Ladies and Gentlemen.
1. Firstly let me say thank you to the Institute for the opportunity to address you today.
2. Unless you have been living in a cave for the past 12 months, it cannot have escaped your attention that the insurance industry is in the spotlight like never before.
3. We have seen a major corporate collapse, a Royal Commission and unprecedented insured losses arising out of terrorist attacks in the US. On top of this we have seen a crisis in the builders' warranty and medical indemnity markets and auditors, engineers, accountants, and yes even lawyers' professional indemnity is under the hammer. Finally, extreme increases in premiums and a withdrawal of capacity in liability classes has meant that hardly a day has passed where insurance has not been a head line topic of media interest, the subject of talk back radio and of legitimate public concern.
4. All we need is a major flood in Australia and the circle will be complete!
5. Without some serious introspection and action by all of us, community confidence and respect for the insurance industry will be seriously damaged, perhaps permanently.
6. We all have a vital interest in ensuring this does not occur. The insurance industry plays an invaluable role in our economy. It provides a mechanism for transferring and pooling risk. This is so that normal economic and social activities can take place.
7. As the Daily Telegraph puts it, an inability to purchase insurance at affordable rates - or indeed at all - spells `The Death of Fun' as we know it. The Australian public is demanding answers as to why those activities which we have previously undertaken without a second thought are suddenly threatened. The perception in small communities is that the insurance industry does not want to play ball any more.
Factors Driving the Current Insurance Crisis
8. Of course, the factors which have contributed to the current situation are far more complex than that.
9. There have been varying degrees of fact and fiction bandied about as to what is really driving the current crisis in the market.
10. In recent weeks I have received two major reports which try to shine some light on what is actually happening.
11. The ACCC Insurance Industry Market Pricing Review identified six key cost drivers in public liability insurance including the fact that premiums have been unsustainably low in recent years and continuing increases in the cost of claims.
12. The ACCC report relied on data received from insurers prior to the full impact of the failure of HIH and terrorist attacks in the US on September 11 flowing through to premiums. The Government has asked the ACCC to update the report and provide an analysis of the competitiveness of the public liability and professional indemnity sectors of the market by July 2002.
13. The second report that I received was from Trowbridge Consulting. Trowbridge was engaged by the Commonwealth Treasury to provide a report to facilitate discussions between myself and my State and Territory counterparts at a Ministerial meeting on 27 March on public liability insurance.
14. The Trowbridge report divided the factors driving premiums into two major subsets.
- Continuing increases in claims costs for personal injury claims over a 20 or 30 year period which shows no signs of abating. These increases, I believe, are in no small part due to an increasing culture of blame within our communities. Almost irrespective of the cause of any accident, individuals increasingly look to others in society to blame for their misfortune.
- The second sub-set of factors stem from the current state of the insurance market. The market is dominated by defensive pricing and underwriting by insurers as part of a severe insurance market cycle. This has arisen due to underpricing of the product for most of the 90s and a determination by those insurers left in the market not to underprice products or insure risks that do not meet their criteria.
15. Some commentators have tried to discredit the Trowbridge report by saying that insufficient data is available to establish a sufficient nexus between individual factors and the drivers of premium increases.
16. Data availability generally is a major issue in this debate. A lack of data is indeed one of the reasons that some community groups are receiving such large premium increases even though they have never made a claim. Insurers lack sufficient data to adequately risk rate policyholders.
17. However, I believe that on this issue the community will not accept a high moral ground or ivory tower approach. The train has already left the station. Finger pointers will soon find themselves in a position of irrelevance in the debate.
18. But that is not to say that we should overreact in how we respond to the crisis. I am keenly aware, as the Minister responsible for the prudential regulation of insurance companies, of the dangers of strong arming insurance companies into under pricing their products. Similarly, calls to review the level of capital that is required by the prudential regulator to support this type of business are misconceived.
19. Long tail classes of insurance such as public liability insurance hold significant risks for insurance companies and they must hold capital sufficient to absorb these risks.
20. The Australian community demands strong, healthy financial institutions. We have seen the dangers of underpricing and under capitalisation and the impacts that an insurance company failure can have on all sectors of our economy.
