August 2005 - Tort reform hot topic for debate
The effects of tort reform legislation continue to be a hot topic for debate, but a report by independent actuary Estelle Pearson, of Finity Consulting, concluded it is too early to estimate the impact on insurer profits.
While claim costs had reduced, the impact on costs was unknown. The Insurance Council of Australia commissioned the report to provide an overview of insurer profits in the wake of reforms to public liability and CTP insurance.
An earlier Law Council of Australia report suggested profits from the changes were sufficient to wind back of the reforms, but the Finity report said the public liability profit estimate by the Law Council needed to be treated with some caution as it was dependent on "approximations and extrapolations". It said the level of profit in current prices was unknown as few post-tort reform claims had been settled.
The report supports insurers' position that good profits in 2004 were due to a wide range of factors other than just tort reforms, although it acknowledged tort reforms have had positive impact on the cost and availability of public liability insurance. The latest Australian Competition & Consumer Commission report into public liability and professional liability showed average premium rates had decreased 15% in real terms in 2004, and the Finity report predicted further premium drops in the class. Anecdotal evidence from the June renewal period was there there were further reductions in professional indemnity and public liability.
Liability claim numbers and costs vary from state to state, depending on the size of thresholds introduced, but the report said the impact on the number of claims would be greater than the cost impact, as 70% of public liability bodily injury claims were less than $20,000 and represented only 10 per cent of the total cost of claims.
The Finity report concluded by saying fundamental changes to the insurance industry structure meant historic returns achieved by the market were unlikely to be considered adequate by insurers for the future.
With the release of the Australian Securities & Investments Commission's report into insurance broker remuneration, it is disappointing to note that some brokers do have contingency fee arrangements with insurers, which were outlawed under the Insurance (Agents & Brokers) Act.
It is to be hoped that, after all the industry-negative publicity generated globally by the Spitzer inquiry, all parties concerned will recognise the hazards involved in such arrangements, particularly emerging from a period where unavailability of some forms of liability cover angered not only affected community groups but also prompted the insurance industry to lobby for government intervention in the form of tort law reform. All this was taking place at a time of relatively high levels of premium.
It is to be hoped that all segments of the industry can confront the thorny issue of broker remuneration head-on in an atmosphere of co-operative and transparent disclosure as far as the buying public at all levels is concerned to remove any doubt or conflicts over the issue.
Deloitte' 2005 Global Insurance Outlook report said insurers must be prepared for more intense scrutiny of the industry in the year ahead, in the wake of the allegations of misconduct by major US insurers.
European insurers were likely to be subject to new regulatory requirements based on Basel II, while US insurers needed to comply with tougher Sarbanes-Oxley corporate governance standards.
The report also pointed out that the industry needed more highly-skilled and sophisticated professionals as it focused more on providing advice than providing products. That would require more innovative recruiting and training strategies.
Peter Backe-Hansen
Immediate Past AILA President
