What can be done about public liability insurance premiums

Public liability insurance premiums are causing serious difficulties for the community. Small businesses and community groups are having difficulty obtaining affordable public liability insurance.

In addition to the problems with public liability, builders are having difficulty obtaining compulsory home warranty insurance. Professionals cannot obtain professional indemnity insurance.

Mudgee Council was forced to cancel its annual Christmas carols. They couldn’t afford the $5,000 public liability insurance premium. The Hawkesbury River Bridge-to-Bridge water skiing race was cancelled for the first time in 40 years. Organisers couldn’t raise the $2 million needed for insurance. The Epilepsy Association cancelled children’s camps. There are hundreds of cases like these.

This is not a simple problem; it is not unique to New South Wales. This is a complex national issue that needs leadership at the national level.

The insurance industry argues several factors have combined to create the current crisis: Low, and possibly uneconomic, premium levels in the 1990s mean consumers have been enjoying unnaturally low prices until now. Losses in investments have led to greater overall losses in public liability insurance lines of business.

Fewer insurers now offer public liability insurance. This is particularly the case following the collapse of HIH which had a large share of the market. There has been an increase in the number of personal injury claims and in the size of compensation awarded by the courts in contested claims.

Insurers were making adjustments for these factors before the events of September 11. They now say additional steps are needed to stem losses flowing from exposure to claims from September 11.

Reinsurers also seem to be reassessing the profitability of insurance markets and moving investment away from areas with potential high exposure and low returns. There is no "quick fix" for a problem of this nature and scope.

The Commonwealth, the States and Territories, the insurance industry, and consumers must work together to develop a systematic response to the price increases and changing market conditions.

We’ve had the collapse of HIH, the issue of terrorism insurance, the crisis with public liability. On each occasion, I have called on the Prime Minister to facilitate urgent action on these insurance problems.

Regrettably, the Prime Minister wrote to me as recently as last month saying he sees no need for a summit on the impact of terrorism on insurance. In response to the problems facing small businesses and community organisations, the Commonwealth Assistant Treasurer, Senator Coonan, has announced she will convene a national meeting on public liability insurance next month. But this meeting deals only with public liability.

The Prime Minister must show leadership and convene a national summit involving heads of government and the insurance industry to examine all the problems besetting the insurance industry.

The Commonwealth regulates the insurance industry. They do this through the Australian Prudential Regulation Authority, the Australian Securities and Investment Commission, and the Australian Competition and Consumer Commission. For example, the Australian Prudential Regulation Authority recently increased the amount of capital that insurance companies need to back their public liability risk. This must lead to higher public liability premiums.

The point is, the Commonwealth has a direct role and direct influence on the insurance market. The Commonwealth has the power to obtain information from insurers to analyse the causes of the current crisis and evaluate the financial impact of any proposed reforms. It’s the Commonwealth’s responsibility to examine the conduct of insurers towards consumers and deal with unconscionable tactics.

They can and should monitor the insurance industry for any sign of anti-competitive practices. If necessary the insurance industry should be subject to price monitoring.

On public liability, the New South Wales Government welcomes the Commonwealth’s belated acknowledgement of its responsibilities in this area. The Commonwealth Government should come to the national meeting convened by the Assistant Treasurer with some firm proposals. They must take responsibility.

The insurance industry also needs to review its own practices. The industry should ensure current prices are not an over-reaction to the collapse of HIH and September 11. The industry should give rational quotes for public liability insurance, based on the real risks involved.

At the very least, insurers should explain clearly to customers why their individual "risk" circumstances may not be relevant.

In the current market, a good claims history or low level of risk does not seem sufficient to ensure insurance will be either obtainable or affordable. This is extremely frustrating for those community organisations with impeccable records and low risk, many of whom perform socially valuable activities.

The industry should reflect on its broader social responsibilities. They should assist their apparently "unprofitable" customers to find an insurance model that might help to make insurance affordable, such as pooling arrangements with similar organisations.

Insurers must also pass on cost savings they make from any future Commonwealth or State law reforms. Insurers have argued in the past for reforms on cost savings grounds. Windfall gains at the expense of small customers are unacceptable.

The Government is aware of the insurance industry’s claims that stamp duty on insurance policies is contributing to the current problems. The industry’s opposition to taxes is not new and stamp duty is clearly not the cause of recent massive premium increases. However, any merit in the arguments about taxation will be considered as part of the Government’s review of options to tackle public liability insurance problems within NSW.

I am aware some organisations may want the NSW Government simply to subsidise the purchase of insurance. I understand how disappointing it is, particularly to country communities, that events are cancelled due to the inability to obtain insurance.

But I must make this important point: while insurance costs are necessarily factored into levels of public funding for certain community services, direct subsidies for other events and organisations might actually entrench inflated premiums at taxpayers’ expense.

In the short term, some community events and activities might be able to proceed if subsidies were given. But in the long term, the whole community may end up paying for higher premiums for years.

This would simply result in growing profits for the insurance industry. More worryingly, subsidies might remove a valuable incentive for organisations to minimise the risks of injury to the public.