21. In addition, I am sure all Australians are most concerned to ensure that seriously injured people who are the victims of negligent conduct or omissions by others are adequately cared for in our community.
22. All of us have a shared responsibility to ensure that this occurs while still addressing the underlying problems in the insurance market. There is plenty of room in this debate for those with good ideas to come forward.
23. We must work toward a solution which finds the balance between people's needs and people's rights and enables insurance companies to meet the expectations and demands of the community without undermining their financial viability.
24. Governments have already stepped up to the plate and collectively we have accepted our share of the problem. Our challenge is to facilitate both short term and longer term solutions.
25. On 27 March, I hosted a meeting of State and Territory Ministers and the President of the Australian Local Government Association in Canberra1. This was particularly important due to the cross-jurisdictional and cross portfolio2 interests of Governments in this issue. States and Territories have primary responsibility for their legal systems and the Commonwealth has responsibility for the prudential and market conduct regulation of the insurance industry. The Ministerial meeting provided a unique opportunity for all tiers of Government to work cooperatively toward an achievable outcome.
26. As a result of the meeting we issued a Joint Ministerial Communique in which we restated our shared determination to tackle the problems of rising premiums and reduced availability of public liability insurance. We also outlined 12 practical measures which we have agreed to implement or seriously consider3.
27. The Heads of Treasuries Group has been charged with fleshing out the detail on how these measures might be delivered. I, and my Ministerial colleagues, will be reconvening in May to consider this work with a view to the earliest possible implementation.
28. What is clear is that all stakeholders in this issue need to be fully engaged in finding a solution.
What can the insurance industry do?
29. I was heartened to see the Insurance Council of Australia last week announce the establishment of an information service4 in conjunction with Insurance Enquiries and Complaints Ltd and the National Insurance Brokers Association. The hot line is designed to assist people looking for public liability insurance. This is a step in the right direction but more can be done. Providing ready access to information is good, but the public wants action.
30. The insurance industry needs to find a way to ensure that public liability insurance is available to the community at a reasonable price. The public does not hold in high esteem business sectors which fail to provide the services which the community demands of them. Banks are a case in point.
31. Of course, these services need to be provided in a way which does not jeopardise the financial soundness of companies. It is a balance that the insurance industry needs to find.
32. One practical suggestion that I could make is that the insurance sector could look to the establishment of a coinsurance pool to underwrite hard to place business. This allows insurers to write the business but only take on a portion of the risks insured in the pool.
33. This concept is successfully used in other parts of the insurance market such as in marine and aviation where insurers do not wish to take on the full amount of individual risks due to the size and nature of the risks involved.
34. I call on the insurance industry to seriously examine the establishment of a coinsurance pool for public liability risks in Australia. The establishment of a pool would give businesses and the community an immediate alternative provider of this type of insurance helping to relieve the current situation in the very short term.
35. A coinsurance pool would greatly assist efforts to put together group buying schemes. Under a group buying scheme, an umbrella policy is purchased on behalf of a range of organisations. A larger policy is far more attractive to insurers than a large number of small risks and can result in cost savings due to the power of bulk buying.
36. One problem that is being faced by people trying to set up group buying schemes is a lack of underwriters willing to provide cover. A coinsurance pool has the potential to alleviate this problem.
37. Another thing that the insurance industry can do is to provide Governments with advice on the sort of legal and procedural reforms that would be most effective in reducing or stabilising premium growth.
38. Long tail classes of insurance such as public liability are extremely difficult for insurers to price.
39. I fully understand the need for insurance companies to provide their shareholders with an adequate return on capital. I also understand the unwillingness of insurers to write public liability insurance in a world of great uncertainty - where courts adjudicate in the future on policies written in the past.
40. In the current formulation of proposals, it is important that insurers provide information to Governments as to what sorts of measures would be likely to reduce the level of uncertainty surrounding the ultimate costs that may be incurred by insurers on these types of policies. This information will be invaluable in determining what reforms will actually work in practice.
