurance premium has increased solely as a consequence of September 11th. No direct effects for PI but a massive impact upon insurers generally and most insurers need to increase their premiums across the board just to refurbish their balance sheets. By contrast Enron has had a massive impact on PI - not just a big direct loss for underwriters (£250M on Andersons PI) but some major ancillary losses will also arise e.g. Bonds and Guarantees - overall loss could be $10bn. However even if by some miracle a particular insurer had emerged unscathed from either of these 2 catastrophes then it is almost certain that their Reinsurers will not have done and it is reckoned that they alone are looking for a 25% premium increase. The net effect is a situation where an increasingly unattractive class of business is looking for an insurer amongst a reducing number of more discerning providers all of whom are demanding a higher price. In short - a sellers market where insurers can dictate prices and terms. Not only PI but also other classes of liability insurance. In Employers Liability the industry-wide ratio of claims to premiums is reckoned to be 150%. Public Liability rates reckoned to be increasing by 100%. Directors & Officer rates up by 300-400%. What is the increase? On ACE scheme the Premium increase is 1.3% of fees on top of whatever you were paying previously. Excess levels are up to 1% of net fees. However - cover is still there - using the same quality insurers who have demonstrated their long term commitment to the scheme - still able to write large Limits of Indemnity - up to £50M - cover for pollution and contamination still available as before - aggregate plus one - wider than available elsewhere - even now the average premium rate is still lower than it was in 1988 (the last "hard" Insurance market) - in real terms excesses are back to 1988 levels What needs to be done? 1. Need to raise your fees
2. Need to avoid claims
* * * * How to reduce claims An analysis of all the major claims from ACE scheme in last 10 years shows that Geotechnicals are capable of producing some hefty claims at an average cost of just under £500,000. A review of some of those major claims also provides an indication of the source of claims. Projects include highways, dams, swimming pools, high rise buildings, rivers, site investigations, landfill sites with claim costs ranging from £100k up to several million pounds. · Design error requiring redesign after job completed · Even more expensively, a design error spotted at review but prior to commencement on site led to contract delays · Inadequate number of boreholes · Inadequate analysis of water containment properties of rock for a reservoir · Calculation error when assessing shear strengths · Overlooking the complexity of the geology on a highways project · A personal injury claim when Gas main was struck during a borehole investigation. Contract stipulated that developer client would undertake a search on services - the client had indeed established that there was a gas main on site but he decided not to tell our insured engineer about it. Whilst the client was held to be primarily responsible, the HSE also held engineer to have been partially culpable for failing to check with the client that they had undertaken the search. They reasoned that if they had checked then the problem would have been disclosed. A review of some current claims also indicates the source of claims · Failure to warn of possibility of solution features in chalk soil · Failure to expressly warn a contractor client that a particular method of temporary works would be inappropriate for a certain slope · Negligently describing made ground as Grade V chalk · Contaminated land investigation on a development site - a calibration error caused an overstatement of contamination present - the successful purchaser has sued for wasted costs whilst another unsuccessful bidder has also sued for lost opportunity! · Allegation that remediation contract was poorly supervised - inadequate and incomplete record-keeping What ought you to do? 1. Don't Make Mistakes Nobody willingly makes mistakes but there are things that you can do lessen the chance of mistakes happening or to stop mistakes actually resulting in any loss. - train staff - supervise - Peer reviews and checks - review report formats/standard letters/site inspection reports. But it has to be said that not even that you are never going to avoid claims altogether. 2. Watch What You Sign Be careful on your appointments. The emergence of D&B and other new methods of procurement is leading to ever more weird contract forms - for the sake of your claims experience and your insurability you need to resist such overtures. General principles
Do Not Sign
Do Sign
