Public Liability Insurance by liaoguiguo

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									Public Liability Insurance
Analysis for Meeting of Ministers 27 March 2002
26 March 2002
         26 March 2002



         Ms Lynne Curran
         General Manager
         Financial Institutions Division
         The Treasury
         Langton Crescent
         PARKES ACT 2600


         Dear Ms Curran,


                                                               Public Liability


         It is our pleasure to deliver this report on the public liability issues in Australia in accordance with your
         brief.

         The report presents a base of information designed to assist Ministers of the Commonwealth, States and
         Territories with their meeting to consider public liability on 27 March 2002. It also gives a framework to
         aid analysis and consideration of possible solutions.

         We look forward to the 27 March meeting.

         Yours sincerely,




         Estelle Pearson                                                                                                 Geoff Atkins




CONSULTANTS & ACTUARIES                      MELBOURNE                       SYDNEY
Trowbridge Consulting Limited
ACN 092 651 057                              Level 39, 140 William Street    Level 38, 1 Macquarie Place
                                             Melbourne VIC 3000              Sydney NSW 2000
The liability of Deloitte Touche             Tel: (03) 9269 4000             Tel: (02) 9324 9000
Tohmatsu, is limited by, and to the extent   Fax: (03) 9269 4111             Fax: (02) 9324 9324
of, the Accountants’ Scheme under the
Professional Standards Act 1994 (NSW).       E-mail: melbourne.office@trowbridge.com.au    E-mail: sydney.office@trowbridge.com.au
Contents

Executive Summary                                                     i

Part A - Introduction                                                 1
What Public Liability Covers                                          1
How Claims Emerge                                                     3
How the Insurance Market Works                                        3
Do We Have a ‘Crisis’?                                                4


Part B – Analysis of the Public Liability Insurance Market           6
Drivers of the Current Crisis                                         7
Trends in Claims                                                     12
Premiums and Availability                                            24
Insurer Profitability                                                31
Availability of Data                                                 39


Part C – A Framework for Looking at Solutions                        43
Government Responsibilities                                          43
Major Directions of Response                                         44


Appendices                                                           58
1. The Consultancy Brief                                             58
2. Sources of Information                                            60
3. APRA Data                                                         63
4. ISA Data                                                          68
5. Statutory Schemes and Examples of Reform                          71
6. Insurance Cycles and Crises                                       74
7. Public Liability Policy Exclusions and   Reinsurance Exclusions   76
8. NSW District Court Information                                    83
9. CCH Tort Reports                                                  84




H:Fedtreas02\Publiab\R_260302_Public Liability.doc     i
Executive Summary
This report has been commissioned by the Commonwealth Treasury to assist the meeting
of Ministers on 27 March 2002. This Executive Summary is deliberately brief and should
be read in conjunction with the report as a whole.


The Context
Public liability insurance is insurance for claims by third parties (the public) for personal
injury or property damage caused by or attributable to the negligence of the insured.

Public liability insurance is used by owners and operators of commercial and non
commercial activities, including use of property, to protect them against the risk that a
member of the public suffers injury or loss that is attributable to these owners and
operators.

Other types of liability insurance which are not public liability insurance are –

    motor vehicle third party (covered compulsorily under State legislation)

    workers’ compensation (covered compulsorily under State legislation)

    professional indemnity (for professional services offered by the insured)

    products liability (for losses attributable to products manufactured or sold by the
    insured).


The Problem
There is a crisis today in public liability insurance. The crisis is that there are many
people seeking insurance who either can find it only at very high prices (compared to
prices during the last 5 years) or cannot find it at all.

The nature of the crisis is that there are fewer insurers than ever before accepting the
business and these insurers are generally charging much higher prices than previously and
are also being very selective in their acceptance of risks.

While this phenomenon can be regarded as the peak (or trough) of an insurance market
cycle, it is nevertheless likely to persist for another year or two at least unless there is
some external stimulus to or intervention in the market.

Investigations reveal that there are two sets of issues to deal with –

    Increasing cost of claims

             o    analysis shows that the cost of claims have been rising for many years
                  driven by personal injury claims (the increases are significant – more



H:Fedtreas02\Publiab\R_260302_Public Liability.doc          i
                 than 10% a year on average – and have probably been going on for 20
                 years or more)

            o    note that claims can be very large (occasionally) and they have a ‘long
                 tail’: they emerge slowly due to delays in notification and delays in
                 resolution

    An insurance market crisis

            o    we can now see clearly that insurers under-priced the business during
                 most of the 90’s

            o    insurers are generally not very comfortable with this business due to the
                 difficulty of assessing risks and estimating future claims costs at the time
                 they quote for the business

            o    insurers are now determined, in the interests of their shareholders, not
                 to under-price or to insure risks that do not meet their criteria

            o    prices in 2002 are likely to average 30% more than in 2001, with many
                 individual premiums several times higher than last year

            o    the attitude of insurers and the recent change in the market in Australia
                 have been heavily influenced by the fall of HIH, which was acting as a
                 “cut price” insurer.

Hence the problem that now exists is the consequence of –

    Continuing increases in claims costs for personal injury claims (a 20 or 30 year
    phenomenon that currently shows no signs of abating)

    An insurance market dominated by defensive pricing and underwriting by insurers (a
    recent phenomenon and part of a severe insurance market cycle).

Both of these phenomena are clearly observable from available data, despite some gaps
in the data. The evidence is indicated in the graphs at the end of this summary. It is
documented and explained in Part B of the accompanying report.

And yet these graphs do not depict the full story. For example –

    claims: while average claim costs appear to have been rising for many years at
    around 10% per annum (and that is a great difficulty in itself) it is likely that some
    segments of the market are worse than this while other segments do not suffer the
    same problems.

    prices: although 2002 prices are expected to be an average of 30% higher than 2001
    prices, we will find that –

            o    20% increases will be common

            o    increases of 50% to100% will not be uncommon

            o    some policyholders will be asked for increases of 500% to 1000%



H:Fedtreas02\Publiab\R_260302_Public Liability.doc      ii
               o   some policyholders will be denied cover altogether.


Framework for Solutions
In our view it is helpful to consider possible responses to the crisis specifically in terms of
the two groups of causes:

    Underlying cost of claims – long term increases in the overall cost of claims in public
    liability, particularly in the bodily injury area

    Insurance market crisis – the extreme insurance cycle that has resulted in short term
    availability problems and some very high premium increases.

In the case of the underlying claim cost issues, the possible responses in turn fall into two
groups:

    Targeted – aimed specifically at problem areas such as community groups, sporting
    organisations, tourism and leisure

    Broadly based – aimed at all segments of public liability claims.

The next two pages outline the range of possible responses suggested in submissions and
during our research.

The many submissions and the public discussion indicate a strong desire for consistent
and nation-wide co-ordinated action. Following our research and analysis for this report,
however, we do not under-estimate the difficulty of forging appropriate solutions.

Our proposal for a framework to examine these possible solutions is that the following
should be addressed:

    What are the objectives of the reforms?

               o   Cost reductions

                       Individually

                       Community-wide

               o   Ensuring current availability of cover

               o   Achieving future stability of premiums and access to cover
               o   Review of social policy

    What responses best target achievement of the objectives?

    What issues can and should have a quick response and what timeframe should apply
    overall?




H:Fedtreas02\Publiab\R_260302_Public Liability.doc          iii
Range of Possible Claim Cost Responses

Targeted to specific industry problems

Change the rules for determining what constitutes ‘negligence’ in certain situations

Exempting certain volunteers and organisations from negligence actions

Promote compliance with industry-specific standards as a valid defence in negligence
actions.

Cover volunteers and contractors by workers’ compensation rather than liability
insurance

Allow valid contractual waivers of liability for participation in inherently risky activities


Broadly based across all public liability claims

Re-write the tort law to bring the standard of negligence back to a reasonable person’s
approach and away from strict liability

Tort reform to reduce the amount of compensation available:

    threshold for general damages

    caps on general damages, earnings loss or medical

    restrict certain heads of damage such as care provided by family members.

Encourage or mandate the use of structured settlements for catastrophic injuries

Reforms to the legal system to reduce the cost and/or amount of litigation:

    control legal advertising

    regulate legal fees

    change “no win no pay” arrangements

    change uplift fee arrangements

    increase the risk involved in unsuccessful litigation through costs arrangements

    mandate alternative dispute resolution systems

An education campaign to change the increasing litigiousness of our community.

                                                   Source: Submissions and discussion papers




H:Fedtreas02\Publiab\R_260302_Public Liability.doc        iv
Range of Possible Insurance Market Responses

Facilitation of the Market:

Group buying by affiliation and industry groups, perhaps with government support

Arrange market access through local government

Develop and promote specific products with help of brokers/insurers

Publish data to help set and evaluate prices

Publish an advisory underwriting and premium rating guide

Increase the use of personal accident insurance as an adjunct to public liability insurance


Supplementing the Market:

Allow pooling of risk outside the insurance regulatory framework (eg local government
does this now)

Government underwriting of some risks (eg certain events on crown land) through existing
government insurance schemes

Subsidies to insurance buyers in critical segments to ease problems (could be grant or
loan)

Start a new Government Insurance Office


Regulation of the Market:

Mandate improved industry data collection and dissemination

Make supply of insurance compulsory for insurers

Set maximum prices that can apply

                                                Source: Submissions and discussion papers




H:Fedtreas02\Publiab\R_260302_Public Liability.doc     v
Indicative Average Claim Size



                              $20,000

                                                                                                    12% p.a.
                              $15,000
 Average Claim Size




                              $10,000
                                                                                                          AWE


                                    $5,000


                                          $0
                                               1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

                                                                   Accident Year
 Source: ISA




Writs lodged – Preliminary Figures for Sydney District Court


                                        2500


                                        2000
                      Number of Writs




                                        1500


                                        1000


                                        500


                                           0
                                                 1996     1997     1998          1999        2000         2001
                                                                          Year
         Source: District Court of NSW




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Premium Rate Index


                        140                                                           Fcst

                        120
   Index (1993 = 100)




                        100

                         80

                         60

                         40

                         20

                          0
                               1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
                                                Renewals at June 30
 Source: JP Morgan/Deloitte




Indicative Insurer Profitability by Accident Year


                         60%

                         40%

                         20%
   % Premium




                          0%
                                1992   1993   1994   1995   1996        1997   1998   1999   2000
                        -20%

                        -40%

                        -60%

                                              Accident Year ending 31 December
 Source: ISA




H:Fedtreas02\Publiab\R_260302_Public Liability.doc                    vii
Part A - Introduction
This report has been commissioned by the Commonwealth Treasury to assist the meeting
of Ministers on 27 March 2002. The brief is shown in Appendix 1.

The report gives a quantitative and qualitative analysis of the current situation in public
liability insurance. It concludes that the circumstances can reasonably be described as a
‘crisis’ and discusses the drivers of the crisis. It does not propose solutions, but gives a
framework within which proposals to deal with the crisis can be developed. It does
present some options identified from our research to this assignment and from our long
term insurance industry observation.

In preparing the report we have been aware of the varying knowledge levels of readers.
While we have attempted to give relevant background and explanations, the amount of
detail is necessarily limited. Users of the report should consult with the authors before
drawing conclusions on any issue in doubt.

The report has been prepared for the purpose stated above and should not be used for
any other purpose or disclosed to third parties without the permission of the authors.

The data analysis and projections in the report deal with items that are inherently
uncertain. While we have attempted to give a fair and unbiased interpretation of the
data it is possible that more detailed analysis of new data might give a different picture.



What Public Liability Covers
Public liability covers the insured’s legal liability to third parties for bodily injury or
property damage. An insurer indemnifies the insured against claims by a third party for
bodily injury or property damage resulting from negligence by the insured.

The public liability policy does not cover:

    Damage caused by a motor vehicle – covered separately by motor insurance (property
    damage) or compulsory third party insurance (bodily injury)

    Bodily injury to the insured’s employees – covered by workers’ compensation
    insurance

    Loss arising from professional services offered by the insured – covered by
    professional indemnity insurance

    Loss caused by products sold by the insured – covered by products liability insurance
    (although as noted below public and products liability are usually treated together).




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Appendix 7 gives an example of the exclusions (ie items not covered) from a typical
policy document.

In most industries, and especially for smaller businesses, public liability and products
liability have been sold as a combined product with a single premium amount. Usually,
therefore, statistics are only available for public and products liability combined.

Each policy has a limit of indemnity selected by the insured, which in public liability
applies to each individual claim for property damage or bodily injury. This limit would
rarely be less than $5 million, with $10 million or $20 million being common. Larger
businesses, or those with high risk exposures, would buy higher limits of indemnity
sometimes into hundreds of millions of dollars.

Many insurance policies also have ‘excess’ provisions whereby the insured pays the first
part of the cost of a claim (referred to as the “excess” or “deductible” amount). The
size of any excess is usually selected by the insured and depends on the financial capacity
of the insured and their strategy towards managing risks. It may be as little as a few
hundred dollars up to several hundred thousand dollars for each claim.

The policy covers legal liability but the liability does not have to be proven in court.
Many claims are settled by negotiation and agreement, even when legal representatives
are involved, without resort to court determination or even formal litigation.

The policy also covers the cost of defending against a claim provided that the policy
would cover the claim if it is successful. Some claims are successfully defended, and if
they proceed through litigation would usually result in a costs order against the plaintiff.
If costs were unable to be recovered, defence costs only would be incurred by the
insurer. Many successful defences do not progress through litigation and in these cases
defence costs are not recovered. In practice most claims that are successfully defended
result in the insurer incurring some or all of the defence costs.


Comparison with Statutory Schemes
In looking at public liability, comparisons are frequently drawn with workers’
compensation and compulsory third party insurance, which cover most other bodily injury
claims. These are referred to as “statutory schemes” because insurance is made
compulsory by legislation and the statutes define many aspects of the schemes including
benefit entitlements and how claims are handled.

Appendix 5 gives some more background on statutory schemes and in particular the type
of reforms that have occurred in these schemes over the last 20 years. It is inevitable
that the community and government in each jurisdiction will look to these schemes for
some models of how public liability might be handled.




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WorkCover Queensland

In Queensland, in 1996, workers with an injury which causes less than 20% work-related
impairment must make an irrevocable election between pursuing common law damages
or statutory entitlements. This reform was introduced as a cost-saving measure in
response to steep increases in the number of common law claims.


TAC Victoria

In the motor accident scheme in Victoria, in 1986, common law costs were blowing out,
so the Government instituted control over access to common law by restricting it to only
those injured parties with a 30% threshold level of impairment.



How Claims Emerge
Public liability insurance is categorised as long tail insurance (as are the other liability
classes) because the time period from occurrence of claims to their finalisation is often
many years. There are often delays in the reporting of claims (for example, while an
injured party awaits the injury stabilising) and usually extended periods before the
settlement of the claim due to investigations, negotiations and legal processes.

It takes three to five years before a reasonably accurate estimate can be made of the
cost of claims from a given year of insurance. This is due to the combination of factors of
delay and the inability to value accurately the likely cost of individual claims (outcomes
from injuries change or develop; some “facts” emerge late in the process; courts provide
little consistency in verdicts). It is not for many years (3-5 at least) after the year of
insurance covering the event that there is adequate experience to be able to determine
with confidence the result for the “accident year” concerned.

In Part B we give more information on the types of claims that arise and how claims are
handled.

Unlike workers’ compensation or motor accidents, there is virtually no specific legislation
governing how claims are dealt with and how any compensation is determined. Claims
are dealt with under ‘common law’ principles established through a long history of case
law and, if litigated, are made by way of civil actions in the relevant jurisdiction.



How the Insurance Market Works
General insurance, of which public liability is a part, is a competitive market. The
relevant parties are as follows:




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1.   Buyers - Most members of the community who own, control or occupy property are
     exposed to the risk of a negligence action by a third party for injury or damage. To
     protect themselves from ruin should such an action be successful, it is customary and
     prudent to purchase “third party” public liability insurance. This cover is
     automatically provided in home insurance products to protect the owner or tenant.
     Business owners need separate cover to protect themselves from actions arising from
     incidents in the course of undertaking their business.

2.   Brokers - Most public liability of a commercial nature is acquired through insurance
     brokers, specialist intermediaries whose role is to advise on insurance needs and
     obtain the best deal (including price) for their clients.

3.   Agents – In some cases the intermediary may be an agent, who acts only for one or a
     few insurers.

4.   Insurers - Most general insurers provide public liability cover. Each policy is
     assessed by the insurer before a premium and terms of cover are offered.

5.   Underwriting agents - Some public liability insurance, especially in specialist
     classes, is placed with underwriting agents who perform most of the functions of the
     insurer but do not carry the risk, which is passed to one or more insurers on a bulk
     basis.

6.   Reinsurers - Insurers buy reinsurance protection against individual large losses that
     they may incur. For example, with liability cover of $10 million an insurer’s own risk
     retention may be $2 million with any claim above this amount covered by
     reinsurance. Reinsurers charge insurers a premium for that cover.



Do We Have a ‘Crisis’?
Insurance markets are renowned for their cyclical nature, with extended periods (say
three to five years) of stable or reducing premium rates, followed by a shorter period
(usually two or three years) of rapidly increasing premiums. The next section discusses
insurance cycles in more detail. While the premium increases are often surprising and
concerning to customers, this does not necessarily indicate a crisis.

Occasionally, however, the market cycles are so severe that insurance becomes
unavailable to some customers, or only available at prices that the customer regards as
unaffordable or unjustifiable. We have such a situation now.

Media reports, submissions received by Treasury and our interviews with insurers and
brokers confirm for us that the public liability market is currently in such a crisis.
Moreover our insurer interviews suggest that availability of cover may diminish further as
insurers progressively strengthen their risk selection criteria.




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The hardest hit in the current situation are those organisations that have ‘public traffic’
(large numbers of members of the public on their premises or participating in their
activities). This includes:

    Hotels and licensed clubs

    Shopping centres

    Event organisers (both community and commercial)

    Sporting organisations

    Tourism operators.