41. Looking at the evidence it is clear that carefully designed reforms have been seen to reduce costs in other areas of liability insurance. I mention but a few examples.
42. The 1999 NSW Government reforms designed to reduce the cost of compulsory third party insurance premiums (Green Slips) led to an almost immediate reduction in premiums. Prior to the reforms, premiums for Sydney motor cars were approximately $430. By March 2000, the premiums had reduced to $343, and have remained at that level ever since.5,6
43. Another example are reforms made by the Western Australian Government in 1999. Prior to reforms to the Western Australian workers compensation scheme, businesses faced 35 per cent increases in premiums. Since the State Parliament enacted law reform measures, premiums have fallen every year since7.
44. In other States we have seen the restriction of access to compensation.8 Clearly, capping claims and imposing thresholds in these schemes have had a role in reducing the cost of claims.
What can the legal profession do?
45. An unedifying part of the current debate about public liability insurance has been the unhelpful slanging match between the legal profession and the insurance sector.
46. I acknowledge that there are vested interests behind the rhetoric.
47. However, the rhetoric obscures the fundamental issues at stake here.
48. The first is that whatever may be the underlying causes, existing premiums have not been adequate to cover the cost of claims.
49. The second is that there is a legitimate community need and expectation that those injured though the negligence of another be able to look to the wrongdoer for compensation.
50. And third, the cost of claims have escalated to the point where the current system is unsustainable.
51. If the current system has become unsustainable what role can lawyers play in reducing the cost of claims?
52. The legal profession is quite naturally concerned about a potential diminution of the rights of individuals and the consequences for plaintiffs if radical tort law reform is progressed.
53. Having been a part of the legal profession myself, I fully understand the point of principle involved. However, I do think that the legal profession needs to consider the extent to which their views are justifiable when weighted against the views of the wider community that is being asked to foot the bill.
54. State Governments have under consideration a range of reforms to the legal system including capping of claims designed to limit future costs. I will not repeat the proposals here.
55. However, I believe that there are particular reforms to the legal system which could be made which would improve the efficiency of dispute handling and would not have an unduly adverse outcome for plaintiffs. In fact, there are some reforms which may even have beneficial outcomes for plaintiffs. The legal profession must look for such measures and provide constructive advice to Governments on this issue.
56. I offer some suggestions which I believe have some merit and deserve serious consideration.
57. Anyone who has ever had anything to do with the adversarial system of civil litigation knows that its most problematic aspects are delay and cost. Much of this is due to inefficient procedures especially in gathering and challenging expert evidence and the `scatter gun' tendency to join every conceivable person in the vicinity of an accident, as a defendant.
58. As long ago as 19939 it was reported that the average delay in completing an out of court settlement in a medical case is two years and for a case fought in the courts, the delay was seven years. Much more work has been done since, including recommendations made in the Woolf Report in the UK and the success of these changes needs to be carefully assessed in the Australian context.
59. Victims of negligence, whether medical or more generally, have immediate financial needs. Delays of this kind are completely unsatisfactory.
60. I was extremely pleased to see that that the Australian Plaintiffs Lawyers Association10 has welcomed an opportunity to review pre-litigation procedures that could be adopted to reduce the cost of and increase the efficiency of resolving claims. This idea has real merit.
61. There are a number of techniques of dispute resolution commended for their ease of access, informality, speed and cheapness. These include expert neutral evaluation, mediation, arbitration and mini trials. The insurers and the legal profession need to carry out much more focussed work in exploring the value of these techniques, the circumstances in which one or other of them is appropriate and to facilitate the training of personnel in the use of these techniques. There are already dispute handling institutions which profess expertise in these areas where advice and guidance could be called on to devise alternate systems to the adversarial court system for handling claims.
62. There needs to be a much better thought out system for contact between those acting for plaintiffs and insurers with early and frank exchange of information. The present `cat and mouse' litigation game between plaintiffs and defendants may be forensically defensible but is surely no longer affordable.
