Economic effects on Employment Protection Insurance
What is the state of the insurance market and what does it means for employment protection insurance and our own scheme?
Global influences on the insurance market
The big picture is a ‘flight to safety’ in the capital markets. This matters because ‘cash is King’ and to the insurance world ‘cash’ is capital and capital is its stock in trade. For example, every time an insurer takes on a new client the regulator makes them put cash in the bank against possible future losses. With very low interest rates and the threat of negative interest for businesses in the future, insurers are seriously worried about having enough capital to cover their liabilities and anxious to ensure they do not deplete resources further by losing money.
Around the world, catastrophic events such as bush fires, earthquakes and flooding are creating enormous drains on insurers’ capital resources, even for countries and insurers not directly involved as these losses are ‘shared among the many’ via the reinsurance treaties (pooling arrangements) that they all need.
Then we come to Covid-19. Unknown effect, unknown duration, massive economic impact. The pandemic has created huge immediate losses from travel and business interruption claims with much worse to follow. Statistically we know that claims generally increase by 25% during a recession from the effects of bankruptcy and unemployment (including fraud, theft and arson).
Anyone faced with losing their job and with no prospect of another one any time soon will grasp at straws and will not shy from using a tribunal system that has no upfront testing of facts and no handbrake on vexatious claimants. The result - a new ACAS notice every 5 minutes and a very worried sector of the insurance industry.
What has specifically happened to the supply of employment insurance?
In March 20, insurers started to press the panic buttons. Employment protection (“EPL”) insurance is seen as high risk, being very prone to recession and with an already high and increasing level of claims. This quote summed up their feeling.
“At this time, we have no appetite for new business with an economic, recessionary exposure such as for legal fees arising from employment disputes”
It has generally become much harder to get employment protection at acceptable terms. Insurers have pulled out, put up prices, kicked out higher risk trades and imposed higher excesses and more exclusions. For example, we have heard that one insurer is declining Care Homes from some brokers – but remains open for business at higher prices with others.
We know that several insurers have completely withdrawn employment protection and we have seen very strong underwriting action from almost all the other active players. Management Protection policies that previously offered employment protection are seen to be removing the employment element effective from renewal date.
The legal expenses sector is led by the worlds’ big three specialists. They only underwrite legal expenses and control around 80% of the market, often providing cover behind other insurance brands. They have all increased basic premiums and are being very selective about new business. Variously they have removed many lines of new business and are not offering renewal for higher risk trades such as those in leisure, hospitality and catering and also property owners (where rent guarantees and tenant evictions are a problem).
"Prospects of success"
Whole product lines have been removed, with most insurance brokers only able to sell legal policies with the very restrictive ‘prospects of success’ wording. This is still our biggest sales advantage – it's the clause that is used by competitors to kill at least 40% of claims - and we don’t have it.
To explain, the ‘prospects clause’ in other policies means the client has to prove a better chance of winning than losing in order to claim legal costs. The problem is that ‘prospects’ are subjective, there can be several different heads of claim each with different ‘prospects’ and prospects go up and down during the life of a claim. This gives an insurer (who is judge and jury) numerous opportunities to say that they there are insufficient ‘prospects’ and to decline the claim. Then, when claims are declined the client will probably blame their adviser - which in turn leads to arguments, paying for another solicitor, advisers being sued and irreparable damage to your brand.
While policies with a prospects of success clause usually require 51% as the definition of winning, several insurers have quietly moved the test up to 60% in order to further reduce claims against them.
In general, the market is now working to policies with a 180 days exclusion of redundancy covers as standard and on many policies there may now be a complete exclusion of any new matter in the first 180 days. We only apply a 90 day redundancy exclusion to new clients – existing clients have had complete continuity and are unaffected by this term.
Deductions from claims
Other underwriting tools include the imposition of mandatory excesses - £2500 is now a common figure- or a (typically) 20% co-insurance clause. Under a co-insurance clause there is no fixed sum a client must contribute AND NO UPPER LIMIT. The insured has to pay a percentage of the final cost – so if the legal bill and settlement is £30,000 the insured has to pay £6000. It is a dangerous clause when we recognise that awards for discrimination are potentially unlimited - for example a court awarded £270,000 for age discrimination last year.
Where are we now?
Back in March the legal expenses market was shaken by a serious threat that all covers would be withdrawn because of the Covid 19 pandemic. However, Straight Solutions made the case, successfully, that we had the controls and expertise to contain losses and keep our policies viable. Our focus was on providing continuity for existing clients and staying open for new business across the broadest possible range of trades.
Clearly the pandemic is not over and we cannot rule out increased prices but we still have the widest standard cover in the market at a very competitive price.
As I write the number of reported claims is now increasing above the same period last year and the next 6 months will be testing. It seems that ACAS has stayed on top of reporting new notifications but there many now be a logjam at the Tribunal service, which means our pipeline of claims may be higher than is visible.
However, we are still able to offer employment protection insurance on affordable terms - but we need to remain vigilant to protect our business partners and clients.
Please feel free to contact us if you have any insurance questions.
FCII Dip M Chartered Insurer
Managing Director, Straight Solutions Ltd