There is no indication at the present time that insurance market conditions are likely to
change within the next one to two years in such a way that the crisis will be resolved by
market forces alone in that time.




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Part B – Analysis of the Public
Liability Insurance Market
In the first part of the report we give our analysis of the public liability crisis and our
assessment of the causes. The sections are as follows:

1. Drivers of the Current Crisis – summarises the causes of the crisis, based on the
    evidence in the subsequent sections

2. Premiums and Availability – analyses available information on premiums and the
    availability of public liability insurance

3. Trends in Claims – describes the characteristics of claims and looks at the available
    evidence regarding trends in claims and litigation

4. Insurer Profitability – examines recent profitability of public liability business for the
    insurance industry, including the adequacy of claim provisions

5. Availability of Data – describes what data is available and, as requested in the brief,
    comments on the inadequacies of available data.




H:Fedtreas02\Publiab\R_260302_Public Liability.doc        6
Drivers of the Current Crisis
From our analysis and interviews, the drivers of the current crisis can be categorised into
two main groups:

    Underlying claim cost increases – a long term issue occurring over many years

    Insurance market crisis – a short term issue arising from an extreme market cycle in
    the insurance industry.

In economic jargon, the current crisis could be described as a market failure. The forces
of supply and demand in the market are such that there is no “equilibrium price” at the
moment. Not all customers are able to obtain suitable insurance at what they regards as
reasonable prices.

In insurance jargon, the insurance cycle is so severe in this class of business that major
dislocations are occurring and many customers are unable to find an insurer.


The Increasing Cost of Claims
The underlying cost increases relate particularly to upward trends in bodily injury claims.
This is a long term issue, with no evidence of any sudden change in the last couple of
years.

Over several decades, and across many types of insurance business, there have been real
increases in the cost of personal injury claims due to both:

    Increases in the propensity of people to make a claim following an injury

    Higher compensation to people for a given type or severity of injury.

These underlying drivers are attributed by commentators to a variety of causes including
(in no particular order):

    Changing community attitudes. The rise in compensation claims is said to have
    reached a stage where “each of us must be prepared to accept a reasonable level of
    responsibility for our own actions, rather than a windfall opportunity to line our
    pockets as a result of some unfortunate accident.”…… “It is argued that there has
    been a reduction in people’s willingness to take personal responsibility for their own
    situation and to accept misfortune, being replaced by an expectation that society
    will look after them and a preparedness to assert their legal rights to achieve this
    protection”. This was discussed in a landmark speech in 1996 by John Cloney (now
    Chairman of QBE Insurance) in an address entitled ‘Claim and Blame’.

    Specialist plaintiff law firms. There has been growth in law firms specialising in
    personal injury cases for plaintiffs. These firms are active in soliciting for business



H:Fedtreas02\Publiab\R_260302_Public Liability.doc      7
    through advertising and other means and are willing to push the common law through
    running ‘test’ cases. They are well resourced and innovative.

    Drift in definition of negligence. Over recent years, “negligence” or a breach of duty
    of care for the public has moved in its legal interpretation from a reasonable duty of
    care in all the circumstances towards a “strict” duty of care, such that an occupier
    has an absolute responsibility for the care of the public on their premises, regardless
    of personal responsibilities.

    In these circumstances, it has become increasingly difficult to defend actions alleging
    negligence or breach of duty of care in public liability business

    Increased levels of compensation. There is a view that, over the years, the amount
    of compensation for a given type of injury has increased in real terms, driven by
    court awards and then followed in the negotiated settlements that are used to
    finalise most claims.

    Perceived generosity of courts. Many involved with the defendants’ side argue that
    the Courts are too generous to plaintiffs, both in determination of negligence and
    awarding damages. The significance of this issue seems to vary by jurisdiction, with
    most concern expressed about NSW and Victoria. This is believed to discourage
    insurers from taking the risk of running cases through the Court.

    Increasing deregulation of legal fees, contingency uplift fees and “no win no fee”
    arrangements. These factors have led to greater access to the judicial systems by
    those unable to otherwise afford it (a desirable outcome) but also to a touting for
    work which would otherwise not be pursued legally (an adverse outcome). In
    practice, we are advised that the extent of contingency fees is limited to some
    “uplifting” of scale fees in certain jurisdictions (25% in NSW).

     Legal advertising in some jurisdictions is also said to have contributed.

    Class actions. There have been several high profile class actions in Australia in
    products liability, mainly involving food contamination. It is argued that this is one
    of a range of influences in the legal system increasing overall costs and changing
    attitudes.

    Reforms in other types of insurance. Other liability classes in Australia, namely
    workers’ compensation and CTP, have been progressively enforcing reform in terms
    of common law access and benefit outcome, since the mid-1980’s. Reforms have
    included:

            o    Abolition of the right to sue (subsequently reinstated in two states)

            o    Caps on damages (say, $250,000 for pain and suffering)

            o    Thresholds for access to common law outcome (minimum 10% bodily
                 impairment to be eligible for damages).




H:Fedtreas02\Publiab\R_260302_Public Liability.doc      8
      As a result, there is advice that, in particular, a leakage from Workers Compensation
      coverage to public liability coverage is being sought by claimants (arguing, for
      example, that they are contractors rather than employees and therefore not eligible
      for workers compensation) where there are no such access or benefit restrictions,
      and hence larger payouts.


The Insurance Market Crisis
The insurance industry is notorious for its cyclical behaviour. An overview of a typical
insurance cycle is shown in Figure 1.

                                           Figure 1

                 Market may overshoot                            Strong profits


              Risk selection            Hard Market                   Capital flows into
                                                                      market
             process rejects
            some activities /
                   industries             (Expensive)
                                                                             Price competition –
     Incidents arise – HIH/                                                  prices fall
                      WTC
       A Sellers’ Market
                                                                                  A Buyers’ Market


   Capital and capacity
withdrawn from market                                                             Insurer demands
                                                                                  premium growth
          Insurer demands
               profitability                                                 No significant
                                            (Cheap)
                                                                             incidents
            Insurer realisation of
         losses – prices begin to        Soft Market                   Prices move into
                  rise tentatively                                     “free fall” – may
                                                                       undershoot




The playing out of this cycle in public liability insurance in Australia is described in the
following paragraphs.


1.     Competition – The Soft Market

Insurance is a competitive market, with countless buyers and a number of sellers (though
fewer now than several years ago).

Importantly, most organisations buy their insurance through brokers – professional
intermediaries who “shop around” to get a good deal for the customer as well as advising
on their insurance needs.

All types of commercial insurance, and public liability is no exception, are able to be
moved from one insurer to another very easily. Big changes in market share of an insurer




H:Fedtreas02\Publiab\R_260302_Public Liability.doc       9
can occur very quickly based on whether the insurer’s prices are competitive or
uncompetitive.

During the mid to late 1990s public liability was very competitive and premium rates
reduced steadily.

By about 1998 many insurers were recognising losses from public liability and either:

     Increased premiums, with a resulting loss of market share

     Cut back the amount and type of business they were willing to write

     Pulled out of the market or large segments of it altogether.

FAI and HIH were significant competitive forces in the market. HIH, in particular,
became the market leader by size and was widely regarded as being one of the main
forces reducing premium rates during the mid 1990s and then keeping them low from
1997 to 1999.


2.   Competition – The Hard Market

By June 2000 the market cycle had bottomed and rates began to rise. During the second
half of 2000, HIH’s market position virtually disappeared:

     Small commercial was sold to the Allianz joint venture at the end of August 2000

     Large commercial was transferred to Gerling in November 2000 following a rating
     downgrade of HIH and QBE subsequently acquired renewal rights.

The provisional liquidation of HIH in March 2001 removed the company totally from the
market.

Remaining insurers, including those acquiring business from HIH, became very
conservative based on a determination to write business at a profit. This has been part
of a move to more cautious financial management by insurers fuelled by poor results,
reduced competition and a global drive for better return on capital.

Since early 2001 the market in Australia has not been sufficiently competitive to see
insurers chasing after business. QBE, for example, selectively renewed much of the
former HIH business even though it acquired the rights to offer renewal to all. The
reduced number of insurers in the market has been content to take modest volumes of
business at premium rates they regard as acceptable (perhaps even attractive) and, as a
result, some business has not readily found an insurer.

One major insurer we interviewed cited, by way of example of its tougher risk selection
process, its trend in surveys of public liability risks prior to acceptance: a handful in 1999
to 600 plus in 2001.




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Acquisitions and mergers in the Australian market have reduced the number of major
insurers and the inevitable disruption this causes has exacerbated the problem. Not only
are there fewer insurers, but the merged companies have priorities on consolidation and
are naturally cautious about pursuit of different opportunities.


3.   APRA Changes

The APRA changes to the regulation of insurers from 1 July 2002 include:

     Minimum capital requirements that take account of the “riskiness” of each class of
     business and result in higher levels of minimum capital than previously

     Compulsory risk management systems, which include pricing and underwriting
     control mechanisms

These changes are not a primary driver of the increase in public liability rates, although
they reinforce the more conservative attitude to risk of insurers and a greater focus on
profitability.


4.   Global Market Forces

Most classes of insurance have moved into a hard market cycle in the last two years. This
has followed several years of steadily reducing premium rates in many classes and
financial losses being carried by many insurers.

Traditionally in this part of the cycle insurers are cautious about growth opportunities
and concentrate on making their existing business profitable.

The terrorist attacks on 11 September 2001 compounded this market cycle. The direct
insurance losses (likely to be over $A100 billion), the recognition of a major new risk
factor, and greater caution throughout the business world have combined to further
reduce the willingness to write business and further increase premium rates.

In the remainder of Part B we work through the information and analysis available on
public liability, particularly the quantitative evidence for the statements above.




H:Fedtreas02\Publiab\R_260302_Public Liability.doc      11
Trends in Claims
In this section we look at evidence about trends in claims and the cost of claims. The
number or frequency of claims appears to be relatively stable overall, although there is
evidence of increasing numbers of bodily injury claims in some areas. The cost of claims
has been rising for many years due to increasing average size of bodily injury claims,
which appear to have trebled in size over the last ten years.


Types of Claim
There are two main types of claims in public liability:

    Property damage

    Bodily injury

A property damage claim can vary from a window broken by a newspaper delivery to
destruction worth tens of millions of dollars (one recent example is of a log entering a
hydro electric plant and exploding the turbine).

Bodily injury claims likewise vary from a “slip and fall” with bruising or a broken bone to
quadriplegia or permanent brain damage.

Understanding the characteristics and mix of these claims has proven during our research
to be a critical factor in interpreting trends and statistics.

Indicative figures for the mix of the claim types across the whole of public liability are:

                              Proportion by          Average Size       Proportion by
                                 Number                                     Cost
 Property damage                    75%                   $5,000              35%

 Bodily injury                      25%                 $25,000               65%



Property damage claims make up the majority by number and have a low average cost.
While there can be an occasional extremely large property damage claim (tens or even
hundreds of millions of dollars), they are rare. Most property damage claims are finalised
within a couple of years of occurrence.

Bodily injury claims make up the minority by number but the majority of the cost,
because they have a much greater average size. Most of these claims are not finalised
until three to six years after occurrence.

Most of the available statistics are for all claims together, and after examining these we
show some results for property damage and bodily injury separately.




H:Fedtreas02\Publiab\R_260302_Public Liability.doc        12
Number of Claims
APRA collates and publishes statistics on the number of new claims reported each year.
Our examination of these statistics indicated they were not sufficiently reliable for
inclusion in this report. The numbers, and the reasons for our conclusion on reliability,
are shown in Appendix 3.

Insurance Statistics Australia (ISA) data also includes the number of new claims reported
for the companies involved. Changing membership of ISA and market share of insurers,
together with the absence of exposure data, makes it hard to draw conclusions.
Indications from this data are that the overall frequency of claims has been fairly flat,
with some reduction in 1999 and 2000.


                                      Figure 2: Estimated Claim Frequency per $100,000 Premium for ISA
                                                                 Contributors

                                 12
   Claims per $100,000 premium




                                 10

                                  8

                                  6

                                  4

                                  2

                                  0
                                        1993     1994     1995     1996     1997     1998     1999       2000

                                                                  Accident Year
 Source: ISA




A small amount of data we have from individual insurers tends to confirm this – no overall
increase in claim numbers, perhaps some reduction in recent years.

There are three important reasons why these observations may not (and in our view
probably do not) indicate a favourable trend:

            The mix of claims seems to be changing, with reductions in property damage claims
            but increases in bodily injury claims

            The introduction of excesses (and higher levels of excess) in recent years may
            account for the lower claim numbers. Even a small excess can eliminate many claims
            by number, but without making a big impact on the total cost of claims

            Changes in the number and business mix of the ISA members distort the observed
            trend.



H:Fedtreas02\Publiab\R_260302_Public Liability.doc                            13
Quite a different picture can be seen in the data from a group of local governments. This
data, provided to us on a confidential basis, shows a sharp increase in the number of
public liability claims being made against the councils in 1996/97 and a continuing
upward trend since that time.


                            Figure 3: Number of Claims for a Local Government Group


                      900
                      800
   Number of Claims




                      700
                      600
                      500
                      400
                      300
                      200
                      100
                        0
                            1994   1995   1996   1997   1998    1999   2000    2001
                                             Year Ended 30 June
  Source: Confidential Data




Trends in Litigation
It is difficult to obtain data on trends in litigation. Insurers do not record on computer
systems the progress of claims in sufficient detail to obtain data on litigation.

Statistics maintained by the various Courts are of variable quality and there is no
consistency from one jurisdiction to another. While we have not had an opportunity to
check with each Court, it is our understanding that most courts are not able in their
statistics to distinguish public liability from other personal injury cases.

Fortunately the District Court of NSW was able to assist. This Court has a good reputation
as a leader in list management and has an effective registry system.

This Court was able to respond to our request for assistance by extracting the number of
new public liability writs lodged in the Sydney region over recent years.




H:Fedtreas02\Publiab\R_260302_Public Liability.doc             14
                             Figure 4: PL Writs Lodged - Sydney District Court

                     2500


                     2000
   Number of Writs


                     1500


                     1000


                      500


                        0
                            1996      1997        1998          1999      2000      2001
                                                         Year
 Source: District Court of NSW




This graph shows a steady increase in new personal injury litigated matters for public
liability in Sydney. The number appears to have doubled over five years, with an average
annual rate of increase of about 15%.

We urge the reader to respect the qualification given by the Court in providing the data:

“These are raw statistics downloaded from the computer database, and are furnished on
the understanding that they have not been checked or verified. As such, they should only
be regarded as indicative and not authoritative.”

It is also necessary to consider the impact that the increase in jurisdiction of the District
Court may have had where in 1997 its limit was lifted from $250,000 to $750,000 with a
resultant referral of outstanding matters from the Supreme Court to the District Court.
The numbers are not known. More detail is shown in Appendix 8.

This pattern may not be similar around the country. Sydney is anecdotally regarded as
the litigation capital of Australia and trends could well be different in other regions.


Average Cost Per Claim
As with the number of claims, APRA statistics were not suitable for examining the
average cost of claims. Analysis of the ISA data shows a trend in average claim cost as in
Figure 5.




H:Fedtreas02\Publiab\R_260302_Public Liability.doc              15
                                  Figure 5: Estimated Average Claim Size for ISA Contributors


                        $20,000

                                                                                            12% p.a.
                        $15,000
 Average Claim Size




                        $10,000
                                                                                                  AWE


                         $5,000


                             $0
                                  1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

                                                              Accident Year
 Source: ISA




Note that claims are analysed by “accident year” (the year in which the incident giving
rise to the claim occurred). The analysis involves projection of the ultimate cost of
claims based on the amounts paid to date and insurer case estimates from time to time.

This chart shows significant increases in average claim size but not in a steady
progression. The annual rate of increase is of the order of 10% p.a.

Other information available to us from individual insurers confirms an increase in the
average size of claims over the 1990s. While it is difficult to get a precise measure of
this increase, the available evidence is that the average size of claims has increased at a
rate at least 5% p.a. higher than community inflation (taken as being AWE).

For two individual insurance company portfolios we were able to access data on property
damage claims and bodily injury claims separately. The two portfolios show virtually
identical patterns with:

                      No major change in property damage costs

                      Very steep increases in bodily injury claim costs.




H:Fedtreas02\Publiab\R_260302_Public Liability.doc                         16
                         Figure 6: Index of Claims Payments by Type of Claim - Adjusted for
                                                       AWE


                       400
                       350
  Index (1993 = 100)

                       300
                       250
                       200
                       150
                       100
                        50
                         0
                             1993      1994       1995       1996         1997    1998     1999
                                                   Year Ending December

 Source: Claim Data from two Insurers                    Bodily Injury       Property Damage




ICA analysis of claim cost distribution
The ICA submission contains a claim cost distribution for public liability claims finalised in
each year between 1993 and 2001. The data is sourced from five insurers. Claims costs
include insurer legal costs and payments to claimants. They also include both personal
injury and property damage claims. This analysis shows –

           A doubling of average claim size in this period; this result was similar when the
          impact of larger claims (over $100,000) was removed

           85% of claims by number are settled for under $20,000 (this is down from 95% in
          1993); these claims account for less than 20% of the total cost of claims (down from
          around 30% in 1993). Given our earlier observations that the average size of property
          damage claims is around $5,000 and that these claims represent around 75% of all
          liability claims by number, we would expect a large number of claims in this band to
          be property damage claims

           11% of claims are settled for between $20,000 and $100,000 (up from 6% in 1993) and
          represent 33% of all costs

           2% of claims are settled for between $100,000 and $500,000 (up from 1% in 1993) and
          represent 30% of total costs

          less than 1% of claims are settled for over $500,000 and represent 20% of total claim
          costs.

The conclusions that we draw from this analysis are –



H:Fedtreas02\Publiab\R_260302_Public Liability.doc                   17
    it confirms the nature of increases we have previously seen in the average claim size
    for public liability claims

    it suggests that the increase in average claim size is not driven principally by large
    claims but across the claim size spectrum

The small proportion of claims (15% and under) that make up the majority of the claims
cost for public liability means also that aggregate claim frequency trends may be
misleading.