63. Another area which I think deserves more robust consideration is the concept of proportionate liability.
64. Joint and several liability means that while several persons have, by their negligence, combined to cause loss to a plaintiff, any one of them may be fully liable to pay the whole amount of a judgement - although the person against whom the action was brought can seek contribution from other negligent parties.
65. Joint and several liability throws the risk of insolvent or untraceable wrong doers on to the defendant who may bear the whole cost, even though only partly responsible. It permits a plaintiff to recover the whole of his or her loss from the deepest pocket, usually an insurance company.
66. In practice, this principle can be quite unfair, and especially so in cases where the plaintiff has contributed to his or her own loss. Circumstances can arise in which the plaintiff's proportionate contribution to their own loss is actually greater than that of the only solvent defendant, but that defendant would be called upon to compensate the plaintiff in respect of the liability of any other (insolvent) negligent parties.
67. Joint and several liability underpins a system of compensation that depends upon liability insurance. It ensures that people who suffer a loss are fully compensated. In this regard, compensation depends on liability insurance and a `deep pocket' defendant11. Business owners with public liability insurance such as owners of shopping centres can be the targets of legal action even in circumstances where they are only one of the parties involved and may only have contributed to a small percentage of the plaintiffs injury.
68. A well advised plaintiff will take proceedings against the person who has insurance adequate to meet a claim. The cost of any particular award is spread among the defendant's insurer's policyholders by way of an adjustment on future premiums.
69. It is not difficult to see how this drives up the cost of premiums for other policyholders!
70. Proportionate liability, on the other hand, divides the loss among the negligent parties according to their share of the responsibility. There is no right of contribution between various parties. Unfortunately, proportionate liability in its truest form puts the risk of insolvency or untraceability of a defendant on to the plaintiff.
71. However, there are various modifications that can be made to proportionate liability to address some of the drawbacks.
72. For example, there could be grounds for abolishing joint and several liability where the plaintiff is partly to blame for his or her own loss. A fairer system might be to distribute an insolvent defendant's proportion of any loss amongst the plaintiff and solvent defendants, in circumstances where the plaintiff is partly at fault, in proportion to their own responsibility for a loss.
73. One further criticism of proportionate liability is that it would be difficult to implement in practice and could add to the cost of litigation for plaintiffs12. I do not dismiss these concerns.
74. However, proportionate liability is already used in some jurisdictions in Australia for defective building work and modified forms are already at work in Ireland and also in some States of the US. This issue is surely worth another look.
75. However one interprets the case law on negligence, few would disagree that the boundaries are unclear and the principles imprecise.
76. It has been largely left to the courts to ensure that those responsible for injury to others pay proper compensation.
77. Holding someone responsible for someone else's injury follows a finding of a breach of a duty of care when an event is foreseeable. Once liability is established, damages are awarded. Although the legal approach is the same in every case, there will be variations between different judges and some decisions are simply outlandish.
78. What seems to be emerging from some members of the judiciary is a recognition that some judges are indeed playing Santa Claus.
79. In his recent retirement speech, Justice Thomas of the Queensland Court of Appeal observed of his fellow judges, `We have allowed the tests for negligence to degenerate to such a trivial level that people can be successfully sued for ordinary human activity'.
80. Although there is some evidence that the High Court is retreating from the 1992 Rogers v Whitaker high water mark in medical negligence, whether negligence has been scaled back is less than clear. Just last year the High Court expanded the possibility of claims against local councils and road authorities by abolishing the `high way rule'. The `high way rule' protected these bodies from liability if they had failed to repair roads and foot paths from normal wear and tear.
81. It is probably too soon to tell whether this will have an added affect on local government authorities.
82. Some will argue that the Courts should be allowed to rein in the excesses of outlandish judgements by clear statements of principle that will bind the lower courts.
83. There is some force in the argument that it would be precipitous to undermine a system that has a built in appeal process to deal with flawed decisions and the right to re-state the law that will filter down the judicial hierarchy.
84. However, what is overlooked is the exceptionally long lead time between flawed decisions being made and getting the right result at appellate level, even leaving aside the increased legal costs. It is all too much like a lottery when both plaintiff and defendant and indeed the broader community requires a more certain and efficient form of justice.
