Product overview: General liability

The concept of pooled risk is well-established, with groups coming together to create funds to compensate members suffering a catastrophic loss as far back as the times of the ancient Babylonian empire. Much may have changed since then but this history means that today’s liability insurance market is stable and mature.

It also has a vital role to play in the economy. “By transferring risk from the balance sheet of a business to the insurer, it supports businesses to grow and develop,” explains Steve Browne, head of casualty at Axa Insurance UK. “They can take on the risks arising from trading with other parties in the knowledge that, for a premium paid, they have the certainty that an insurance company will provide funds to deal with third-party loss should it arise.”

With such a fundamental principle at its heart, little has changed to the products over the years other than when new liabilities have emerged. Examples include the introduction of employers’ liability insurance in the 1880s, when laws were passed to give employees rights to compensation for workplace injury or death, and the more recent arrival of environmental liability cover in the 1970s, to help with clean-up costs arising from a pollution event.

Insurers have also created extensions for particular industry sectors, as Browne explains: “Cover can be taken out for pure economic losses, in the absence of property damage, or a hairdresser or beautician can take out a policy to cover the liabilities that may arise from the treatments they provide.”

Market conditions
While the general commercial market has hardened over the last year or so, with Covid-19 serving as the final straw for insurers, the liability market has been largely immune to this shift. Robert Keene, director of commercial at Aston Lark, says it’s performed in a similar way to the motor insurance market. “With so many people working from home and limiting their time outside, the number of accidents fell,” he explains. “This led to fewer claims over the pandemic.”

As a result, while other markets are feeling the squeeze, there’s plenty of capacity in the liability market. It’s served by a broad range of carriers and there are lots of specialist scheme arrangements where cover is tailored to needs of a niche industry sector.

But the market isn’t without its issues, as Graeme Trudgill, executive director at the British Insurance Brokers’ Association (Biba), explains: “Rates have been depressed as they haven’t kept up with inflation due to the plentiful supply over the last 15 years. Since the Ogden discount rate changed in 2017 it was highly probable there would need to be a market adjustment to pay for the higher awards.”

Rate correction
The Ogden rate, which is used to determine compensation for future financial losses, has already caused ripples through the market. Back in 2017, it was shifted from 2.5% to -0.75%, pushing up the compensation payments. Following insurance sector outcry, it was later reviewed and revised upwards to -0.25% in 2019, with provision for a five yearly review under the Civil Liability Act 2018.

Although insurers factored in these changes to the rate, the market remains undervalued. Keene says insurers are trying – and succeeding – to get rate. “Rate rises are taking place across the market but competition is fierce so we’re only seeing increases of around 5% to 10%,” he explains. “The market needed this correction and, as it’s so modest compared to the increases on other lines of business, I expect to see increases coming through over the next few years too.”

Pandemic side-effects
The liability market is also carefully watching to see how the pandemic affects the claims landscape. “The pandemic has seen a rise in litigation generally around the world, including in the UK,” explains Browne. “This has meant that claims frequency from third parties may increase where those that have suffered any loss believe there is another party at fault that should pay them compensation.”

There are certainly some areas where potential claims could arise. Employees could seek compensation for health problems arising from working from home, with a rise in mental health and musculoskeletal issues expected from the change in workplace. Keene says it’s possible but employers will have to be found wanting. “Employers do have a responsibility to ensure the home is a safe place to work but, as home working was a government order, I think the courts will be looking to see whether or not the employer listened and supported staff during this time,” he says. “Where they ignored their duties, the claims will come.”

The end of furlough could also trigger more claims, especially where employees’ roles are made redundant. However, although claims management companies were lining up cases for people claiming to have caught Covid-19 in the workplace or in a bar or restaurant, difficulties pinpointing where infection took place mean these are unlikely to materialise in any volume.

Positive behaviour
While the industry waits to see how the market reacts, Keene is pleased to see that one reaction that was predicted in 2020 hasn’t happened. “There was an expectation that struggling businesses would bail out on cover but there’s no evidence of this,” he says. “It’s good that they can see the benefits of insurance.”

Against this backdrop he’s trying to encourage clients to reassess their need for cover, recommending in particular that they take out higher limits. He admits this is a difficult sell in the current market but says that a limit of £10m on employers’ liability can leave a business exposed if more than one person is seriously injured. “Getting an extra £10m or more is relatively cheap,” he adds, “but it’s difficult to persuade them of the value when their other covers are increasing so much.”

The other positive that came out of the pandemic was an increase in risk management activity. Driven by the need to be Covid-secure, and supported by advice from the insurance sector, businesses are more switched on to managing risk.

With these positives feeding into the market, insurers will have greater confidence on rates. “It will take a while for the market to find its rhythm,” says Keene. “I expect increases will filter through over the next few years and wordings tighten up. No one saw Covid-19 coming, and they need to take back control.”

*Correct as of November 2021*