Insurer legal versus compensation
In GST work that required a split of public liability bodily injury claims between insurer
legal costs and compensation, we have used an approximation that –

    75% of claims costs are in respect of compensation (which will include party/party
    costs and the plaintiff solicitor/client costs)

    20% of claims costs are in respect of insurer legal costs

    5% of claims costs are in respect of investigation costs.

These proportions were derived from sampling of claims and there are, therefore, some
limitations on their reliability. In addition, we do not have any information to understand
how these relative proportions may vary by size of claim. This will be important for
public liability since issues of liability would mean that –

    there is a greater level of legal work required than for CTP, and

    the rough rule of thumb derived from CTP that party/party legal costs are similar to
    defence costs may not hold for public liability due to the relatively high level of nil
    compensation claims.


Australian Torts Reports (published by CCH)
The Australian Torts Reports (1988 to 2000) contain outcomes for damages awards to
claimants for selected verdicts. It is not a complete listing of all verdicts and thus
represents only a small proportion of all claims (given that the vast majority of claims are
settled out of court). Over the years 1988 to 2000, 110 matters have been reported that
we believe are public liability matters from the “cause of loss” description.

There are too few claims to examine any trends in the size of the various heads of
damage over time. However, the listing can be used to provide some indication of the
components of awards by head of damage and size of claim. We have grouped claims
into the same size bands as in the ICA study, noting that we are aware that this is not a




H:Fedtreas02\Publiab\R_260302_Public Liability.doc        18
like-with-like match because the claim amounts from the Torts Reports do not contain
either party/party legal costs or insurer legal costs.

The following pie-charts show the components of claims costs for each group of claims.




                 Composition of Court Awards for Payouts
                             under $20,000

                               Loss of Future
                             Earning Capacity
                             (including Super)
                   Loss of Earnings 0%                         General/Pain and
                         3%                                       Suffering
                         Interest
                                                                    84%
                            2%
                     Gratuitous Care
                           0%
                      Future Needs
                           1% Out of Pocket
                                  Expenses
                               (including past
                                  medical)
                                     10%




             Com position of Court Aw ards for Payouts of
                         $20,000 - $100,000
                          G ratuitous Care   Interest
                                 1%            5%
                                                        Loss of Earnings
                          Future Needs                        11%
              O ut of Pocket 4%
                Expenses                                      Loss of Future
             (including past                                Earning Capacity
                 m edical)                                  (including Super)
                    8%                                             21%




                              G eneral/Pain and
                                  Suffering
                                    50%




H:Fedtreas02\Publiab\R_260302_Public Liability.doc               19
                 Composition of Court Awards for Payouts of
                            $100,000 - $500,000
                                        Gratuitous Care
                                              0%
                  Out of Pocket                    Interest
                    Expenses     Future Needs        5% Loss of Earnings
                 (including past      4%                      16%
                   medical)
                     5%
                      General/Pain and
                         Suffering
                           26%
                                                               Loss of Future
                                                             Earning Capacity
                                                             (including Super)
                                                                    44%




                  Composition of Court Awards for Payouts
                               over $500,000

                                                  Future Needs
                            Out of Pocket
                                                      38%
                              Expenses
                                                                    Gratuitous Care
                           (including past
                                                                          0%
                              medical)
                                 8%
                                                                    Interest
                     General/Pain and                                 3%
                        Suffering
                          12%                                   Loss of Earnings
                                           Loss of Future             11%
                                         Earning Capacity
                                         (including Super)
                                                28%


These graphs indicate that –

    for smaller claims, under $20,000 (15 in total in the analysis):

            o    the major component of compensation is general damages (84%), with
                 the average amount of general being $10,000

            o    the remainder of the compensation for these claims is mainly out-of
                 pocket expenses and past loss of earnings (13%)




H:Fedtreas02\Publiab\R_260302_Public Liability.doc             20
             o   no claim in the listing had an amount for loss of future earning capacity

    for claims in the $20,000 to $100,000 range (37 in the analysis) –

             o   general damages comprises 50% of the compensation amount, with most
                 claims having a general damages amount in the range $20,000 to $40,000

             o   out-of-pocket expenses and past economic loss make up a further 19% of
                 the award

             o   loss of future earning capacity represents 21% of total compensation
                 with around half the claims having an award for this head of damage;
                 the awards range from about $15,000 to about $30,000

    for claims in the $100,000 to $500,000 range (48 in the analysis) –

             o   general damages comprises 26% of the compensation amount, with most
                 claims having a general damages amount in excess of $40,000 and up to
                 around $120,000

             o   out-of-pocket expenses and past economic loss make up a further 21% of
                 the award

             o   loss of future earning capacity represents 44% of total compensation
                 with almost all claims having an award for this head of damage; the
                 awards range between about $30,000 and $250,000

    for claims above $500,000 (10 in the analysis) –

             o   general damages comprises 12% of the compensation amount, with most
                 claims having a general damages amount in excess of $80,000

             o   out-of-pocket expenses and past economic loss make up a further 19% of
                 the award

             o   loss of future earning capacity represents 28% of total compensation,
                 with awards ranging between about $150,000 and $300,000 (the
                 maximum amount shown is $750,000)

             o   future needs represents 38% of total compensation with large variation
                 in the amount from claim to claim and a maximum amount shown of
                 $2.7 million


How Insurers Handle Claims
When an insurer receives a claim, either directly or via the insured, it typically
undertakes the following steps:




H:Fedtreas02\Publiab\R_260302_Public Liability.doc      21
    Investigates the allegation of negligence against its insured – usually by factual
    investigation of the circumstances giving rise to the loss and possibly by technical
    investigation (by say an engineer) to determine or confirm the agent or cause of the
    incident

    Investigates the alleged extent of loss (the nature of injury and impairment in a
    personal injury matter) using a loss adjuster and/or medical practitioner, as well as
    considering the information supplied by the claimant or their lawyer regarding the
    extent of loss alleged

    Formulates a strategy depending upon the outcome of the investigations e.g. settle
    as quickly as possible at an assessed value through to vigorously defending the
    matter

    May seek to settle internally through its claim staff making offers

    May allocate the matter to its (usually external panel of) lawyers to defend the
    matter and prepare it for settlement or court, especially if:

               o   the insurer is rejecting the negligence allegation

               o   the claimant issues a court writ, or

               o   the complexity of the matter warrants external advice

    Provides ongoing instructions to the lawyers and receives regular updated
    information and advice from them

    Pays the claim and costs and seeks to provide feedback to the underwriters if the
    claim has any extraordinary qualities which may affect future selection of insurance
    risks.

Our assessment, both from our industry experience over the years and from research
during this assignment, is that there has been little or no material change to the manner
in which insurers have handled claims in recent years. Changes in claim handling can
thus be excluded as a possible cause of the increase in the average size of claims
discussed earlier in this section.


Some Suggested Causes of Increased Frequency and Cost
In our discussions with insurers and others, a number of potential causes for increasing
claim costs were raised. Some consistent messages were:

    The general move in the economy towards contracting of workforces means that the
    individual contractors (formerly employees) who would previously claim on workers
    compensation insurance may now claim on the liability insurance of the principal in
    the event of a workplace accident.




H:Fedtreas02\Publiab\R_260302_Public Liability.doc        22
    Restrictions on common law in environments of workers compensation and CTP
    leading some injured persons to prefer pursuit of a public liability claim if possible
    (eg against the local council).

    An increasing trend for volunteers in community events, not being employees, to
    bring public liability actions against organisations in the event of an injury. For
    example, virtually all claims for Parents and Citizen organised events are apparently
    from and on behalf of the volunteers or their children, according to one insurer.

    A tendency of the community to participate in riskier outdoor pastimes.

    The much quoted increase in the propensity of members of the community to seek
    redress through “litigation”.

Additionally, the Law Council of Australia advises that the recent move to make public
liability cover compulsory for all new incorporating entities could be contributing to the
increase in claim costs as the number of insureds to claim against increases.




H:Fedtreas02\Publiab\R_260302_Public Liability.doc      23
Premiums and Availability
This section deals with our analysis of premiums and the availability of public liability
insurance. It confirms steep rises in premiums in 2000, 2001 and 2002 and that there are
current problems with availability of insurance at acceptable prices for some market
segments.


Premiums – Total Volume
APRA statistics show the total premiums for Australian insurers. The figures are net of
stamp duty and net of GST.


                           Figure 7: Gross Written Premium For Public & Product Liability

                         1200
                                                                                            Est

                         1000
   Premium Amount ($m)




                         800


                         600


                         400


                         200


                           0
                                1993   1994   1995   1996    1997   1998   1999    2000     2001
                                                     Year Ending June 30
 Source: APRA Selected Statistics




The total premium volume has shown a cyclical pattern, with the upward trend slowing in
1996/97 and premiums reducing in 1997/98.

For the year ended 30 June 2001 we have had to estimate the figure because APRA’s
statistics did not include the HIH companies. These companies went into provisional
liquidation in March 2001 and did not submit returns to APRA.

This premium of just over $1 billion for 2000-01, and the corresponding amounts for
earlier years, will understate the total cost of public liability to the Australian community
to the extent of:

          Any self insurance, including deductibles on policies



H:Fedtreas02\Publiab\R_260302_Public Liability.doc                          24
    Business placed directly offshore, with Lloyd’s of London, international insurers and
    captive insurers

    Some State and Territory governments and local governments that self insure wholly
    or partly.

The extent of these understatements is unknown but is likely to be modest (perhaps 10-
20%).


Allowing for Economic Growth
Premiums might be expected to vary with growth in the economy and with inflation.
Public liability premium expressed per $1000 of private sector GDP is shown in the next
figure.


                          Figure 8: Liability Premium per $000 GDP

             $2.50
                                                                               Est
             $2.00


             $1.50
   Premium




             $1.00


             $0.50


             $0.00
                     1993    1994   1995   1996   1997   1998    1999   2000   2001
                                           Year Ending June 30
 Source: APRA Selected Statistics




The cost to the community of public liability has been around 0.2% ($2 per $1000) of
private sector GDP. This measure, which allows for inflation and economic growth:

    increased slightly from 1993 to 1996

    declined from 1996 to 1998 as market premium rates fell

    by 2000-01 had returned to a level above that of the mid 1990’s

    as explained below, is expected in 2001-02 to be around 30% higher than in 2000-01.




H:Fedtreas02\Publiab\R_260302_Public Liability.doc       25
Premium Rate Changes
The JP Morgan/Deloitte/Trowbridge survey shows a broadly similar picture, although it is
based on estimates of premium rate changes provided to the survey each year by insurers
and brokers.

The survey has the benefit of being up-to-date, and also gives forecasts for up to two
years ahead.


                          Figure 9: Premium Rates Percent Change

               40
                                                                       Est
               30

               20
   Percent %




                                                                              Fcs
               10

                0
                     1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
               -10

               -20
                                             Renewals at June 30
 Source: JP Morgan/Deloitte /Trowbridge Survey




The survey indicates significant reductions in market premium rates in 1996, 1997 and
1998. There were large increases in 2000 and 2001 with an even larger increase (over
30%) estimated for the current year.

The 2001 JP Morgan/Deloitte/Trowbridge survey was conducted in August 2001 (before
the 11 September terrorist attacks, although it was published after). At that time the
expectation was for average premium rate increases of 18% by June 2002 and a further
12% by June 2003.

The survey was updated in February 2002, after the immediate impact of 11 September
had been absorbed. In the update it was reported that rates would rise by an average
32% by June 2002, and that most of this increase in rates had been put through by
December 2001 renewals.

By comparing the August 2001 estimate of 18% and the February 2002 estimate of 32%,
we can deduce that about 14% of the rate increase can be attributed to the direct and
indirect effects of 11 September (along with any other market changes in that six month
period).




H:Fedtreas02\Publiab\R_260302_Public Liability.doc          26
From the estimated market rate changes we have constructed a premium rate index
showing the relative level of premiums over the last decade.




                                       Figure 10: Premium Rate Index

                        140                                                      Fcst

                        120
   Index (1993 = 100)




                        100

                         80

                         60

                         40

                         20

                          0
                              1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
                                                Renewals at June 30
 Source: JP Morgan/Deloitte Trowbridge Survey




This chart is similar to Figure 8, indicating that by 2001 rates had returned to the levels
of the mid-1990’s, and shows that by 2002 rates will be higher.

The shape, however, is more exaggerated than Figure 8, which we believe is due to:

       The fact that it is based on market perceptions which may be slightly exaggerated
       and ignore large volumes of business placed at unchanged rates

       Some timing differences with APRA showing business written in the previous year
       while the survey describes current market rates.

It is clear that the average premium rate increase in the current year is very steep, and
that the insurance industry is expecting further increases next year.


Premiums by Industry Segment
All the above statistics relate, of course, to the whole class of public and products
liability business in all industry segments and nationwide.

There is only one statistical source available by industry segment, that is ISA. Even in
that data, with about 100 industry classifications, the segments are not very finely
divided.




H:Fedtreas02\Publiab\R_260302_Public Liability.doc             27
We examined this data but it could not tell us anything useful about the level of change
in premiums by industry segment because:

    There is no adequate measure of exposure to compare the dollars of premium with

    The member companies of ISA provide data for only about 20% to 30% of the total
    market

    The composition and market share of the companies changes over time.

We are left then, with anecdotal evidence from our qualitative research. This evidence
indicates that all segments of industry have faced increases in public liability premiums,
but with extreme increases for organisations with high exposure to personal injury claims:

    Any organisation with a high level of public traffic

    Shopping centres etc (referred to as “slip and fall” risks)

    Those with participants in dangerous activities (eg horse riding)

    Local governments.

This evidence indicates that premium increases of:

    20% are routine

    100% are not uncommon

    500% to 1000% have occurred.

Those largest increases have typically arisen following a change of insurer (HIH collapse
or another insurer no longer covering the event) where the basis of calculating premiums
is different between insurers particularly if the risk is unusual.


How Premiums are Set by Insurers
Insurers set premiums in public liability business by:

    Assessing the risk potential of each policy from information supplied by the client or
    their broker, or by undertaking its own risk assessment, using its experienced
    surveyors (one major insurer will now only accept risks where the potential client has
    formal quality accredited systems in place and uses quality surveyors to undertake
    such risk assessments)

    Establishing a set of base rates for each industry segment (more science has gone
    into this process in recent years using technical analysis of an insurer’s own
    database, ISA data and overseas, particularly US experience)

    Placing the client’s risk in the appropriate industry segment and size category to
    which the base premium rate applies



H:Fedtreas02\Publiab\R_260302_Public Liability.doc         28
    Multiplying the rate by the selected exposure base – typically turnover of the
    company concerned

    Varying the premium or indeed denying or limiting cover on the basis of specific
    attributes of the risk – risk management systems in place; corporate attitude to risk
    and housekeeping; claims experience from the past.

    Recognising the market realities of the price that can be charged (this is particularly
    pertinent during a soft market phase when the insurer is typically also interested in
    the premium that a prospective client can achieve in the market. It is not so
    important during a hard phase where the insurers can charge their ‘technical rate’
    regardless of the market attitude).

There is always some combination of a quantitative approach (formula rates based on
classification, sizes etc), a qualitative approach (the judgement of an expert underwriter
based on all the available information) and a commercial approach (what the
competitive market will accept).

At a portfolio level insurers may reject whole industry or activity groups based on their
past poor performance or perceived riskiness. Reinsurance restrictions on covering
certain types of risk can be an issue, as described in Appendix 7.

Premiums are established by insurers with the intention of making a profit, but premiums
must be set before the cost of the product (particularly the claims cost) is known. This
need to set the price without knowing the cost of the product makes the insurance
business unusual; it introduces the potential for an insurer to unwittingly take business at
a loss and is one reason for the market cycles.

The main components of the public liability premium from an insurer’s perspective are:

                                                      Typically for
                                                     Public Liability
         Cost of claims                                      65%
         Commission/brokerage                                15%
         Administration expenses                             22%
         Investment income credit*                           (10%)
         Target profit margin                                 8%
         Premium to insurer                                  100%
         GST                                                 10%
         Stamp duty                                          11%
         Premium to customer                                 121%

* Allows for investment earnings on funds retained to pay claims.




H:Fedtreas02\Publiab\R_260302_Public Liability.doc      29
Availability of Insurance
The submissions and media reports frequently cite examples of problems with availability
of insurance.

In our view it is helpful to recognise that there is a difference between:

    Availability – whether or not adequate insurance can be purchased, regardless of
    price

    Affordability – whether or not the price for the insurance is seen as acceptable given
    the buyer’s previous premium history and ability to pay.

The qualitative evidence indicates that the main problem appears to be affordability
rather than availability. Most of the case studies refer to situations such as “we could
only get insurance at an outrageous price therefore we cancelled our event”. On the
other hand, our interviews with insurers do indicate a continuing trend towards selective
underwriting, indicating that there may be some true availability problems.

With the amount of dislocation in the market it is likely that some customers who say
they have been unable to get insurance have in reality not had access to all the markets
where it might be available. We have been advised, for example, that one local insurer
and the London Lloyds market are active in hard to place risks.

Information we obtained from submissions, media reports and our interviews indicated
that affordability problems are widespread including in:

    Community events

    Sporting events

    Tourism and leisure operations

    Retail industry

    Local non-government community groups that operate under the umbrella of local
    government.




H:Fedtreas02\Publiab\R_260302_Public Liability.doc      30
Insurer Profitability
In this section we examine the recent record of profitability of insurers in the public
liability market. In addition to helping understand the current crisis this analysis helps in
taking an informed view about the adequacy of current premium levels.


A Key Definition
The most suitable measure of insurer profitability for the public liability class is the
Insurance Trading Result:

Insurance Trading Result or (ITR):

     Profit or loss from underwriting (premiums less incurred claims and expenses)

     Plus Investment income on insurance funds

     Expressed as a percentage of Premium revenue.

As indicated in the Insurance Council of Australia submission an ITR of 6% to 10% of
premium is needed to achieve a reasonable target return on capital for public liability
business.


