BALANCING AFFORDABLE PREMIUMS WITH EQUITABLE COMPENSATION

The situation

In Australia in the late 1990s and 2000, public liability claims costs began to rise significantly. During this time, the country's then biggest liability insurer, HIH, kept premiums artificially low. HIH, therefore, failed to provide adequately for the costs of claims.

This environment changed dramatically in 2001, when HIH collapsed and the availability of liability insurance was significantly reduced. At the same time, the cost of reinsurance also increased following the economic effects of the September 11 terrorist attacks.

The impact

This situation had a knock-on effect for insurers who were unable to sustain the large underwriting losses caused by spiralling liability claims costs. As a result, they began increasing premiums and withdrawing from unprofitable types of cover. This led to many small businesses, sporting clubs and community organisations being unable to either afford or obtain public liability cover. Without this important protection, many of these groups were unable to operate, significantly affecting many local communities.

Australia's experience of spiralling liability claims costs is similar to many other countries. In recent years, general liability claims costs in most major economies have grown faster than overall economic activity, with long-term estimates suggesting claims have been growing 1.5 to 2 times as fast as nominal GDP*. In such an environment, liability cover quickly becomes unaffordable and insurance schemes fail.

The way forward

State and Federal governments, insurers and the community worked together to find a solution. The result was a series of changes to negligence and other civil liberty laws, also known as 'torts'. These changes restored the balance between appropriate compensation for injured people and the community's ability to afford the associated insurance premiums.

In 2004, our commercial insurance business, CGU, reduced its commercial public liability rates by 10% in anticipation of the benefits of tort reform. This reflected our commitment to ensuring that the benefits of these reforms were passed on to the community. Since then, industry monitoring by the Australian Competition and Consumer Commission has found liability insurance premiums have continued to fall as the benefits of tort reform flow through.

Australia's tort reforms have created a more sustainable environment where liability cover is once again accessible and affordable, injured people continue to be compensated and legal costs are reducing. The real winner from these reforms has been the community at large, as was always intended.

* 'The economics of liability losses - insuring a moving target' Swiss Re Sigma Report No. 6/2004