Charles Hayward The AGS Contaminated Land Working Group organised a seminar in July 2001 to provide an update on the latest position of environmental insurance. Seminar presentations were provided by speakers from both insurance brokers and underwriters (Mike Patterson of Willis, Tony Lennon of ECS, Ian Evans of CERTA and Richard Davies of AIG). Introduction The regeneration of brownfield land has been hindered by the absence of a coherent redevelopment framework, the entrenched attitudes of some regulators and the previous availability of greenfield alternatives. Concerns over the inherent complexity of the Contaminated Land regime and its ambiguous liability principles are causing ongoing uncertainty in the property industry. Research carried out on behalf of the RICS has demonstrated that concern about contamination is still the major barrier to brownfield land regeneration. The main concerns tend to centre around financial uncertainties such as escalating clean up costs, the long term liability exposures and the potential impact of stigma. The risks are compounded by a perceived lack of clarity in relation to the consistent enforcement of the new regime by the local authorities (and regional Environment Agency offices) and the practical application of the risk assessment process Notwithstanding these concerns, Government policy, new fiscal incentives and other commercial pressures are encouraging the mainstream property sector to reconsider its historic aversion to land with a previous industrial usage. The evolution of new environmental insurance solutions over the past five years has had a significant impact on brownfield land development. New risk transfer products are being used to remove residual risk exposures and maximise financial certainty. It is recognised that insurance should be considered in the context of a risk management strategy as indicated below: RISK IDENTIFICATION AND EVALUATION RISK RESPONSE AVOID - abstain from activity or purchase This article will review the main environmental insurance products and markets as outlined in the seminar. Environmental Risk Exposures Most operations and business ventures are exposed to environmental risk. Practical sources of risk arise from three sources a) Operational risk - may lead to pollution at some time in the future and typically arise form sources such as industrial plant, vehicles and transportation, fuel and chemical storage or waste products b) Historical risks - relate to past activities that may have left a legacy or dormant or active pollution. c) Contractual risk - liabilities and warranties agreed in contract such as sale and purchase agreements, leases, indemnities and warranties etc. Many organisation perceive that environmental risks are covered by their existing public liability or property damage insurance however these usually have pollution exclusion clauses and do not cover own site clean-up. Potential consequences of these risks include own site / off-site damage and clean-up costs, business interruption, regulatory authority notices, legal costs, bodily injury and property damage. The Players The design and placement of an appropriate environmental insurance solution usually requires input form many parties. Policies cover potentially enormous loss scenarios and may represent significant capital outlay. It is therefore important to recognise the pitfalls and obtain objective advise. The players potentially involved comprise: "PLAYER" ROLE BROKERS Professional intermediaries
who have access to the whole market and range of products, acts in Clients
interest to obtain best solution. Not to be confused with underwriting agents or
insurers eg. Willis, Aon, Marsh, INSURERS Underwrite the risk eg AIG, Allianz, ECS / XL Capital, Zurich REINSURERS Insure the insurers eg Swiss Re LLOYDS Private and corporately funded syndicates INSUREDS Varied but includes industry, commerce, banks / pension funds, governments etc etc The Products The main environmental insurance products include :
§ Future Pollution Cover (Operational Pollution Risks) Public liability policies generally provide cover only for the costs of third party damages and injury arising from pollution incidents that are sudden, accidental and unexpected. Most PL policies do not therefore provide cover for claims arising from gradual pollution such as leaking underground storage tanks. In addition PL policies do not cover clean up of the insured's own land and may not respond to clean-up orders from the regulatory authorities. Future Pollution cover is designed to "plug" these gaps providing for own site clean-up, claims from neighbours for damages or injury, legal defence costs and clean-up notices from regulatory authorities. Such insurance is available for policy periods between one and five years. In many situations the correct business risk solution involves the combination of historical contamination cover and future pollution cover for example. This provides cover for claims for third party damage and injury arising from historical contamination migrating off site and future spills, run-offs and leaks. It also provides for clean-up orders for the insured's own site or third party land from enforcement authorities - for example remediation notices from the local authority. Where sites are heavily contaminated and remediation is required, cost cap cover can be placed to limit escalation of costs, backed up by historic contamination cover to provide assurance for financial consequences of potential residual contamination not dealt with by the remediation. The Finale Most industrial