APRA Statistics
APRA statistics do not show the ITR directly, but give us enough information to estimate
the ITR for public liability for the total of all insurers in Australia. The results are shown
in Figure 11, with the detail in Appendix 3.




H:Fedtreas02\Publiab\R_260302_Public Liability.doc       31
                         Figure 11: Insurance Trading Result from APRA Returns

                  40%

                  20%
  ITR % Premium


                   0%
                         1993   1994   1995   1996    1997   1998   1999   2000   2001
                  -20%

                  -40%

                  -60%

                  -80%
                                              Year Ending 30 June
 Source: APRA Selected




It is critical to understand that these figures are based on the financial period in which
the business is accounted for. It does not relate to the “pure” outcome for the year of
insurance concerned. In particular, the claims incurred in any period include increases or
decreases during the year in provisions made for claims from prior periods.

The figures thus do not reflect the profitability of the business being written in a given
year. If insurers have under-reserved and then later corrected this under-reserving, the
ITR will be overstated in earlier years and understated in later years.

This is in fact what has happened with public liability. The ITR for years up to 1996
appeared to be very favourable. Insurers believed the business to be profitable, because
they (presumably unwittingly) understated the outstanding claim provision and therefore
the cost of claims.

Late in the 1990’s insurers needed to increase claim provisions for prior years as the past
under-reserving became apparent. This led to very large financial losses for these years
as shown in the graph, more than wiping out the profits from the first part of the decade.

At the same time that the large losses were being recognised, premium rates began to
increase. Note that the 2001 figure excludes HIH and would be much worse if it was to
be included.

The very poor financial results for 1999 and 2000 are, therefore, not representative of
the profitability of the insurance business being written in those years, but more a
reflection of past years’ outcomes brought to account recently.

We would expect, therefore, the average premium rate increase to restore profitability
to be:




H:Fedtreas02\Publiab\R_260302_Public Liability.doc            32
     less than indicated by the apparent 2000 and 2001 profitability

     more than indicated by the apparent 1996 or 1997 profitability.


ISA Statistics
The ISA statistics allow the cost of claims to be allocated back to the year in which they
occurred (referred to as the “accident year”). In many ways this gives a more helpful
picture of the true profitability of the business, even though it will not match the timing
of recognition of profits (or losses) in an insurer’s accounts.

The ITR by accident year for the ISA members is shown in Figure 12 (again the detail is in
Appendix 4). Note that these statistics only cover 20% to 30% of the industry.


                 Figure 12: Estimated Insurance Trading Result for ISA Contributors
               60%

               40%

               20%
   % Premium




                0%
                      1992   1993    1994    1995    1996    1997   1998    1999      2000
               -20%

               -40%

               -60%
                                      Accident Year ending 31 December
 Source: ISA




This graph shows:

     Healthy level of profit for 1992 and 1993 business

     Marginally unprofitable business in 1994 and 1995

     Severe losses from 1996 through to 2000 with 1998 representing the low point in
     trends of profitability.

On the basis of this data, which we regard as currently the best available indication,
premiums would need to increase by around 100% from 1998 levels to give adequate
profitability. Referring back to the premium rate index in Figure 10 on page 22, this is
broadly what is likely to have occurred to premium rates by June 2002.




H:Fedtreas02\Publiab\R_260302_Public Liability.doc          33
Of course, these indications are relatively broad, and apply to the public liability class as
a whole. Individual insurers and individual business segments might (and indeed do) vary
quite markedly from the average.


Profitability Indications by Segment
Analysis of the ISA data was able to produce some indications of relative profitability by
selected segments. Unfortunately reductions in ISA membership and immaturity of the
claim data mean that the data is relatively old. It is also worth noting that while ISA has
segmented data according to industry activities, the segmentation is still relatively
coarse.

Figure 13 shows the loss ratio – ie claims divided by premiums – for selected industry
segments for the ISA members. Figures are averaged for the accident years 1994 to 1998
to give some stability of results given that many of the segments have only small volumes
of data.

The bottom bar shows the total data – all industries – for the ISA members with a loss
ratio of close to 150%. This highlights the poor overall profitability of public liability,
noting that the loss ratio needs to be significantly less than 100% for an insurer to be
profitable after allowing for expenses and other factors noted in Section B.

In broad terms, industry segments with a loss ratio higher than the average would
indicate a need to increase premium rates more than the average, and vice versa.


              Figure 13: Estimated ISA Loss Ratio   * 1994-1998 by Industry Segment
                                   Profitable               Unprofitable

       Unlicensed Clubs

   Sports and Recreation

           Hotel Accom.

  Welfare / Commmunity

             Food Stores

           Special Trades

                Building

           All Industries

                            0%      50%         100%              150%     200%        250%

*Ratio of claims to premiums. After taking account of expenses, results below about 90%
are “profitable”; above 90% “unprofitable”.

This chart shows the “unlicensed club” and “hotel accommodation” segments as having
much worse results than average in the 1994 to 1998 years. Sports and recreation,



H:Fedtreas02\Publiab\R_260302_Public Liability.doc           34
welfare/community and the building trades did not present special profitability problems
for the ISA members during this period, at least relative to other industries.

While this data is limited, and no doubt asks more questions than it answers, we are
satisfied that it is the best available at the current time without a major investment in
collecting and analysing new data. This evidence is not sufficiently reliable to draw
conclusions about specific corrective action, but does:

    Give an example of the type of analysis needed

    Highlight the inadequate premium rates of past years.


Claim Provisions Held by Insurers
The discussions in this section on the profitability of insurers in public liability has drawn
out the difficulty of accurate measurement of that profitability, even by the insurers
themselves. The accuracy of claim provisions is the critical factor in assessing that
profitability, and the financial results as reported by APRA highlighted the significance of
corrections to provisions for prior year claims.

Provisions are usually determined by the combination of three distinct processes:

    Case estimates of the cost of known claims are assessed by claims officers based on
    the individual circumstances of each claim, the known “facts” of the case and their
    experience of the value of various types of claims

    Actuarial estimates are made based on portfolio-wide analysis and projections taking
    account of past experience, inflation, etc

    Company management makes a decision on the provision to be made for claims in
    the accounts based on the first two steps together with other factors they consider
    relevant.

The provision required for public liability business is almost always much higher than the
total of the case estimates because:

    There are claims incurred but not yet reported, which by definition cannot have a
    case estimate

    For many claims the available information on which to make estimates is limited,
    and it is normal for total case estimates to increase as information develops.

The APRA statistics show the total provision for outstanding claims held by the industry
over recent years.




H:Fedtreas02\Publiab\R_260302_Public Liability.doc        35
                    Figure 14: Composition of Provision - Case Estimate and Total
                 3500                        Provision


                 3000


                 2500
   Amount ($m)




                 2000


                 1500


                 1000


                  500


                    0
                        1994    1995    1996    1997     1998    1999    2000
                                        Year Ending June 30


                                    Case Estimate      Additional Provision

The provision increased relatively slowly from 1994 to 1998. The total provision
expressed as a multiple of case estimates reduced from 1.54 in 1996 to 1.43 in 1998.

In 1999 and 2000 the provision increased sharply, as earlier under-provisioning was
identified and corrected. Total provisions moved up to a multiple of 1.62 times case
estimates.

In interpreting this information we note that:

       The APRA statistics do not give enough detail to identify the amount of increased
       provision relating to prior years claims

       The 2001 figures are not available because HIH did not submit returns.


Are Current Provisions Adequate?
The analysis of profitability showed very poor results for insurers over the last decade,
once the under-provisioning was identified. If the provisions are still too low, true
profitability is even worse than that indicated, and vice versa.

We do not have any analytical evidence one way or the other on this question. Actuary
Peter McCarthy in his 2001 paper indicates a view that the provisions held in the industry
are now about right.




H:Fedtreas02\Publiab\R_260302_Public Liability.doc              36
As Warren Buffett points out

“Not knowing your costs will cause problems in any business. In long-tail…where years of
unawareness will promote and prolong severe underpricing, ignorance of true costs is
dynamite.”

McCarthy in a 1999 paper put a rough estimate on industry under-provisioning of $500
million to $1000 million. In 2001 he raised this estimate of the level of under-
provisioning back in 1998 and 1999 to around $1,500 million.

McCarthy gives his view of the causes of under-provisioning:

    Poor data and inadequate access to levels of detail

    Limitations of actuarial models and science

    Management pressure on actuaries

    Inadequate understanding of the business by actuaries

    An underlying environment that leads to increases in personal injury claims

    Manipulation of case estimates by insurers

    Poor corporate governance

    Characteristics of public liability business especially the variety and the type of risks.

While under-provisioning does not always occur, when it does we would agree that one or
more of these causes is usually present.


Other Components of Premium Rates
For completeness we have also considered the trends in the components of premium
rates other than claims. The paragraphs below consider these issues and conclude that
they have not been major contributors to poor profitability.


Commission and Expenses

There has been no significant change in commission (also referred to as brokerage) or the
administration expenses of insurers.


Rates of Investment Return

Premiums are received by insurers before claims are paid (average about 3 years for
public liability). The funds are available for investment during this period and the
investment income supplements the premium income as revenue to the insurer.




H:Fedtreas02\Publiab\R_260302_Public Liability.doc      37
Most such funds obtained from premiums are invested by insurers in low risk fixed income
securities. The average returns available on such investments have been between 5% and
5.5% since mid-1997, having been in the range 6.5% to 8.5% in the first half of the 1990’s.
This evidence indicates that changes in the rate of investment return should not have
been a factor in premium rate changes in the last three years.


Reinsurance

During the upward cycle, reinsurers have increased their rates by in the order of 25%
although one insurer has reported a significantly greater increase.

However, reinsurance programs for public liability are typically “excess of loss programs”
and only pick up the top end of large claims (say over $2 million - $5 million depending
upon insurers’ capital levels).

As such, they account for less than 10% of the direct insurers’ premium in this class and
hence the reinsurance rate increase has a marginal effect (25% of 10% or say 2-3%) on
price for most insurers. Additionally reinsurers advise that they have taken no action to
exclude any risk types of recent times, except certain very high risk occupations, and
terrorism.


Government Taxes

GST applies to the premium before stamp duty. For most businesses, GST paid on public
liability insurance generates an input tax credit and so any change in GST would not
change the net cost of public liability. There may be some organisations such as charities
where this is not the case.

Stamp duty is imposed by each State and Territory on the premium including GST and has
a directly proportional impact on the premium paid by the customer.




H:Fedtreas02\Publiab\R_260302_Public Liability.doc     38
Availability of Data
As part of our brief we were asked to describe the data available regarding public liability
insurance and comment on the adequacy of that data.

The structure of this section is as follows:

    What data is needed?

    What data is available?

    Comments on adequacy of data.


What Data is Needed?
Adequate underwriting, pricing and monitoring of public liability insurance requires a
significant amount of complex data on exposure and claims.


Exposure Data

Exposure data is surprisingly complex because of the wide mix of business types and claim
risks involved. It is necessary for the insurer to have, in respect of each insured risk:

    Classification of exposures – usually based on the nature of business activities or
    occupation of the insured – what does the insured do that gives rise to a risk of public
    liability claims?

    Quantification of exposures – which is most often based on the turnover of a business
    but might also involve wages, floor area of a shopping centre, number of visitors or
    participants for an event, etc

    Underwriting information describing specific features of the risk, any risk
    management processes, etc and enabling the application of judgement by an
    underwriter using expertise and experience.

Because of the long tail nature of the business and the small numbers of policies in many
risk classifications, it is necessary to have this data available for at least five years of
history, preferably ten years.


Claims Data

Claims data needs to be available historically matched up into the same categories as the
exposure data and ideally showing:

    The type of claim (property damage or bodily injury)

    The circumstances giving rise to the claim



H:Fedtreas02\Publiab\R_260302_Public Liability.doc        39
    The past and likely future cost (in terms of payments and case estimates).

By the nature of the insurance business, this information is needed for each individual
policy (to enable assessment at each renewal date) and also at a portfolio-wide level in
order to set the overall level of premiums required. Even with high quality data, there
are many unique types of risk and many very small risk pools so that judgement is always
required.

It is also worth noting that collection and analysis of this data needs to be economically
justifiable on cost-benefit grounds. For businesses where there are tens of thousands of
policies for just a few hundred dollars premium, it is not economically viable to spend
hundreds of dollars collecting and analysing data on the risk characteristics of each
policy. It is necessary to find a suitable balance between what is theoretically desirable
and what is practical and economical.


What Data is Available?
Overall, it seems fair to conclude that the insurance industry in Australia has done a poor
job in collecting and analysing data for public liability.

This begins at the individual policy level, and flows through to the portfolio analysis,
where insurers have traditionally:

    Not sought detailed information on the classification of risk or the quantification of
    exposure for each policy

    Not coded and stored accurately on computer systems the information they do obtain

    Not analysed and used the information they do have to assist in premium rating
    (although changes have/are occurring in this regard in recent years)

    Not had a comprehensive industry-wide system to make relevant information
    available across the industry (noting that many insurers have elected not to join ISA).

Brokers and other intermediaries also have a part to play because they are primarily
responsible for collating the relevant information on each insured risk and passing it to
the insurance market.

As a consequence, the information now available to help understand the crisis and
develop solutions is limited.

While there are strong indications that this attitude is changing, it takes a considerable
time for data initiatives to take effect.

Ironically, this absence of adequate data exacerbates the current insurance problem.
Many insurers have realised that they need to take a more scientific approach to public




H:Fedtreas02\Publiab\R_260302_Public Liability.doc       40
liability and are very reluctant to enter some segments of the market because they have
no data on which to base premium rates.


APRA Data

APRA collects financial data for prudential regulation. While compilation of totals
provides some statistical information as a by-product it is not the main purpose of the
collections. Some relevant aspects of APRA data are:

    It is at a class of business level – ie the public liability class as a whole

    Claim statistics by year of accident are not published

    HIH data is not included for 2001 (and may not be included in future years)

    It is based on company balance dates, so for example the 2000/01 data is actually
    from 1 January 2000 to 31 December 2000 for some companies and 1 July 2000 to 30
    June 2001 for some companies (and a few with other balance dates)

    Company takeovers and mergers complicate the issue

    Companies change their balance dates (for example CGU changed from 30 June to 31
    December in 1994, with an 18 month financial ‘year’ to 31 December 1994. CGU
    figures do not appear at all in the 1993/94 APRA statistics and then in the 1994/95
    statistics cover 18 months worth of business)

    Major quota share arrangements (such as IAG uses with its subsidiaries and
    associates) result in double-counting of some figures

    APRA only covers Australian insurers – it does not pick up mutual pools, self
    insurance, or business placed offshore by brokers or underwriting agencies.


ISA Data

Insurance Statistics Australia is a non-profit company owned by a number of insurance
companies. Membership of ISA is voluntary for insurers.

Data is collected and analysed for the benefit of the insurer members. Not all member
companies are able to supply data due to computer system limitations, especially
following mergers and system changes.

The level of detail of the data is restricted due to practical considerations of cost and
efficiency.

The main limitations on the development of ISA have been:

    Support from only some insurers

    Priorities in insurers, especially around computer systems, pushing statistics down
    the agenda of priority.




H:Fedtreas02\Publiab\R_260302_Public Liability.doc         41
Individual Insurer Data

Insurance companies use a variety of computer systems and a variety of approaches to
recording and classifying policy and claim information.

Each insurer naturally considers its database to be a commercially valuable and
proprietary asset. Most are reluctant to share their data unless they have good
commercial reason to do so (the limited development of ISA is testimony to this).

Furthermore, each insurer’s data is limited (although to varying degrees) by the issues of
quality and completeness of the underlying data as described at the beginning of this
section.

Few insurers have the flexibility and ease of access to their own data that they would
desire due to limitations of old computer systems and the effect of mergers.


Improving Data

It is interesting to note that in a survey of public liability insurers, McCarthy et al report
“Lack of Industry Data” as the top of the major challenges for insurers.

The task of improving data is difficult and slow:

    Either the voluntary commitment of insurers needs to be obtained or data collection
    needs to be mandated by regulation

    It is expensive to collect and insurers have to be able and willing to meet the cost

    Computer system changes are difficult and costly for insurers

    If the original data is not on insurers’ systems then collection can only start
    prospectively after they begin to collect it

    It takes several years after collection begins for an adequate track record to be
    available.

Thus any initiative of this kind to improve data will not have results in time to contribute
to resolution of the current crisis.




H:Fedtreas02\Publiab\R_260302_Public Liability.doc        42
Part C – A Framework for Looking at
Solutions
In this section we give a structured approach for considering possible solutions. It is not
part of our brief to recommend solutions. What we have done is to compile the various
suggested approaches identified to us during our research and present them so that they
can be considered in an orderly way.



Government Responsibilities
Aspects of the problem are under the direct influence of various governments, broadly as
follows:

Federal                    Prudential Regulation of Insurers (Insurance Act, APRA)

                           Market Conduct of Insurers and Intermediaries (Financial
                           Services Act, ASIC)

                           Minimum Terms of Some Insurance Contracts (Insurance
                           Contracts Act, ASIC)

                           Product Liability (Trade Practices Act, ACCC)

                           GST

State/Territory            Can make purchase of insurance compulsory (eg as condition of
                           operating licence)

                           Tort Reform (both definition of liability and limits on
                           compensation)

                           Interaction with Statutory compensation systems

                           Court system, alternative dispute resolution, legal profession

                           Stamp Duty



Local government also rates a mention because of its close involvement with many of the
community and sporting organisations, both as a provider of facilities and a supporting
framework.




H:Fedtreas02\Publiab\R_260302_Public Liability.doc      43
Major Directions of Response
In Part B we identified two groups of causes of the current crisis:

    Underlying cost of claims – long term increases in the overall cost of claims in public
    liability, particularly in the bodily injury area

    Insurance market crisis – the extreme insurance cycle that has resulted in short term
    availability problems and some very high premium increases.