85. Parliament should only intervene when there is a clear need that is not being met and a public purpose to be fulfilled.
86. Although it is clearly a matter for the States and Territories, in my opinion there is a demonstrated need for legislation to renovate a complex compensation system based on the law of negligence, that is clearly not meeting the needs and expectations of the community.
87. Finally, I think we need some creative thinking on the way in which as a society we compensate catastrophically injured people. The civil litigation system is in many ways akin to a lottery for severely injured people. Some people hit the jackpot and others are left to care for themselves.
88. I do not favour the adoption of a no-fault insurance scheme. A scheme which provides universal compensation means that everyone has to accept a lower level of benefits. This type of system is fundamentally unfair to people who are catastrophically injured through someone else's negligence. It also imposes no level of accountability on individuals for their own actions.
89. In my view, the focus ought to be on what an injured person actually needs rather than on the pursuit of a rights based remedy that in the end may or may not be adequate.
90. We can do better to ensure that those who are injured are properly cared for in a more cost effective manner. For example, offers of particular care, life time funding or equipment may be more important from a needs perspective than a cash award. Structured settlements may provide for a better alignment with the needs of a claimant and ensure that sufficient funds are available over the entire course of a person's life. A shortfall in compensation for a catastrophically injured person is as unjust as a windfall is to a defendant.
91. In closing, I would like to reaffirm my commitment to driving this issue forward. All of us have a joint responsibility to find a balance between the need of the community to have access to affordable insurance and the needs of injured people to access appropriate compensation.
92. Governments are determined to take responsible steps to address the problem of rising insurance premiums. The community must also decide what level of compensation it is prepared to pay. The culture of blame must stop.
93. I now look forward to seeing constructive input from both the insurance industry and the legal profession to help Governments to address this important issue. Not until we get a system that delivers no windfall and no shortfall, will this problem be truly resolved!
Thank you.
MINISTERIAL MEETING ON PUBLIC LIABILITY
27 March 2002, Canberra
The Commonwealth, State and Territory Ministers and the President of the Australian Local Government Association (the Ministers) restated their shared determination to tackle the problems of rising premiums and reduced availability of public liability insurance.
The Ministers agreed that many of the issues are complex and cross-jurisdictional, requiring collective action from governments and industry in the immediate and long term. The problems being confronted in the public liability area are not unique and are also evident in other insurance classes.
The Ministers received an expert report identifying the major factors behind rising premiums and reduced availability of public liability insurance as being:
- changing community attitudes to litigation;
- change in the courts' view of what constitutes negligence;
- increased compensation payments for bodily injury claims;
- past under-pricing and poor profitability of the insurance industry;
- the collapse of HIH, a major player in the public liability market; and
- a decision by insurance companies to be more selective about the risks that they cover.
The Ministers noted that a number of jurisdictions had already undertaken a range of initiatives including facilitating group insurance for not-for-profit organisations, tort law reform and development of risk management guidelines.
Ministers agreed that:
1. The Commonwealth will introduce legislation to make tax changes to encourage the use of structured settlements for personal injury compensation.
2. The States and Territories will make such legislative changes as are necessary to remove the barriers to structured settlements as an alternative to lump sum pay outs.
3. Subject to evidence that changes will increase affordability and availability of cover, the States and Territories will examine:
- targeted claims cost reduction by, for example, protecting volunteers, community and appropriate sporting organisations from actions;
- broadly based tort reform; and
- legal system costs and practices, such as legal advertising.
TRADE PRACTICES ACT/FAIR TRADING ACTS
4. The Commonwealth, the States and Territories will examine relevant sections of the Trade Practices Act and comparable State and Territory legislation to consider the extent to which individuals can legally and confidently assume personal responsibility for high risk activities.
5. State Governments would encourage group insurance buying where appropriate.
6. The insurance industry will be asked to collect more detailed information on claims experience through a co-operative industry arrangement.
7. A representative of the Insurance Council of Australia will be invited to address the next meeting of Ministers.
8. Ministers encouraged the insurance industry to be more innovative and responsive in product development and communications with consumers.