operations and business ventures are exposed to environmental risk. Constantly tightening legislation coupled with an active merger and acquisition climate means that these risk area becoming more significant. Environmental insurance is providing a rapidly expanding armoury of solutions to these risk exposures. The environmental insurance market in the UK has seen substantial increases in insurance premium volume and innovative deals to demonstrate the value of environmental insurance. Willis estimate up to £25 million in premium was written in the London insurance markets during 2000 and this figure was almost doubled during 2001. This represents very rapid growth - five years ago premium was negligible. Insurance should form only part of an integrated risk management approach to environmental liability exposures but can be a valid and real part of the solution. For further information please
contact Fiona Rooney (Director - Environment Practice, Willis Ltd) SITE INVESTIGATION SHOULD BE FOR CONCRETE DURABILITY IN ADDITION TO SOIL STRENGTH PARAMETERS All too often Site Investigation work is seen solely to provide soil strength parameters to enable economical foundation design. There is a need for the site investigation industry to make clients more aware that the aggressive nature of the ground should also be accurately determined if adequate precautions are to be taken in the design of a durable concrete for use in the foundations. The problems associated with the thaumasite form of sulfate attack (TSA) have been well documented and in August 2001 BRE Special Digest 1 was published. Part 1 of the digest is particularly relevant to the site investigation industry. Without the necessary soil and ground water testing to determine the extent of those aggressive chemicals present at a particular site the concrete cannot be designed in accordance with best practice. It is where possible beneficial to have results from both groundwater and soil samples. Many Site Investigation reports are issued without fundamental site-related parameters to enable the adequate design of the concrete. The site assessment procedures should vary depending on whether the site can be defined as natural ground, brownfield containing industrial wastes or pyritic ground, reference to BRE Special Digest 1 should be made for full details. In general it will be necessary to determine the water soluble sulfate in 2:1 water/soil extracts and the pH in 2.5:1 water/soil extracts. Many Site Investigations where they report any chemical testing only show an occasional soluble sulfate result which is often inadequate to determine the Design Classification for the concrete mix. Where the sulfate in the soil extract exceeds 3.7 g/l SO4 or in the groundwater sample exceeds 3.0 g/l SO4 it is necessary to also determine the Magnesium content. The mobility or otherwise of the groundwater on site also has an affect and should be established. Where a site is brownfield it will generally be necessary to obtain the Chloride and Nitrate content in both the soil and groundwater samples if the aggressive chemical environment for the concrete is to be accurately determined. Where Pyritic ground conditions are anticipated more substantive testing is required to enable the total potential Sulfate and hence the concrete design requirements to be determined, for full details reference should be made to BRE Special Digest 1. It should be apparent from the above that greater consideration needs to be given to determining the aggressive chemical environment at the site investigation stage than is currently the case, to determine site-related parameters for strength in one site investigation and then undertake further work at a later date to enable the Aggressive Chemical Environment for Concrete to be determined is no way for the industry to improve its standards or its advice to clients. It should also be noted that BRE Special Digest 1 has superseded BRE 363. D.Brightman Technical Manager, Rock & Alluvium The official launch of the CLEA model took place on 17 March 2002, covering:-
Much of the documentation (but not the model) can be downloaded from the web. Publications CLR7-10, Tox reports and SGV reports are
available to download from the DEFRA website. 'LATE PAYMENT' LEGISLATION IS COMING INTO FORCE The revised 'late payment legislation' is coming into force on the 7 August 2002, from this date all businesses and public sector bodies can claim interest for late payment. The 'late payment legislation' is composed of the Late Payment of Commercial Debts (Interest) Act 1998, as amended and supplemented by the Late Payment of Commercial Debts Regulations 2002, which combined introduce a number of changes and new entitlements including:
Guide available for businesses Better payment practice and Business link have produced "A User's Guide to late payment legislation" which can be downloaded from the Better Payment Practice Group's website www.payontime.co.uk/downloads/latepayment download.html. It may also be ordered free of charge from DTI Publications Orderline, Admail 528, London, SW1W 8YT, tel. 0870 1502500, fax. 0870 15022333 or by email at sbspubs@eclogistics.co.uk. |