In our view it is helpful to consider possible responses under these headings. In the case
of the underlying claim cost issues, the possible responses in turn fall into two groups:

    Targeted – aimed specifically at problem areas such as community groups, sporting
    organisations, tourism and leisure

    Broadly based – aimed at all segments of public liability claims.

                               Framework of Responses


                 Underlying Cost of Claims                    Insurance
                                                               Market
             Targeted               Broadly Based               Crisis




Responses to Increasing Cost of Claims
Many of the submissions have addressed this issue, although it is fair to say that many of
the proposed solutions are simplistic when considered against the past experience of the
personal injury statutory insurance systems. The range of possible responses can be
summarised as follows.




H:Fedtreas02\Publiab\R_260302_Public Liability.doc      44
Range of Possible Claim Cost Responses

Targeted to specific industry problems

Change the rules for determining what constitutes ‘negligence’ in certain situations

Exempting certain volunteers and organisations from negligence actions

Promote compliance with industry-specific standards as a valid defence in negligence
actions.

Cover volunteers and contractors by workers’ compensation rather than liability
insurance

Allow valid contractual waivers of liability for participation in inherently risky activities


Broadly based across all public liability claims

Re-write the tort law to bring the standard of negligence back to a reasonable person’s
approach and away from strict liability

Tort reform to reduce the amount of compensation available:

    threshold for general damages

    caps on general damages, earnings loss or medical

    restrict certain heads of damage such as care provided by family members.

Encourage or mandate the use of structured settlements for catastrophic injuries

Reforms to the legal system to reduce the cost and/or amount of litigation:

    control legal advertising

    regulate legal fees

    change “no win no pay” arrangements

    change uplift fee arrangements

    increase the risk involved in unsuccessful litigation through costs arrangements

    mandate alternative dispute resolution systems

An education campaign to change the increasing litigiousness of our community.

                                                   Source: Submissions and discussion papers




H:Fedtreas02\Publiab\R_260302_Public Liability.doc        45
Responses to Insurance Market Crisis
The possible responses in this area are largely commercial in nature, aimed at altering
the short term availability and price issues. The suggestions we have received are
summarised below:


Range of Possible Insurance Market Responses

Facilitation of the Market:

Group buying by affiliation and industry groups, perhaps with government support

Arrange market access through local government

Develop and promote specific products with help of brokers/insurers

Publish data to help set and evaluate prices

Publish an advisory underwriting and premium rating guide

Increase the use of personal accident insurance as an adjunct to public liability insurance


Supplementing the Market:

Allow pooling of risk outside the insurance regulatory framework (eg local government
does this now)

Government underwriting of some risks (eg certain events on crown land) through existing
government insurance schemes

Subsidies to insurance buyers in critical segments to ease problems (could be grant or
loan)

Start a new Government Insurance Office


Regulation of the Market:

Mandate improved industry data collection and dissemination

Make supply of insurance compulsory for insurers

Set maximum prices that can apply

                                                Source: Submissions and discussion papers




H:Fedtreas02\Publiab\R_260302_Public Liability.doc     46
Getting the Context Right
There is a strong desire in the consumer and insurance markets for consistent and co-
ordinated national action. The consistency has two dimensions:

1.   That jurisdictions implement packages of solutions that are the same, so that we
     avoid having a patchwork of rules and approaches around the country

2.   That each jurisdiction aims for consistency with other insurance and personal injury
     arrangements within that jurisdiction (eg workers’ compensation, CTP, court
     arrangements).

We already have inconsistencies in workers’ compensation and CTP arrangements around
the nation. It might not be possible, therefore, to achieve consistency on both
dimensions.

It is also evident from the submissions that governments have a challenge in aligning the
responses to the public liability crisis with the social and economic policy context.

Some of the issues raised are:

     Adequate protection and compensation for injured persons

     Enabling community and non-profit organisations to continue their activities

     How to balance affordability of insurance with the rights of injured people

     What sort of regulation and how much regulation works best in insurance

     Promotion and support of specific industries such as tourism, and of small business
     generally

     The right mix of individual responsibility for the risks one takes and the duty of care
     for others.


Framework for Solutions
Thus our proposal for a framework to provide for solutions is that the following should be
addressed:

     What are the objectives of the reforms?

              o    Cost reductions

                       Individually

                       Community-wide

              o    Ensuring current availability of cover

              o    Achieving future stability of premiums and access to cover

              o    Review of social policy



H:Fedtreas02\Publiab\R_260302_Public Liability.doc          47
    What responses best target achievement of the objectives? We believe this
    assignment has identified a wide range of issues and signified possible responses

    What issues can and should have a quick response and what timeframe should apply
    overall?

The following sections give more detailed discussion in some of the approaches suggested
in submissions.


Further Discussion of Possible Claims Responses
Options for modifying the suggested costs of claims canvassed in submissions include:

Change the rules on what constitutes negligence in certain circumstances.

    In relation to duty of care, there could be explicit legislative provision to the effect
    that, for example, organizers of prescribed types or instances of events or activities
    are not to be under any liability in specified areas. An example might be that
    organisers of sporting events are not to be under any liability for injury arising from
    the rules for the conduct of the match, meeting or event.

    In relation to standard of care, provision could be made to the effect that in
    prescribed situations the organisers/authorities concerned are not required to take
    any action in specified areas, such as in relation to the condition of premises.
    Alternatively limited steps such as engaging someone to undertake an inspection and
    the erection of warning notices might be specified.

Promote compliance with industry standards as a valid defence to negligence.

    strengthen on an industry-by-industry basis, the health and safety protocols which
    should apply to occupiers to be able to mount a successful defense against
    negligence and indeed to satisfy statutory health and safety regulations.

Cover Volunteers and contractors by workers’ compensation rather than liability
insurance.

    Encourage states to deem people as “workers" in more circumstances (contractors
    and volunteers) and cover them by state/territory workers’ compensation schemes
    with their attendant controls over premiums charged, income loss, medical
    treatment, injury management, and modified common law access.

Exempt certain organisations and volunteers from negligence actions.

Allow valid contractual waivers of liability for inherently risky activities.

    Examine the implication of the potential to modify the Trade Practices Act in terms
    of contracting out of liability for dangerous pursuits, unless, say, gross negligence
    comes into play.




H:Fedtreas02\Publiab\R_260302_Public Liability.doc        48
Rewrite tort law to bring the standard of negligence back to a reasonable person’s
approach, and away from strict liability

    A clear statement of legislative objectives specifying the affordability of
    compensation and the retention of community and sporting facilities and activities as
    considerations should assist in the way the legislation is interpreted and applied,
    such as the statement of objectives of the NSW workers compensation objectives
    including reference to affordability in the Workplace Injury Management and
    Workers Compensation Act 1998 (..to be fair, affordable and financially viable)

     Include in the statement the principles of self assumption of risk and contributory
     negligence to give courts direction on community standards.

    Introduce thresholds for access to common law damages to prevent small claims
    being able to succeed. Introduce caps on general damages to set community
    standards for compensation for major injuries similar to those applying in Statutory
    schemes – see Appendix 5.


Proportionate liability and contributory negligence

Proportionate liability means that if more than one party is responsible for the damage to
an individual, then the damage they pay is a proportion only equal to their share of the
responsibility.

The alternative doctrine is joint and several liability, where one negligent party can be
forced to pay the whole of the damages.

Proportionate liability only comes into play when there is more than one negligent party.
This would apply only in a minority of public liability cases, although it would not be rare.

This issue was examined in detail in a Joint Commonwealth and NSW Inquiry into the law
of Joint and Several Liability, issued in 1995. That report, while not covering personal
injury, made a thorough examination of the issues and recommended the replacement of
the doctrine of ‘joint and several liability’ with that of ‘proportionate liability’.

A similar issue arises with “dual insurance”, ie when there is coverage under more than
one type of insurance such as workers compensation or CTP as well as public liability.

Clarification of proportionate liability would be helpful in putting a boundary around
public liability but it may also be complex because of the many different laws involved,
with many variations of the relevant provisions around the nation.

Contributory negligence is a similar concept but relates to the injured party being partly
at fault.

If contributory negligence is applied, the damages awarded are reduced by the proportion
that the injured person contributed to the accident. Application of contributory




H:Fedtreas02\Publiab\R_260302_Public Liability.doc        49
negligence has become relatively uncommon, although it is frequently raised as a
bargaining point in settlement negotiations.


Structured Settlements

    Structured settlements are an option for catastrophic claims and involve paying the
    claim by way of a mixture of a smaller lump sum (or sums) and regular payments over
    the claimant’s lifetime, particularly covering future care and future loss of earnings.

    The Commonwealth recently announced changes to taxation laws to encourage the
    use of structured settlements. Various governments now have the opportunity to
    mandate, or at least encourage, the use of structured settlements for catastrophic
    injuries.


Reforms to the legal system

    As with reforms within the statutory schemes (Workers Compensation and CTP) in
    various states and territories, these reforms would be designed to control the extent
    and cost of litigation and indirectly influence the number of claims into the system.


Examples from Statutory Schemes
When considering limiting compensation and/or legal costs in public liability, it is useful
to examine what measures have been taken in the past. In looking at examples, CTP
systems are more relevant than workers compensation systems. This is because in
workers compensation a defined schedule of benefits is available as of right to all injured
employees.

Within CTP, some examples are probably more relevant than others, and it is worthwhile
to categorise between the common law systems and the hybrid no-fault/common law
systems. In summary the situation is –

    NSW, Queensland, SA, WA and ACT – common law systems.

    Victoria – no-fault schedule benefits including “lifetime” care, with access to
    common law restricted to the most seriously injured (less than 10% of claimants)

    Northern Territory – no-fault benefits only for residents and common law only for
    non-residents

    Tasmania – no-fault benefits with unrestricted access to common law




H:Fedtreas02\Publiab\R_260302_Public Liability.doc      50
Compensation

The following table summarises the current compensation restrictions that apply in each
of the common law jurisdictions with respect to thresholds and caps on economic loss and
general damages. Note that thresholds and caps are subject to CPI indexation and the
amounts shown in the table are indicative of current levels for each scheme.


 Jurisdiction              Access to              General Damages Cap       Economic Loss
                       General Damages                                          Cap

NSW                   >10% Whole Person                  $300,000           $2,700 net per
                         Impairment                                             week

Queensland                    None                         None                3 x AWE

SA                 Significantly impaired for     $100,000 (with scaling     $2.2 million
                           over 7 days               below this cap)
WA                 $11,500 (also a deductible            $230,000                None
                        to GD amount)


It is noteworthy that the NSW threshold is based on a medical measure of impairment.
Previously NSW had a monetary threshold and deductible. This threshold/deductible
commenced at $15,000 in 1989 (increased by CPI each year) and was increased
significantly to $35,000 in 1995. The increase in the monetary threshold and subsequent
change to a medically assessed impairment level was due to the failure of the threshold
to produce a sustainable reduction in claims costs to the desired level.

The SA approach (with a low cap and scaling) and the monetary threshold/deductible in
WA appear to have been more successful than the previous NSW approach at producing
sustained reductions in claims costs. This may well be due to a more benign legal
environment rather than superior scheme design.


Legal Costs

NSW (in 1999) and Queensland (in 2000) have introduced measures intended to reduce
the amount of litigation and legal costs. Note that some work we carried out on the NSW
CTP scheme prior to the 1999 changes suggested that for more minor claims, legal costs
(including investigation costs) for litigated matters were 2.5 times those for non-litigated
claims of similar quantum and injury level. Note that the measures address only
party/party legal costs not plaintiff solicitor/client costs.

In NSW the measures revolve around –

      Introduction of CARS (Claims Assessment & Resolution Service) through which all
     matters must pass (except on exemption) before being litigated



H:Fedtreas02\Publiab\R_260302_Public Liability.doc        51
    Activity-based scale of fees for party/party legal costs up to and including CARS, no
    restriction on costs at court provided outcome exceeds any previous CARS decision,
    otherwise no party/party costs.

These measures were accompanied by significant limitations on general damages (with
access intended for only 10% of claimants) and introduction of other system changes
intended to encourage direct claimants. The specific legal cost restrictions were aimed
at halving legal costs.

In Queensland the measures are –

    Compulsory conferencing and exchange of settlement offers prior to litigating

    Limits on party/party costs depending on the size of compensation to the claimant,
    no restriction on costs at court provided outcome exceeds final insurer offer.

The potential cost savings from the Queensland changes are less ambitious than in NSW
(noting also that legal costs in Queensland were well below NSW levels).

It is too early at this stage to understand what impact either set of measures will have on
party/party legal costs specifically and claims costs more generally. In general,
restrictions are likely to result in significant and sustainable reductions in party/party
costs and claims costs if –

    They are very explicit, e.g. dollar limits

    They are also accompanied by significant tort reform and system changes

    There are measures to prevent substitution of compensation (which includes
    solicitor/client costs) for party/party legal costs.


Indicative Assessment of Possible Impact of Compensation
Restrictions
The material we have presented on public liability claims costs in Part B of the report is
not adequate to accurately assess the impact on premiums of some of the proposed
compensation restrictions. This is because –

    the ICA claims cost distribution includes property damage claims and legal costs,
    whilst

    the Tort Report information on heads of damage is for compensation for bodily injury
    claims only (i.e. excluding any legal costs) and covers only 110 claims in total.

The information can, however, give an approximate initial indication about the possible
influence of various compensation restrictions on claims costs and thus premiums.




H:Fedtreas02\Publiab\R_260302_Public Liability.doc         52
Caps
It is clear from the material and from our general knowledge of large awards for personal
injury claims that –

    a cap on general damages is unlikely to have any material impact on current claims
    costs unless set at a very low level (say $100,000) and accompanied by proportionate
    scaling below this level

    caps on future economic loss amounts at the level currently utilised in the NSW,
    Queensland and SA CTP systems will not have any impact on current claims costs


Thresholds and deductibles

Introducing a threshold/deductible for general damages equivalent to, say, $20,000
would be unlikely to have the potential to reduce claims costs by any more than 10% and
for any savings to be sustainable would need to –

    prevent erosion of the deductible itself (as occurred in the NSW scheme) through
    increasing general damages awards for more minor injuries

    prevent leakage of compensation from general damages to future earning capacity
    (economic loss buffers).

Introducing a threshold/deductible for general damages equivalent to, say, $40,000
would be unlikely to have the potential to reduce claims costs by more than 15% and the
same issues of erosion and economic loss buffers as noted above would remain.


Interaction of Thresholds for Common Law and Legal Cost Control

The emerging experience of the NSW and Queensland CTP scheme reforms indicates that
there is a strong connection between the operation of thresholds for common law and
measures regarding legal fees. The interaction is complex, and the design of measures in
the two areas needs to be done in concert. One set of measures without the other can
be unsuccessful, and the two together (if carefully designed and implemented) can have
a reinforcing effect on each other.


Further Discussion of Insurance Market Response
Possibilities for creating a more “efficient” market that were raised in submissions
include:

Group buying by affiliation and industry groups

    Availability of insurance to some groups and industries has been restricted due to the
    absence of both buying power and an ability of insurers to assess individual risks and




H:Fedtreas02\Publiab\R_260302_Public Liability.doc     53
    price them appropriately. Grouping has been suggested as a means of overcoming
    this.

Arrange market access through local government

    Some community groups operate under the umbrella of local government. It has
    been proposed that such organisations could/should be able to be covered by local
    government protection, providing their needs were specified, or at least be able to
    access insurers via their local governments.

Develop and promote specific coverage with the help of brokers/insurers

    It has been proposed that not-for-profit and one-off coverages could be arranged
    through special arrangements put together specifically by brokers with insurer
    support. It has also been suggested that government may need to support such
    arrangements on start-up.

Publish data to help set prices

    Data should be collected at an industry level and be disseminated to all licensed
    insurers to assist with pricing and stability. In the short run it may be possible to
    obtain and publish HIH data.

Publish advisory rates

    Analyse data on an industry level and provide advisory rates as a basis of premium
    determination.

Use of Personal Accident Insurance

    Some organisations such as pre-schools or sporting bodies have provided personal
    accident insurance for participants. It has been suggested that the availability of
    this insurance reduces the likelihood of a liability claim being made if there is an
    accident.

Allow pooling of risks

    This approach allows for bodies to participate in financial mutual pools to fund
    losses. It would be similar to groups, but without an insurer as risk underwriter. The
    pools would attend to their own financial viability

Government underwriting of some risks

    Most state governments have self-insurance arrangements. It has been proposed that
    certain activities such as those authorised on crown land, could participate in these
    self-insurance arrangements.

Subsidies to certain bodies

    It has been suggested that through industry assistance packages, governments may
    be willing to subsidise certain key industry groups – for example, tourism and leisure.




H:Fedtreas02\Publiab\R_260302_Public Liability.doc        54
Start a new government insurance office

    Such offices were established in the early part of the 20th century to respond to
    insurance market failure. Those organisations continued to underwrite on a “social
    basis” for community groups until privatised.

Mandate improved industry data

    APRA has the power to require insurers to adhere to its operational risk
    requirements. This could be expanded to provide for mandated specified data to be
    provided to a central data warehouse for analysis and subsequent dissemination.

Make supply of insurance compulsory for insurers

    Under privatised CTP legislation, insurers are required to accept all risks that are
    presented to them. This principle could be extended to public liability.

Set maximum prices that can apply

    Insurers could be similarly required to operate off a set maximum premium rate per
    industry, again similar to CTP in some jurisdictions.


Group Insurance Buying and Risk Pooling
It is important to draw a distinction between groups banding together to buy insurance on
a collective basis and groups that pool funds and retain part of the claim risk.

Both concepts are important in the debate about public liability. For clarity we have
used the following terms in this report:

    Group Insurance Buying – purchasing insurance on a group basis, to take advantage of
    bulk buying and common interests

    Risk Pooling – retaining some or all of the claim risk in a mutual pool formed from the
    premiums or contribution paid by the pool members.

In some respects the features of the two arrangements are similar, but they are quite
different in terms of the legal and financial risks involved.