We acknowledge that along with the Commonwealth Government and the insurance industry, the State Government has a role to play. We have been fulfilling our responsibilities. For example, my Government provided a $600 million rescue package following the collapse of HIH. The package covers claims against HIH – both compulsory third party motor vehicle and home building warranty. We also called on the Prime Minister to set up the HIH Royal Commission and we are represented before the Commission. We introduced health care liability reforms in response to an increase in litigation and sky-rocketing insurance costs.

The Government will also shortly introduce legislation to exclude terrorist acts from compulsory third-party motor vehicle policies. This will ensure the CTP scheme can continue, despite international reinsurers refusing to cover terrorist acts as a result of September 11.

One of the many factors leading to rising costs is the increase in personal injury claims and the size of compensation awarded. This trend has been driven by an increasing litigiousness in our society. Australia is adopting a culture of blame, even where the damage suffered might be minor and temporary.

Elements in the legal profession have encouraged a view that someone else must always pay, that litigation is the way to resolve disputes. All it does is increase costs for insurance customers and the wider community.

The Government is introducing restrictions on lawyers’ advertising for personal injury matters, to take effect from April 1. The new rules will stop lawyers advertising personal injury services on television, on radio and in hospitals. For example, patients and visitors will no longer see advertisements for lawyers in hospital lifts.

The new rules will also restrict the kinds of statements that lawyers can make about personal injury work in printed advertisements or advertisements on the internet.

The rules will prevent lawyers engaging in "ambulance chasing" advertising. This advertising encourages people to claim for every little slip and fall, regardless of the real merits of the case or their genuine need for compensation.

The new rules will counteract the litigious approach of some members of the legal profession.

On the broader question of public liability insurance, the Government is holding discussions with the Insurance Council of Australia, the New South Wales Council of Social Services, arts and sporting organisations, small business and tourism operators, and local government representatives.

The Government is helping organisations help themselves. Next month, for example, the Minister for Sport and Recreation will launch a detailed risk management guide for sporting and recreational bodies in NSW. I understand New South Wales arts and cultural organisations are starting to consider the issue of risk management for the types of activities they undertake. We will ensure the new sporting risk management resource is available to bodies in the arts and community services fields which may also find it useful.

While governments and the insurance industry have a clear role to play, consumers and small businesses experiencing difficulties finding affordable insurance might also have more options than they realise. They might consider shopping around different insurers and brokers and re-evaluating their insurance needs to make sure they only buy what they need.

Some organisations might also consider different ways of buying insurance, such as bundling their insurance needs together or pooling their insurance with other similar organisations, possibly through a peak industry body. Many organisations could also adopt formal risk management practices, so the incidence of accidents is reduced and, in time, claims against insurers are also reduced.

The Government will continue to explore whether there are other ways that it can provide practical assistance to affected organisations. For example, the Government is working with local councils to identify options for managing their liabilities arising from the HIH collapse. There is a need to consider how councils might arrange their insurance and risk management in a more effective and consistent way across the State.

We are also holding discussions with the insurance and building industries to ensure the home building warranty scheme is not adversely affected by these developments. The Government is cooperating closely with Victoria, which has a similar scheme, to develop a coordinated response to this issue.

The NSW Government has asked that the issue of public liability insurance be placed on the agenda for upcoming meetings of the Council of Australian Governments and the Standing Committee of Attorneys General.

In December 2001, Cabinet directed The Cabinet Office, Treasury and the Attorney General’s Department to coordinate a review of potential reform measures, such as reforms to the tort law system and the statutory requirements to hold public liability insurance. The Government intends to put on the table for discussion at the national meetings some of the options for reform being considered by the review. The options include capping damages for some types of compensation, such as compensation for lost future earnings.

Another option is to set thresholds for claims so that trivial claims do not waste valuable court time or increase costs for the community and insurers.

Another reform worth considering is allowing provisional damages awards and encouraging, or requiring, the use of structured settlements. The success of these reforms, however, depends on the Commonwealth fulfilling its commitment to change the taxation treatment of structured settlements.

Other reform options include requiring parties in personal injury cases to undertake conciliation, and introducing shorter limitation periods for claims. The impact of lawyers’ fee arrangements on the growing litigiousness of our society will also be considered.

Limiting the liability of organisers of events that have a particularly high value to the community might also be considered, as might limiting the liability of organisers of inherently dangerous activities.

The Government recognises that there are advantages and disadvantages to all these options. This is why they should be discussed in national forums.

If we could be certain that reforms to New South Wales laws would help reduce insurance costs, the Government would not hesitate to introduce the necessary amendments now. But this issue has national and international implications. The findings of the HIH Royal Commission will also need to be considered. We need to be certain that any reforms to NSW legislation will address the underlying causes of the problem.

We need a consistent, nation-wide response. Our new rules on lawyers’ advertising are an important step in stemming the rise in insurance costs. My Government will bring additional serious reform proposals to the national meetings.

Our rich diversity of cultural, social, business and sporting opportunities is under threat. We’ve got to fix public liability. We’ve got to do it nationally, cooperatively, and, above all, quickly. My Government wants solutions. We’ll do anything we can to get them.