9. The Commonwealth will consider widening data collection on the insurance industry by APRA and will report to a subsequent meeting on the impact of the new prudential requirements for general insurers.
10. The States and Territories will collect data on claims and costs and provide it to Heads of Treasuries.
11. States and Territories will provide advice to Heads of Treasuries on risk management practices introduced in their jurisdictions that have assisted in making insurance more available and more affordable.
12. The insurance industry will be asked to advise Heads of Treasuries on other effective risk management procedures.
There was also agreement that the problem needed to be tackled against two frameworks - one of addressing rising claims costs and the second of addressing the availability of insurance cover. Ministers recognised that there were no easy solutions but that work will commence immediately on the above.
Given the multiplicity of the functions in governments impacted by the problem in public liability markets, the meeting agreed to request that the Council of Australian Governments (COAG) on 5 April 2002 endorse the outcomes of today's meeting.
Recognising the complexity, urgency and technical nature of many of the issues, Ministers agreed that the Heads of Treasuries Group, which will include the Commonwealth and Local Government, was best placed to develop practical measures for consideration by each Government by 30 April 2002.
Ministers noted that the Commonwealth had asked the Australian Competition and Consumer Commission to update its recently released report on Insurance Industry Market Pricing by July 2002. The report will analyse the competitiveness of the public liability and professional indemnity markets and the Australian Securities and Investments Commission will be asked to provide advice on improving the information to consumers in insurance policies.
Ministers acknowledged the significant contribution from stakeholders and thanked those who made submissions for the meeting. These submissions will be further considered by the Heads of Treasuries Group.
Ministers agreed to meet again in May.
1 The purpose of this meeting was to assist the States and Territories to coordinate the exchange of information about the various courses of action currently being considered in their States and also to provide an opportunity to examine the scope for a nationally consistent approach across different jurisdictions.
2 The following Commonwealth Ministers have a cross portfolio interest in public liability insurance and have provided valuable input to the Minister for Revenue and Assistant Treasurer in the current debate: the Hon Darryl Williams AM QC MP, Attorney-General, Senator the Hon Nick Minchin, Minister for Finance and Administration, Senator the Hon Amanda Vanstone, Minister for Family and Community Services, the Hon Wilson Tuckey, Minister for Regional Services, Territories and Local Government, the Hon Danna Vale, Minister Assisting the Minister for Defence, Senator the Hon Rod Kemp, Minister for Arts and Sport, the Hon Joe Hockey, Minister for Small Business and Tourism.
3 A copy of the Communique is attached.
4 The information service can be contacted by calling Insurance Enquiries & Complaints Limited on telephone: 1300 363 683. Calls to the telephone service are toll free, with the exception of calls from mobile telephones.
5 Motor Accidents Authority data: average premium for Annual Policies, provided quarterly.
6 The key reforms in the NSW CTP reform package included: procedural reforms to encourage claims to be made within 28 days; arrangements for the early payment of medical expenses; new procedures for the resolution of disputes about medical condition, disability and impairment and less focus on litigation in the courts; a cap on economic loss payments of $2,500 net per week and a cap on the maximum amount available as damages for non-economic loss; and thresholds for access to damages for non-economic loss.
7 WA Workers Compensation Premium Rates Committee.
8 The Transport Accident Commission in Victoria restricts compensation to persons with more than a 30 per cent threshold of impairment. In Queensland, WorkCover requires people with less than a 20 per cent impairment to make an irrevocable election between pursuing common law damages or statutory entitlements.
9 Mr David Bolt, British Medical Association, speaking at the Royal Society of Medicine conference `Disputes Between Patient and Doctor: is arbitration the solution', 10 December 1993.
10 APLA Submission to the Ministerial Meeting on Public Liability Insurance of 27 March 2002.
11 Inquiry into the law of Joint and Several Liability Report of Stage 2, January 1995. The inquiry was established by the Commonwealth and New South Wales Attorneys-General and conducted by Professor Jim Davis, Australian National University.
12 New South Wales Law Reform Commission, Report 89 (1999) Contribution between persons liable for the same damages.