Group Insurance Buying
It has long been commonplace for groups with a common interest to band together for
the purchase of insurance. The extent and details of the structure vary from informal
arrangements to highly structured and branded products. We understand that a few
years ago HIH insured more than seventy schemes of this kind.




H:Fedtreas02\Publiab\R_260302_Public Liability.doc       55
Group insurance buying is generally organised through an insurance intermediary (broker
or agent). In some of the more mature arrangements the industry group actually runs its
own insurance intermediary business.

The scheme is generally insured with one insurance company, although it could be shared
among several insurers. Sometimes it is written with an underwriting agency that acts on
behalf of one or several insurers.

The insurance may take the form of individual policies for each group member or a
master policy covering the scheme with certificates of insurance for each group member.


Risk Pooling
Rather than buying individual insurance policies (or a master policy), a group of insureds
can arrange to:

    Pool their funds

    Pay for part of the cost of claims from this pool

    Buy a lesser amount of insurance, generally to cover large claims only.

Pools are generally established with the expectation of saving on insurance costs because
of the strong accountability for prevention and claims management that arises. This
assumes that those running the pool are able to do a better job than insurance companies
and/or that membership of the pool will change the behaviour of the insured members.


Operating Alongside the Insurance Regulations

There are strict limits to the extent of pooling before the “pool” would be defined as an
insurer under the Insurance Act. Once it comes under the Insurance Act the organisation
needs substantial capital (minimum $5m) and must meet a wide range of stringent
prudential requirements designed to ensure the security of policyholder entitlements.

Without specific legislative backing (such as exists for local councils or some legal
profession schemes) in practice it is legally difficult to run a pool that retains a
substantial amount of risk.


Prudential Concerns

The reason the Insurance Act contains stringent prudential requirements is to improve the
security of policyholders and claimants.

A fundamental difficulty with a pool is how to ensure enough funds are available to meet
all claims on the pool. This issue is exacerbated for public liability because claims take
many years to settle and both the volume and size of claims can be volatile.



H:Fedtreas02\Publiab\R_260302_Public Liability.doc       56
Examples

The best example of public liability pooling is local governments. There are several
pooling arrangements around the nation that cover public liability and buy commercial
insurance to cover large claims only.

These pools tend to insulate the Councils somewhat from insurance market conditions.
They do not, however, insulate Councils from a high volume of claims because the pool
must meet the full cost. We understate that the local government pools are under
considerable financial pressure because increases in claims over recent years have
outstripped the funds contributed to the pools.

Another example is some State government pools covering solicitors for professional
indemnity. State legislation permits these pools to operate outside the Insurance Act
regime. History shows that these pools suffer from very similar cyclical issues to the
insurance industry and tend to go through periods of success and crisis.

A further example relates to Medical Defence Organisations, by which doctors pool
liability risks and buy reinsurance. At present, these organisations operate outside the
insurance regulatory system (although there are proposals for change)

A further example in the private sector is McDonald’s franchises. Individual franchise
holders participate in a pool that covers the first part of any claim. This arrangement is
possible because of the legal structure of McDonald’s business.

A key to the viability of any pool is compulsory membership and the ability to collect
money in arrears if contributions (premiums) prove to have been too low. Without this
continuity of funding it is extremely difficult to set up and run a pool on a financially
sound basis.


Concluding Remarks
The preceding “menu” of possible responses to the various components of the public
liability insurance problem is not a set of recommendations but rather an indication of
the range of initiatives that could be taken to improve access to and affordability of
public liability insurance.

Following our research and analysis for this report, we do not under-estimate the
difficulty of forging appropriate solutions.

The Federation adds complexity in this issue with responsibilities falling across different
governments and the issue is an important one politically.

This report aims to give an evidence base from which a cooperative approach by
governments and stakeholders can produce a consistent package of solutions for the
benefit of the community. Action needs to be prompt but well considered.




H:Fedtreas02\Publiab\R_260302_Public Liability.doc       57
Appendices

1. The Consultancy Brief
The brief agreed between Treasury and Trowbridge Consulting in March 2002 is as
follows:

1. A confidential analytical report for Commonwealth Treasury. The objectives of the
    report are:

    •      To ascertain what changes, if any, have occurred in key variables in public
           liability insurance, including:

           -       Premium income;

           -       Claims;

           -       Loss, expense and combined ratios;

           -       Provisioning levels; and

           -       Profitability
    •      To isolate and quantify the main drivers behind changes in these key
           variables (where data limitations prevent quantitative assessment,
           qualitative judgements should be made where possible).
    •      To identify a framework for possible solutions including issues of market
           structure and underlying costs. This may include consideration of negligence
           issues, liability caps and thresholds, and the management of claims.

2. A presentation to a meeting of Sate and Territory Treasury Ministers and the
    Commonwealth Ministers for Revenue and Assistant Treasurer on public liability
    insurance on 27 March 2002 in Canberra based on the above report.

    •      The presentation would provide an overview for Ministers of the current
           market conditions for public liability insurance, and highlight the key drivers
           affecting premium rates, profitability and availability of public liability
           insurance.

           -   Powerpoint format, length 45 minutes with 15 minutes question time.

    •      The Consultant is to attend the entire meeting and provide an overview of
           the day’s proceedings (including State initiatives and the report of the States
           Working Group on Insurance Issues) and proposing possible ways forward
           (drawing upon the work outlined in the third dot-point).




H:Fedtreas02\Publiab\R_260302_Public Liability.doc      58
        -   Powerpoint format, length 15 minutes

        -   The Consultant will contribute if required to the subsequent discussion on the
            day’s proceedings and possible ways forward




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2. Sources of Information
ISA

Liability State Level Report As at June 2001 for all contributors, Insurance Statistics
Australia Limited.


APRA
Selected Statistics on the General Insurance Industry, For Year Ended June 2001,
Australian Prudential Regulation Authority.

Selected Statistics on the General Insurance Industry, For Year Ended June 2000,
Australian Prudential Regulation Authority.

Selected Statistics on the General Insurance Industry, For Year Ended June 1999,
Australian Prudential Regulation Authority.

Selected Statistics on the General Insurance Industry, For Year Ended June 1998,
Australian Prudential Regulation Authority.


ISC
Selected Statistics on the General Insurance Industry, For Year Ended June 1997,
Insurance and Superannuation Commission.

Selected Statistics on the General Insurance Industry, For Year Ended June 1996,
Insurance and Superannuation Commission.

Selected Statistics on the General Insurance Industry, For Year Ended June 1995,
Insurance and Superannuation Commission.

Selected Statistics on the General Insurance Industry, For Year Ended June 1994,
Insurance and Superannuation Commission.

Selected Statistics on the General Insurance Industry, For Year Ended June 1993,
Insurance and Superannuation Commission.


JP Morgan/Deloitte/Trowbridge Survey
2001 General Insurance Industry Survey, JP Morgan/Trowbridge Consulting/Deloitte
Touche Tohmatsu.




H:Fedtreas02\Publiab\R_260302_Public Liability.doc      60
2000 General Insurance Industry Survey, Ord Minnett/Deloitte Touche Tohmatsu/Ord
Minnett Research.

1999 General Insurance & Reinsurance Survey, Ord Minnett/Deloitte Touche
Tohmatsu/Ord Minnett Research.

1998 General Insurance & Reinsurance Survey, Ord Minnett/Deloitte Touche
Tohmatsu/Ord Minnett Research.


Papers and Publications
Can Liability Business be Profitable?, Pearson, E, 17 September 2001 presented to the
Australian and New Zealand Institute of Insurance and Finance.

Public and Products Liability Industry Profitability Update, Pearson, E, 4 May 1999.

Public & Products Liability – Experience, Expectations, Expensive? An Update, Andrews,
T, Pearson, E, Whittle, D, November 1997 presented to the Institute of Actuaries of
Australia Eleventh General Insurance Seminar.

Public & Products Liability – Experience, Expectations, Expensive?, Andrews, T, Pearson,
E, 4 June 1997 presented to the Australian Association of Insurance Accountants 1997
General Insurance Conference.

Industry Profitability – A Brave New World; McCarthy P; Institute of Actuaries of Australia
Thirtieth General Insurance Seminar November 2001.

Managing a Public Liability Portfolio; McCarthy, P, Backe-Hansen, P, Bendall, A, Wilson,
S; Presentation to Institute of Actuaries of Australia Thirteenth General Insurance
Seminar, November 2001.


Torts Reports
Australian Torts Reports Volume 1988 – Volume 2000, CCH Australia Limited.


Further Information
We obtained further information both qualitative and quantitative from:

    Submissions received and summarised by the Federal Government up to 19 March
    2002

    Review of media reports and press articles

    State Treasury officials dealing with the liability issue

    Interviews with:
            o    Law Council of Australia



H:Fedtreas02\Publiab\R_260302_Public Liability.doc       61
            o    Insurance Council of Australia
            o    Local Government Association (NSW)
            o    Three insurance companies
            o    One reinsurance company
            o    Four insurance brokers

    The registry of the District Court of NSW




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3. APRA Data
The tables following, list the data from APRA (and its predecessor the ISC) used to
prepare the graphs in Part B of the report.

The Selected Statistics tables for each year show the total amount for companies with
balance dates in the 12 months specified. Figures are totals for the public liability and
product liability classes. Figures are for private sector direct insurers and, where
possible, exclude inwards reinsurance.

To give a longer historical context, we also show the total written premium for 1986 to
1994. This is for the total liability class including professional indemnity which was not
split out in statistics until 1993.

This graph also shows a cyclical pattern with:

    Steep increases in 1987 and 1988 following the 1985 crisis referred to in Appendix 6

    Very flat premiums from 1998 to 1992

    Another large increase in 1993 and 1994 after the 1992 insurance crisis.

The graph of claims reported by year shows an obviously incorrect figure in APRA
statistics for 1998. Even apart from this, we are not confident that other years are
sufficiently reliable to give an accurate trend.




H:Fedtreas02\Publiab\R_260302_Public Liability.doc      63
              Gross Written Premium for Public & Product liability (Figure 7)
                     and Liability Premium per $000 GDP (Figure 8)


                 Public &
                  Product
                  Liability
                Premium CGU Balance                               GDP less Liability Premium
             less Duty as         Date                    Percent   Public     per thousand
  As at June per source     Adjustment     Adjusted       Change Demand          dollars GDP
                  $(000)         $(000)       $(000)                  $(000)
      1993      528,155              0      528,155             -   317,312            $1.66
      1994      575,487       +48,787       624,274       18.20%    338,610            $1.84
      1995      704,537        -48,787      655,750        5.04%    359,010            $1.83
      1996      754,501              0      754,501       15.06%    388,166            $1.94
      1997      777,590              0      777,590        3.06%    407,849            $1.91
      1998      732,651              0      732,651       -5.78%    434,137            $1.69
      1999      820,127              0      820,127       11.94%    455,548            $1.80
      2000      915,535              0      915,535       11.63%    480,808            $1.90
                                               Estimate
      2001      882,766 excl HIH          1,071,176       17.00%    517,371            $2.07




H:Fedtreas02\Publiab\R_260302_Public Liability.doc        64
                                   Written Premium - Total Liability Class

                    1000
                     900
                     800
                     700
   Premium $(000)




                     600
                     500
                     400
                     300
                     200
                     100
                       0
                            1986    1987    1988       1989   1990     1991   1992    1993       1994
                                                       Year Ending June 30


                                                Total Liability


                    Year Ending       Total Liability      Stamp Duty Direct Premiums less
                        June 30    Direct Premiums               Paid          Stamp Duty
                                              $(000)              $(000)                $(000)
                           1986              330,992              10,372               320,620
                           1987              472,329              13,175               459,154
                           1988              587,758              19,371               568387
                           1989              604,623              20,600               584,023
                           1990              618,859              22,793               596,066
                           1991              621,955              35,267               586,688
                           1992              648,013              39,954               608,059
                           1993              869,914              43442                826,472
                           1994              933,704              53525                880,179
                           1995            1,167,073              76,105             1,090,968
                           1996            1,226,388              79,015             1,147,373
                           1997            1,239,207              81,641             1,157,566




H:Fedtreas02\Publiab\R_260302_Public Liability.doc                65
                   Insurance Trading Result from APRA Returns (Figure 11)

                                                     Net
                                                  Earned       APRA
                               Year         ITR Premium        ITR %
                              1987        3,972      301,545      1%
                              1988       45,285      394,146     11%
                              1989      159,073      424,017     38%
                              1990      137,474      472,020     29%
                              1991       89,991      454,435     20%
                              1992       25,451      412,843      6%
                              1993       78,296      423,921     18%
                              1994      104,483      475,136     22%
                              1995      141,850      571,506     25%
                              1996       70,319      611,510     11%
                              1997      -12,102      636,849     -2%
                              1998     -122,347      598,204    -20%
                              1999     -403,482      606,736    -67%
                              2000     -269,110      657,470    -41%
                              2001     -242,776      465,399    -52%



         Composition of Provision – Case Estimate and Total Provision (Figure 14)


                                       Provision for
                                       Outstanding Direct Claims
                                   Claims at End of    Reported
            Year     Case Estimate             Year  during Year                IBNR
                              $(000)             $(000)          $(000)         $(000)
            1994          1,043,806          1,607,568          43,991        563,762
            1995          1,143,973          1,775,357          48,693        631,384
            1996          1,286,654          1,822,371          47,751        535,717
            1997          1,345,944          1,929,340          50,657        583,396
            1998          1,527,105          2,184,129         261,000        657,024
            1999          1,701,549          2,658,251          52,000        956,702
            2000          1,937,918          3,134,851          65,000      1,196,933




H:Fedtreas02\Publiab\R_260302_Public Liability.doc      66
                                 Claims Reported during Year

                  300

                  250

                  200
   Number (000)




                  150

                  100

                   50

                    0
                        1993   1994   1995   1996   1997   1998    1999   2000   2001
                                             Year Ending June 30




H:Fedtreas02\Publiab\R_260302_Public Liability.doc          67
4. ISA Data

    Estimated Claim Frequency per $100,000 Premium for ISA Contributors (Figure 2)




              Gross Earned                   Adjusted GEP        Number of Per $100,000
   Year    Premium $(000) Rate Index                $(000)          Claims Adj Premium
  1993                52,829         1.02             54,102             3,922          7.25
  1994               105,195         1.00            105,195             8,608          8.18
  1995               114,607         0.87             99,404            10,072         10.13
  1996               150,422         0.88            131,813            13,324         10.11
  1997               151,770         0.89            135,083            13,538         10.02
  1998               155,006         1.01            155,923            14,968          9.60
  1999               149,643         0.94            141,330            13,448          9.52
  2000               148,900         0.89            133,226            10,580          7.94



               Estimated Average Claim Size for ISA Contributors (Figure 5)



                                 AWE at      Change in                       12% p.a
            Year          ISA      May           AWE            AWE          Growth
            1990      $7,219       569.3                 -     $5,000         $5,000
            1991      $5,068       591.7             3.9%      $5,197         $5,600
            1992      $4,714       617.6             4.4%      $5,424         $6,272
            1993      $5,900       632.6             2.4%      $5,556         $7,025
            1994     $11,811       656.1             3.7%      $5,762         $7,868
            1995     $10,561       687.8             4.8%      $6,041         $8,812
            1996     $14,188       715.2             4.0%      $6,281         $9,869
            1997     $15,111       736.8             3.0%      $6,471        $11,053
            1998     $14,314       767.8             4.2%      $6,743        $12,380
            1999     $13,986       790.6             3.0%      $6,944        $13,865
            2000     $17,489       821.5             3.9%      $7,215        $15,529




H:Fedtreas02\Publiab\R_260302_Public Liability.doc       68
            Estimated Insurance Trading Result for ISA Contributors (Figure 12)

                                 APRA Net Loss          ISA Net Loss
                Year    APRA ITR         Ratio                 Ratio     ISA ITR
               1992            6%               71%             39%          38%
               1993           18%               67%             44%          41%
               1994           22%               71%             97%          -4%
               1995           25%               67%             93%          -1%
               1996           11%               80%            126%         -34%
               1997           -2%               85%            135%         -51%
               1998          -20%              102%            138%         -57%
               1999          -67%              140%            126%         -52%
               2000          -41%              126%            124%         -39%



           Estimated ISA Loss Ratio 1994-1998 by Industry Segment (Figure 13)

                       Industry Segment               ISA Loss Ratio
                       All Industries                         142%
                       Building                               140%
                       Special Trades                          94%
                       Food Stores                            125%
                       Welfare / Commmunity                    87%
                       Hotel Accom.                           178%
                       Sports and Recreation                  104%
                       Unlicensed Clubs                       215%




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                                                   Gross Earned Premium
     Industry Category             Accident Year                  $(000)      Loss Ratio
     All Industries                        1994             152,172,832         119.42%
                                           1995             167,089,806         122.05%
                                           1996             205,947,875         155.55%
                                           1997             229,085,594         160.27%
                                           1998             216,434,617         143.17%
     Sum Product GEP and Loss
     Ratio                                                                 1,383,017,522
     Sum GEP                                                                 970,730,724

     Weighted Average Loss Ratio                                                  142%
     Building                              1994                5,057,151         59.11%
                                           1995                5,380,573         56.14%
                                           1996               12,747,045        124.17%
                                           1997               16,903,585        177.48%
                                           1998               14,488,605        168.80%
     Sum Product GEP and Loss
     Ratio                                                                   76,295,357
     Sum GEP                                                                 54,576,959

     Weighted Average Loss Ratio                                                  140%
     Special Trades                        1994                9,470,974         60.41%
                                           1995               10,126,431         74.68%
                                           1996               13,343,545         88.49%
                                           1997               18,593,423        126.44%
                                           1998               18,017,765         91.68%
     Sum Product GEP and Loss
     Ratio                                                                   65,119,529
     Sum GEP                                                                 69,552,138

     Weighted Average Loss Ratio                                                    94%
     Food Stores                           1994                2,187,182         81.58%
                                           1995                2,496,328         78.23%
                                           1996                3,074,112        131.47%
                                           1997                3,508,406        151.54%
                                           1998                3,241,537        156.15%
     Sum Product GEP and Loss
     Ratio                                                                   18,156,929
     Sum GEP                                                                 14,507,565

     Weighted Average Loss Ratio                                                  125%
     Welfare / Community                   1994                  980,715         53.39%
                                           1995                1,052,315        117.77%
                                           1996                1,839,895         78.08%
                                           1997                1,767,031        114.84%
                                           1998                1,861,996         70.69%
     Sum Product GEP and Loss
     Ratio                                                                    6,544,895
     Sum GEP                                                                  7,501,952

     Weighted Average Loss Ratio                                                    87%
     Hotel Accom.                          1994                2,349,162        150.60%
                                           1995                2,427,060        237.12%
                                           1996                2,922,876        166.47%
                                           1997                2,957,290        139.09%
                                           1998                2,728,207        205.95%
     Sum Product GEP and Loss
     Ratio                                                                   23,890,314
     Sum GEP                                                                 13,384,595

     Weighted Average Loss Ratio                                                  178%
     Sports and Recreation                 1994                1,377,630         39.02%
                                           1995                1,939,930        100.02%
                                           1996                2,074,160         69.75%
                                           1997                2,622,510        129.52%
                                           1998                2,025,952        155.88%
     Sum Product GEP and Loss
     Ratio                                                                   10,479,560
     Sum GEP                                                                 10,040,182




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5. Statutory Schemes and Examples of
       Reform
Statutory, or legislatively controlled schemes exist in all Australian states and territories
in respect of workers compensation and third party motor vehicle personal injury
insurance. The legislation makes this insurance compulsory in each case. There are also
federally controlled schemes of workers compensation for commonwealth public servants
– COMCARE – and seamen who ply the ports of more than one state – SEACOVER).

The features of the schemes differ by jurisdiction. The schemes range from monopoly
state schemes (workers compensation in Queensland and COMCARE, and motor vehicle in
Victoria, South Australia, Tasmania and Western Australia), schemes whose claims are
managed by competing insurers but underwritten by states (workers compensation in
NSW, Victoria and South Australia) with the remainder of schemes privately underwritten
although controlled by a dedicated statutory authority. Various attempts have been
made to achieve national consistency in workers compensation, but the competitive
interest of the stakeholders has made that impossible to date. The principal features of
schemes are:

    Generally control or supervision over pricing by government authorities involved –
    either absolute, within parameters or by advisory rates.

    Statutory benefit structures which prescribe the extent, if any, of weekly benefits
    and lump sums, and the level and manner of payment for medical and related costs.

    The benefit structures, for workers compensation in particular, seek to encourage
    return to work by providing less than pre-accident earnings and there may be benefit
    reductions for non-cooperation with rehabilitation and return to work objectives.

    Where there is access to common law lump sum benefits for damages, an offset is
    made for statutory benefits paid.

    Many schemes have some restrictions on access to common law, typically attempting
    to restrict common law to more serious injuries.

    Dispute settling mechanisms, generally tribunals established specifically for the
    scheme involved – concerning each of liability (claim acceptance) and claim value
    disputes.


The Stakeholders
Reform is generally a very complex process due to competing interest of the stakeholders
involved. So, for example, in a workers’ compensation scheme the objectives of the
stakeholders may be:




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    The authority: work place safety, optimum outcome for injured workers, and stable
    premiums

    Employers: minimisation of premium costs

    Workers: maximisation of benefits

    Lawyers: maximisation of disputes

    Doctors: ongoing relationships as the family doctor – hence conservative medical
    certificates

    Insurers: maximum profit

The interests of the stakeholder are never as simple or extreme as this, but it does serve
to illustrate the complex balance that is required for reform to be instituted.


Scheme Reforms
Over the last 20 years there has been progressive reform to the majority of schemes,
arising generally because of cost blow-outs caused by increases in the cost of claims, and
community objection that the resulting premium increases are too high.

Over those 20 years, reform has concentrated on these prime issues:

    Underwriting responsibility for the schemes – government or private sector

    Rehabilitation and recovery of injured parties

    Curtailing of common law rights.

The latter two are most pertinent to the current “crisis” and how to respond to it. We
cite the Transport Accident Scheme in Victoria:


Examples of Reform

Victoria Motor Accidents

    In 1986, common law costs were blowing out, so the Government instituted control
    over access to common law by restricting it to only those injured parties with a
    certain threshold level of impairment. That level was 30% - impairment to the whole
    body as measured by particular international medical guidelines. The access level
    has an alternative test of “serious injury” to allow access for that additional group of
    claimants whose injury because of their particular vocation, have more serious
    consequences (often cited example of the concert pianist’s little finger – certainly
    not 30% impairment or much of an enduring disability to most people, but
    devastating to the concert pianist).




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    Progressively over the years, the TAC has been attending through its statutory
    obligations to the rehabilitation of injured claimants, particularly the most seriously
    injured, by a regime of proactive intervention, early access to rehabilitation services
    and the facilitation of infrastructure required to bring about the early, optimum
    outcome for the client.


Queensland WorkCover

    In Queensland access to common law is restricted, although not nearly so much as in
    some other states.

    From 1 January 1996, workers with an injury which causes less than 20% work-related
    impairment must make an irrevocable election between pursuing common law
    damages or statutory entitlements. This reform was introduced as a cost-saving
    measure in response to steep increases in the number of common law claims and in
    the reliance of claimants on common law. Between 1990-91 and 1995-96 the number
    of common law claims had tripled, while the total number of claims had increased by
    a little over 20%.

    Although no further restrictions on common law access have been introduced, there
    has been considerable further rebate about the place of common law in the
    Queensland workers’ compensation system.




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6. Insurance Cycles and Crises
There have been three major global insurance and reinsurance crises in the last twenty
years:

    1985 – US liability crisis

    1992 – reinsurance crisis

    2001 – World Trade Centre


1985 US Liability Crisis
During the first half of the 1980s the cost of all types of liability claims in the US
increased at rates exceeding 10% p.a. This was not recognised by insurers either in claim
reserves or premium rates for several years, with flat or reducing rates in a competitive
market.

In 1985 and 1986 the problems were recognised, with massive increases in reserves and
premium rates across the whole industry. Many insurers pulled out of the market and
many customers could not buy insurance at all, including schools, hospitals, doctors,
accountants, governments and corporations.

The average price went up 200% in 3 years.

The eventual outcome included:

    establishment of ACE and XL in Bermuda (now major global insurers)

    governments easing the rules to encourage self-insurance

    federal laws to allow “risk retention groups” – pooling arrangements outside the
    insurance regulations

    promotion of mutual insurers including doctor-owned and lawyer-owned companies.


1992 Reinsurance Crisis
After a string of huge catastrophe losses – Hurricane Andrew, Northridge Earthquake,
Piper Alpha, European storms – losses were such that reinsurance became nearly
unavailable, spreading through to insurance pricing and availability in many direct classes
around the world. Property insurance was particularly severely impacted.

Among the consequences were:

    the establishment of seven new insurers in Bermuda




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    reform of Lloyds, including the introduction of corporate capital and the
    establishment of Equitas

    two years of very profitable premium rates for insurers


2001 World Trade Centre
This year represents a crisis of similar dimensions. While the details and consequences
are still being played out, there have and will be changes of similar magnitude.

The public liability crisis in Australia is a very similar situation on a local scale, occurring
in the context of this larger crisis.




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7. Public Liability Policy Exclusions and
       Reinsurance Exclusions
                    Intermediary Business – Corporate (NSW)
                       Broadform Liability Insurance Policy

                                Insurer exclusions
The Company shall not be liable to indemnify the Insured in respect of -

1.   Employer's Liability
     (a) Liability for Personal Injury to any person arising out of, or sustained in the
         course of, the employment of such person in the Insured's service, or through
         the breach of any duty owed to that person, where the Insured
         (1) is indemnified or entitled to be indemnified (either in whole or in part) in
              respect for claims for damages under a policy of insurance (which
              expression includes arrangements made by the Insured to provide
              accident insurance for the Insured's workers under a licence to self
              insure) arranged (whether required by law or not) in accordance with
              any workers’ compensation legislation or accident compensation
              legislation ; or
         (2) would have been indemnified or entitled to be indemnified had the
              Insured arranged a policy of insurance as required by such legislation.

     (b) Liability for Personal Injury to any person arising out of, or sustained in the
         course of, the employment of such person in the Insured's service in Western
         Australia, other than a person of who the Insured is deemed to be an
         employer by reason only of Section 175 of the Workers’ Compensation and
         Rehabilitation Act 1981 (WA);

     (c) Liability for mental anguish suffered by any person arising out of, or in the
         course of, that persons employment by or service to the Insured;

     (d) Liability for Personal Injury arising out of the harassment, libel, slander,
         defamation or humiliation of, or discrimination against, any person while in
         the Insured's service or while employed by the Insured;

     (e) Liability of a type in respect of which indemnity previously would have been
         provided under a policy of insurance arranged in accordance with any
         workers’ compensation legislation or accident compensation legislation, but
         in respect of which indemnity has been withdrawn or reduced as a
         consequence of a change to the scope, terms, provisions, or requirements of
         such legislation made after the commencement of the current Policy Period;
         and

     (f)   Any other liability imposed by the provisions of any workers compensation
           legislation or accident compensation legislation or industrial award,
           agreement or determination.




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     This exclusion does not apply to the liability of others assumed by the Insured
     under a written contract where the contractual liability has been notified and
     specifically accepted by the Company.

2.   Motor Vehicles
     Liability to pay compensation for Personal Injury or Property Damage arising out
     of the ownership, possession, operation, use or legal control by the Insured of any
     Vehicle:
     (a) which is registered or
     (b) in respect of which insurance is required by virtue of any legislation relating to
          motor vehicles, or
     (c) which is otherwise insured in respect of the same liability
     Provided that this Exclusion does not apply to Vehicles whilst being operated or
     used by the Insured as a Tool of Trade.

3.   Aircraft and Watercraft
     Liability to pay compensation for Personal Injury or Property Damage arising from
     the ownership, maintenance, possession, operation, use or legal control by the
     Insured of:
     (a) any Aircraft, or
     (b) any Watercraft or vessel exceeding eight (8) metres in length.

4.   Property in Physical or Legal Control
     Liability to pay compensation for Property Damage to:
     (a) property owned by the Insured
     (b) property leased, rented or in the physical or legal control of the Insured.
     This exclusion shall not apply to liability for Property Damage to:
          (1) premises which are leased or rented by the Insured for the purpose of
                 the Insured's Business;
          (2) vehicles (not belonging to or used by or on behalf of the Insured) in the
                 physical or legal control of the Insured where such property damage
                 occurs whilst any such vehicle is in a car park owned or operated by the
                 Insured;
          (3) any property not under lease or rental agreement in the physical or legal
                 control of the Insured up to a limit of $100,000 (or any other amount if
                 specified in the Schedule) for any one Occurrence.

5.   Faulty Workmanship
     Any liability for the cost of performing, completing, correcting or improving any
     work done or undertaken by the Insured.

6.   Damage to Insured's Products
     Liability to pay compensation for:
     (a) physical injury to or destruction or loss of the Insured's Products or any part
          of those Products arising out of them or any part of them;
     (b) loss of use of any tangible property caused by physical injury to or
          destruction or loss of the Insured's Products or any part of those Products
          arising out of them or any part of them.

7.   Product Recall and Repair
     Liability to pay compensation for damages claimed for the withdrawal, inspection,
     repair, replacement or loss of use of the Insured's Products.




H:Fedtreas02\Publiab\R_260302_Public Liability.doc     77
8.    Aircraft Products
      Any liability arising out of the selling, leasing, hiring or manufacture and/or supply
      of parts and/or products that are used with the Insured's knowledge in Aircraft or
      any aerial device.

9.    Contractual Liability
      Liability to pay compensation for Personal Injury, Property Damage or Advertising
      Liability where the liability has been assumed solely under an agreement unless
      such liability
      (a) would have attached in the absence of such agreement, or
      (b) is specifically allowed by the Company's written endorsement, or
      (c) is assumed by the Insured under a warranty of fitness or quality, or is implied
           by law, in respect of the Insured's Products.

10. Professional Liability
    Liability to pay compensation for the rendering of or failure to render professional
    advice or service by the Insured or error or omission connected therewith, but this
    Exclusion does not apply to the rendering or failure to render professional medical
    advice by medical persons employed by the Insured to provide first aid and other
    medical services on the Insured's premises.

11.    Libel and Slander
      Any liability to pay compensation arising out of the publication or utterance of a
      libel or slander:
      (a) made prior to the Policy commencing on the date stated in the Schedule, or
      (b) made at the direction of the Insured with the knowledge of the falsity thereof.

12. Fines and Punitive Damages
    Any liability for fines, penalties, punitive, exemplary, or aggravated damages.

13. Pollution
    (a) Liability to pay compensation for Personal Injury or Property Damage caused
        by or arising directly or indirectly out of the actual, alleged or threatened
        discharge, dispersal, release or escape of smoke, vapours, soot, fumes,
        acids, alkalis, toxic chemicals, liquids or gases, waste materials or other
        irritants, contaminants or pollutants into or upon any property, land, the
        atmosphere or any watercourse or body of water (including groundwater) but
        this exclusion does not apply if the actual discharge , dispersal, release or
        escape
        (1) is neither reasonably expected nor intended by the Insured; and,
        (2) is the consequence of a sudden and instantaneous cause which takes
              place at a clearly identifiable point in time during the Policy Period;
    (b) Liability for any costs or expenses incurred in the preventing, removing,
        nullifying, or cleaning up any discharge, dispersal, release or escape as
        described in (a) above, unless such costs or expenses are consequent upon
        an unexpected, unintended sudden and instantaneous cause which takes
        place at a clearly identifiable point in time during the Policy Period and results
        in Personal Injury or Property Damage neither of which is otherwise excluded
        by this Policy:

      Provided that the total aggregate liability of the Company during any one Policy
      Period in respect of all claims arising out of such Personal Injury or Property
      Damage or such costs or expenses shall not exceed the Limit of Liability stated in
      the Policy Schedule.




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14. Asbestos
    Liability to pay compensation for Personal Injury or Property Damage caused by
    or arising directly or indirectly out of or in connection with any mining, handling,
    processing, manufacture, sale, transportation, distribution, storage or use of
    asbestos, asbestos products or asbestos contained in any products or any
    installation, removal or treatment of asbestos material.

15. Nuclear
    Liability to pay compensation for Personal Injury or Property damage of
    whatsoever nature directly or indirectly caused or contributed to by or arising from
    ionising radiation, or contamination by radioactivity from nuclear fuel or from any
    nuclear waste from the contamination of nuclear fuel. For the purpose of this
    Exclusion combustion shall include any self-sustaining process of nuclear fission.

16. War
    Liability to pay compensation for Personal Injury or Property Damage directly or
    indirectly caused by or in consequence of war, invasion, act of foreign enemy,
    hostilities (with or without the declaration of war), civil war, rebellion, insurrection,
    military or usurped power.

17. Advertising Liability
    Liability to pay compensation for Advertising Liability arising from
    (a) offences committed prior to the inception date of this policy
    (b) offences made at the direction of the Insured with knowledge of the illegality
          or falsity thereof
    (c) breach of contract, other than misappropriation of advertising ideas under an
         implied contract
    (d) incorrect description of the price of the Products, goods or services
    (e) infringement of trade mark, service mark or trade name by use thereof as the
         trade mark, service mark or trade name of the Products, goods or services
         sold, offered for sale or advertised, but this exception does not apply to titles
         or slogans
    (f) failure of the Products , goods or services to conform with advertised
         performance, quality, fitness or durability
    (g) any Insured whose business is advertising, broadcasting, publishing or
         telecasting.

18. Terrorism
     Liability to pay compensation for Personal Injury or Property Damage directly or
     indirectly caused by or contributed to by, or arising from or happening through or
     in connection with any act of terrorism. Terrorism is defined as being an act, which
     may include but is not limited to an act involving the use of force or violence
     and/or threat thereof, of any person or group(s) of persons, whether acting alone
     or on behalf of or in connection with any organisation(s) or government(s), which
     from its nature or context is done for, or in connection with, political, religious,
     ideological or ethnic or similar purposes or reasons, including the intention to
     influence any government and/or to put the public, or any section of the public, in
     fear.

19. Electronic Data
     Liability to pay compensation for Personal Injury or Property Damage in respect of
     any claim of whatsoever nature which consists of or arises directly or indirectly out
     of or in connection with:
         (1)       total or partial destruction, distortion, erasure, corruption, alteration,
     misinterpretation or misappropriation of Electronic Data and/or Software,




H:Fedtreas02\Publiab\R_260302_Public Liability.doc       79
      (2) error in creating, amending, entering, deleting or using Electronic Data and/or
      Software, or
      (3) total or partial inability or failure to receive, send, access or use Electronic
      Data and/or Software for any time or at all, from any cause whatsoever,
      regardless of any other contributing cause or event whenever it may occur.
      Electronic Data means facts, concepts and information converted to a form
      useable for communications, display, distribution, interpretation, or, processing by
      electronic or electromechanical data processing or electronically controlled
      equipment.
      Software means programs, procedures, and routines associated with the operation of
      electronic or electromechanical data processing or electronically controlled equipment,
      including any operating system.

Reinsurer exclusions

                     COMBINED PUBLIC AND PRODUCTS LIABILITY

                      SCHEDULE OF EXCLUDED/DECLINED RISKS

1.      War and Civil War.

2.      Atomic and Nuclear energy risks.

3.      Excess of loss reinsurance and obligatory proportional reinsurance treaties.

4.      Aviation liabilities of all types including:

(a)    Construction, reconstruction, repair, alteration, servicing or work of all kinds upon
       aircraft or upon any parts thereof.

(b)     Airport owners and/or lessors.

(c)     Any concern or corporation maintaining or operating an airline.

(d)     Any risks involving the refuelling of aircraft or any other occupation involving
        physical risk to aircraft e.g. provisioning, baggage handling.

(e)     Construction work on airports not completely closed.

(f)     Operation of aircraft of all descriptions.

5.      Marine liabilities of all types including:

(a)     Shipowners liability and other liability arising from the use of vessels excluding
        vessels used solely in harbours, inland waterways and coastal waterways.

(b)     Shipbuilding, ship repair and ship breaking in respect of vessels exceeding 500
        GRT.

(c)     Operation of docks, quays, wharves and refuelling of ships.

6.      Stevedores.




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7.     Manufacture, storage, filling, breakdown and transport of:-

(a)    Fireworks, ammunition, fuses, cartridges, gun powder, nitroglycerine or any
       explosives,

(b)   Gases and air under pressure in containers, unless incidental to the main
      operations of the insured.

8.     Public utility undertakings which are defined as any company or statutory body
       undertaking any of the following:-

       (a)    Railway undertakings,
       (b)    Canal undertakings,
       (c)    Harbour undertakings,
       (d)    Gas undertakings,
       (e)    Electricity undertakings,
       (f)    Water undertakings,
       (g)    Sewerage undertakings,
       (h)    Lighthouse undertakings.

9.     Subaqueous construction and/or other work.

10.    Construction and maintenance of coffer dams except where incidental to the
       main risk.

11.    Construction of bridges except where incidental to the main risk.

12.    Hydro-electric works.

13.    Tunnelling and underground work except where incidental to the main risk.

14.    Quarries where explosives are used.

15.    Underground mining.

16.    Oil and gas wells, oil refining and oil tanks for bulk storage.

17.    Railways and tramways other than private sidings.

18.    Liability of promoters and/or organisers of motor racing.

19.    Circuses and carnivals.

20.    Chemical product and pharmaceutical product manufacturers.

21.    Risks involving nuclear fission.

22.    Any form of atomic or nuclear fission.

23.    Asbestos manufacturing, processing, installation and removal.

24.    Tobacco manufacturing or processing.

25.    Professional Indemnity or Directors and Officers Liability.



H:Fedtreas02\Publiab\R_260302_Public Liability.doc      81
26.    Product Recall or Products Guarantee.

27.    Municipal or Shire Councils.

28.    Amusement Parks including skating rinks (ice or roller), skate board parks,
       bowling alleys, pin ball parlours.

29.    Dog racing organisers (race tracks/clubs).

30.    Commercial undertaking producing or distributing drugs, chemicals, cosmetics,
       fodder and animal foods, canned goods, mineral oil products, gas, aircraft
       components, fertilisers, insecticides, sprays and medicines.

Following requests for interpretation of this clause we have clarified the intention of the
most common references -

(1)    The word "producing" is intended to relate to manufacturing, and distributing
       refers to wholesaling and not retailing.

(2)    Regional Fuel Agents are not regarded as falling under the classification of
       "distributing mineral oil products".

(3)    Country Co-operative Stores who often sell a range of goods to farmers
       including fodder and animal foods, fertilisers and insecticides are not intended
       to fall under Exclusion No. 30.

(4)    Retail Chemists who invariably "produce" medicines under Doctors'
       prescriptions are not considered to fall under this clause as the retail activities
       are the influencing factor in determining the classification.

(5)    "Sprays" is intended to relate only to insecticide sprays. Weed killer chemicals
       and sprays however, would fall under the broader description of chemicals.

31.    Wine cork manufacturers, importers or suppliers.




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8. NSW District Court Information




H:Fedtreas02\Publiab\R_260302_Public Liability.doc   83
9. CCH Tort Reports

Australian Torts Reports 1988-2000
(CCH Australia Limmited)

Number           Injury          Cause      Sex    Loss of    Loss of future General/Pain      Out-of-pocket     Future Gratuitous      Interest           Total Jurisdiction
               Category        Category           earnings   earning capacity and Suffering          expenses     needs        care                (inc interest)
                                                                   (inc super)              (inc past medical)

   2000                                                                                                                               (n/a 2000)
    253          Internal     Accident       M          -             15,000        32,792              4,331          -          -                     52,123           ACT
    267        Multiple              Fall    M           -                 -        22,350                  -          -          -                     22,350           ACT
    301               Leg         Horse      M           -                 -        18,000                  -        500          -                     18,500           WA
    302             Back             Fall    F     18,750                  -        27,500              1,548          -     13,960                     61,758           ACT
    353            Ankle         Leisure     M     45,000            270,000        60,000              7,363     15,000      7,000                    404,363             SA
    354         Fracture      Accident       F     15,000            150,000       120,000              5,000     55,000          -                    345,000          NSW
    452             Knee             Fall    F     29,200            120,000        68,500              4,613      7,152          -                    229,465            NT
    453             Knee             Fall    M    170,012            120,000       136,200            106,939     50,100          -                    583,251          NSW
    503             Back             Fall    M           -            50,000        25,000              2,866          -          -                     77,866            Tas
    504        Psoriasis Electric Shock      M     44,434             15,000        29,200              3,898      3,500          -                     96,032             SA
    552     Amputation               Fall    M     25,904            172,379       168,350                553    171,047          -                    538,233          NSW
    554             Back             Fall    F    164,042             49,346        76,300              7,847     11,435      7,690                    316,660          NSW
    556    Psychological           Burn      F     56,000            150,000        26,100              2,459      1,500      3,500                    239,559            SA
    655              Arm      Accident       M           -                 -        10,000                505          -          -                     10,505           WA
    710         Fracture             Fall    F     25,571             25,000        41,092              4,248        470          -                     96,381          NSW
    717             Back             Fall    M     70,272            185,520        41,668             18,704     51,000          -                    367,164          QLD
                                   Total          664,185          1,322,245       903,052            170,873    366,704     32,150                  3,459,210
                                Average            60,380            110,187        56,441             12,205     33,337      8,038                    216,201




H:Fedtreas02\Publiab\R_200302_Public Liability.doc                    84
 1999                                                                                         (n/a 1999)
  203         Fracture            Fall   F    12,054    30,000    60,000    20,000        -                     -     122,054   NSW
  354            Knee             Fall   F         -         -    10,000     1,753      950                     -      12,703     Tas
  362        Multiple             Fall   M       720    15,000    12,000       367        -                 1,179      29,265     SA
  404        Multiple             Fall   F         -         -    30,000    18,538   32,000                 1,910      82,448    ACT
  408             Back            Fall   F   106,000    45,000    30,000    34,010   27,090                     -     242,100     Tas
  501              Leg        Leisure    M         -         -    45,000    20,673        -                     -      70,673   NSW
  502        Multiple            Bull    M         -         -    55,000    17,350        -                     -      76,250     SA
  502        Multiple            Bull    F         -         -    22,000    17,555        -                     -      31,295     SA
  503        shoulder       Accident     M         -   150,373   110,000     4,330   12,280                 4,950     312,632   NSW
  552         Fracture            Fall   M    27,070    91,827    35,000         -    5,000                 5,414     164,311    WA
  609            Ankle            Fall   F         -    25,000    50,000     2,145        -                 3,375      80,520   NSW
  652            Head       Accident     F     3,000         -     5,000     5,534        -                     -      13,534     SA
  711        Multiple             Fall   F     6,672     7,228    10,000       897    3,599                   122      28,518    WA
  759        Multiple             Fall   M         -   225,840   180,000     5,457    3,000                 6,000     420,297   NSW
                                Total        155,516   590,268   654,000   148,608   83,919                22,950   1,686,600
                             Average          25,919    73,784    46,714    11,431   11,988                 3,279     120,471


 1998                                                                                         (n/a 1998)
  361       shoulder     Accident        F         -         -     2,500     1,259        -                   191       3,950    WA
  404       Multiple     Accident        M         -         -         -         -        -                     -      86,900    VIC
  455       shoulder            Fall     F   102,750   160,500    45,000    15,760    1,000                20,458     362,714   QLD
  459       Multiple            Fall     M    15,000    30,000    25,000    12,544      500                 5,952      91,996   QLD
  461           Back            Fall     F    23,500    10,000    45,000     5,404        -                 3,420     112,325      SA
  506 Brain Damage          Leisure      M   133,588   482,677   108,900    21,944        -                     -     747,109   NSW
  607        Fracture           Fall     F     6,000    50,000    50,000     1,285   10,000                     -     117,285   NSW
  657           Knee            Fall     F         -         -    14,000       320    1,250                     -     155,570     Tas
  663           Back        Leisure      F         -    50,000    40,000     6,687    3,640                 4,240     104,567    ACT
  753       Multiple         Horse       M    11,000    25,000    35,000     9,707        -                     -      83,707   QLD
  754 Psychological Electric Shock       M         -    27,000    30,000     4,410        -                   445      61,856   QLD
                              Total          291,838   835,177   395,400    79,322   16,390                34,707   1,927,979
                           Average            48,640   104,397    39,540     7,932    3,278                 5,784     175,271




H:Fedtreas02\Publiab\R_200302_Public Liability.doc      85
 1997                                                                                          (n/a 1997)
  302          Back              Fall    M    24,154    33,608    30,000     1,500         -                  2,463      91,725    WA
  353       Fracture        Accident     M   116,770   194,369   111,150     1,840     8,000                      -     429,129   NSW
  402          Head         Accident     F    33,792    10,000    20,000     3,000     2,500                      -      69,292    WA
  451          Back         Accident     F         -         -    15,000       737         -                      -      15,737    ACT
  464          Knee              Fall    F    70,000   125,000    37,500    19,546    15,500                  8,563     281,609   QLD
  563       Multiple             Fall    M    44,700    80,000    40,000         -     2,000                 20,157     202,127   QLD
  605          Head          Boating     M         -    20,000    42,500     1,767    15,000                  6,477      94,856   QLD
  660       shoulder         Boating     M   173,681   210,710    58,000     1,713         -                 96,433     540,537   QLD
  669       Fracture           Horse     F         -         -    40,000       693     3,540                      -      44,213    WA
  759 Brain Damage               Fall    F    82,500    82,500    20,000     3,841     5,690                      -     194,531     Tas
                                Total        545,597   756,187   414,150    34,637    52,230                134,093   1,963,757
                             Average          77,942    94,523    41,415     3,849     7,461                 26,819     196,376

 1996                                                                                          (n/a 1996)
  258            Arm          School     M         -         -    20,000     9,855     1,000                      -      30,585    WA
  303           Back          School     M    37,500    55,000    80,000    40,000         -                 47,365     259,865   NSW
  360        Multiple             Fall   F    55,273    97,824    50,000    15,498         -                 33,837     252,432   NSW
  552        Fracture             Fall   F         -         -    48,500    26,134         -                  2,150     135,784    ACT
  606           Back           Horse     F    23,000    50,000    65,000     4,804    19,000                  7,735     194,049    ACT
  653        Multiple             Fall   M   161,802   194,986    75,000     7,240     3,000                 62,377     504,405   NSW
  659        Multiple Electric Shock     M    79,000   224,950    85,100    16,970    35,000                  6,679     447,699   NSW
  762           Hand          Leisure    F     2,995    65,000    85,720     7,251         -                 22,109     183,075   NSW
                                Total        359,570   687,760   509,320   127,752    58,000                182,252   2,007,894
                             Average          59,928   114,627    63,665    15,969    14,500                 26,036     250,987

 1995                                                                                          (n/a 1995)
  201            Eye          Leisure    M         -         -    54,000     1,156    10,412                      -     64,568     Tas
  759         Rashes        Accident     M    40,000    90,000   110,630     9,181         -                      -    250,000    NSW
                                Total         40,000    90,000   164,630    10,336    10,412                           314,568
                             Average          40,000    90,000    82,315     5,168    10,412                           157,284

 1994                                                                                          (n/a 1994)
  320 Brain Damage        Boating        F    12,000   100,000    80,000    20,000     6,500                      -     218,500    WA
  462 Brain Damage Electric Shock        F         -   180,000    25,000   339,056   628,924                 31,450   1,204,430   QLD
  626 Brain Damage          Horse        F    21,860   134,000    65,000     6,754     2,085                      -     229,700    WA
                             Total            33,860   414,000   170,000   365,810   637,509                 31,450   1,652,630
                          Average             16,930   138,000    56,667   121,937   212,503                 31,450     550,877




H:Fedtreas02\Publiab\R_200302_Public Liability.doc        86
 1993                                                                                            (n/a 1993)
  351             Leg         Leisure   M            -    20,000    90,000        -          -                      -    110,000    NSW
  672             Eye         School    M            -    50,000   100,000      279          -                  6,000    156,279    NSW
                                Total                     70,000   190,000      279                             6,000    266,279
                             Average                      35,000    95,000      279                             6,000    133,139

 1992                                                                                            (n/a 1992)
  115          hip            School    F     30,004     156,293    40,000     3,000    50,574                 26,100     214,180    NT
  154   Amputation         Transport    F          -           -   150,000   135,647   300,597                  7,875     594,119   NSW
  475 Brain Damage           Leisure    M          -     250,000    80,000     5,200    44,350                 13,824     393,374   QLD
  515 Brain Damage            School    M     10,000     120,000    70,000     5,799     3,000                      -     208,799     SA
  664         Knee               Fall   M     70,000     235,000    42,800    58,625     5,000                  1,000     411,425     SA
                               Total         110,004     761,293   382,800   208,271   403,521                 48,799   1,821,897
                            Average           36,668     190,323    76,560    41,654    80,704                 12,200     364,379

 1991                                                                                            (n/a 1991)
  326       Internal          School    M          -           -    38,000    15,449         -                      -      53,449    Tas
  329            Leg          Leisure   M          -           -    12,000    12,314         -                      -      24,314    Tas
  566          Knee         Accident    M          -      30,000    35,000     1,163         -                  2,360      68,522   QLD
  572 Brain Damage             Horse    F    175,000     130,000    80,000    26,442   175,702                 13,783     600,927   QLD
  575          Back           Leisure   F     75,400      82,560    25,000    12,463     7,000                 30,660     233,083   QLD
  659   Amputation            School    M     60,000     200,000   100,000    20,000    20,000                 99,290     497,290   QLD
  670          Back           Leisure   F     52,000      40,000    45,000         -         -                      -     140,000    VIC
  723           Arm         Accident    M          -           -    15,000     3,642         -                      -      18,642    WA
  755          Back         Accident    F     30,000      80,000   100,000    29,327    12,500                      -     251,827     SA
  766            Leg        Accident    F          -           -     5,000       841         -                     40       5,881    WA
  770           Hip           Leisure   M     36,060      59,000   120,000    22,124     6,500                 46,125     289,809   NSW
                                Total        428,460     621,560   575,000   143,763   221,702                192,258   2,183,742
                             Average          71,410      88,794    52,273    14,376    44,340                 32,043     198,522




H:Fedtreas02\Publiab\R_200302_Public Liability.doc         87
 1990                                                                                        (n/a 1990)
  256            Hip         Leisure   M      3,500     35,000    70,800    9,950        -                  7,300     126,550     SA
  271            Jaw         Leisure   M        651          -     6,000       19        -                  1,120       9,345    ACT
  272          Ankle         Leisure   M          -          -     1,000        -        -                    187       1,187    ACT
  384             Ear        Leisure   M     89,000    208,421    42,000   10,688    5,931                 47,384     403,424   QLD
  415           Back         Leisure    F         -     25,000    30,000    2,000    9,000                      -      78,521   QLD
  467          Ankle         School    M      8,000     50,000    30,000        -        -                  8,000      96,000   QLD
  484          Ankle         Leisure   F          -          -    18,000    4,111        -                      -      21,111    WA
  613          Knee          School    M      1,452          -    17,500        -        -                      -      18,952    WA
  652            Leg         Leisure   M     23,414     17,288    50,000    7,308        -                 43,704     141,714   NSW
  780      Abdominal       Accident    M     55,000     55,000    40,000   15,485        -                 18,000     183,485   QLD
                               Total        181,017    390,709   305,300   49,562   14,931                125,695   1,080,289
                            Average          25,860     65,118    30,530    7,080    7,466                 17,956     108,029


 1989                                                                                        (n/a 1989)

                Burn         School    M           -         -    40,000      106        -                 15,820     55,926    NSW
                Burn         School    M           -         -    65,000        -        -                 23,730     90,933    NSW
                Arm          Leisure   F       4,000         -    40,000    3,306        -                  8,850     55,856    NSW
               Neck        Accident    F      32,000    15,000    22,000    5,189        -                  5,150     79,339    QLD
                 Ear       Accident    F           -         -    12,000        -        -                      -     12,000    QLD
               Hand          Leisure   M           -    45,900    35,000        -        -                  3,200     84,100    QLD
           Abdominal         Leisure   M           -    27,540    17,500        -        -                  1,600     46,640    QLD
                Back         Leisure   M           -         -    20,000        -        -                      -     20,000     WA
               Ankle       Accident    F      26,500         -    15,000    4,309        -                 10,238     56,047     ACT
               Wrist         Leisure   F           -         -    45,000    4,677        -                  6,500     56,177    NSW
                 Eye       Accident    M      22,926   235,304    62,500    2,650        -                 12,612     82,896     ACT
                               Total          85,426   323,744   374,000   20,237                          87,699    639,913
                            Average           21,357    80,936    34,000    3,373                           9,744     58,174




H:Fedtreas02\Publiab\R_200302_Public Liability.doc       88
     1988                                                                                                                             (n/a 1988)

                      Head         Leisure      F      28,000                    -            40,000                 5,746        -                 5,100     185,546   QLD
                      Heel             Fall     M           -                    -            30,000                 2,800        -                 1,800      34,600   QLD
                      Head         School       M      30,000              275,764            45,000                     -   68,860                 5,850     425,474   QLD
                      Burn Electric Shock       M       8,000              175,000           125,000                26,500   26,000                25,944     386,444    SA
                                     Total             66,000              450,764           240,000                35,046   94,860                38,694   1,032,064
                                  Average              22,000              225,382            60,000                11,682   47,430                 9,674     258,016


 Note that the year averages are based only on those cases that contain payouts in the relevant fields
 and also Total (inc interest) is a gross value prior to deductions for contributory negligence or workers' compensation




H:Fedtreas02\Publiab\R_200302_Public Liability.doc                           89

								
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