IBC Conferences. Public Liability Insurance Summit. Sydney, June Recent ACCC Involvement in Public Liability Insurance Issues

Transcription

1 IBC Conferences Public Liability Insurance Summit Sydney, June 2002 Recent ACCC Involvement in Public Liability Insurance Issues Dr David Cousins Commissioner, Australian Competition and Consumer Commission

2 1. Introduction This conference, which involves a broad ranging discussion on public liability insurance, is both timely and welcome. It is timely of course because of the recent Commonwealth and State and Territory Government announcements and initiatives, the various issues and proposals for reforming the system that the industry has raised and the genuine concerns that other stakeholders have voiced. It is welcome because it enables me to outline the Commission s preliminary views on a number of the proposals that have been suggested to address the current crisis in this important class of insurance and to discuss the Commission s understanding of some of the current issues. The number of different perspectives that have been put forward over the course of the last months is testament to the fact that the issues are not clear cut and a definitive account of this sector, including the relative weight of the various cost drivers is not currently available. This is not to say that the industry and other interested parties including the Commission for that matter are not increasingly developing a surer handle on the various issues. But caution in determining appropriate responses continues to need to be exercised. Over the recent months a number of reports and articles have have made a useful contribution to general understanding of the public liability insurance market. The recent reports prepared by Trowbridge Consulting to assist the Heads of Treasuries discussions and consideration of potential reforms are valuable. 2

3 However it should be remembered that, the level of public disquiet over the course of late 2001 and 2002 is not indicative of a suddenly emerging crisis that has come about from one off events. This issue has been unwinding over at the last few years and will require considerable effort and time to fully analyse and correct. 2. Outline I will cover a number of areas in my presentation today. First, I will comment briefly on the ACCC s March 2002 general insurance report. This is a precursor to some comments on our current work, which is the updating the March report for the Government by July 2002, and on our recently announced brief to monitor general insurance premiums, including public liability, on a six monthly basis over the next two years, to ensure that cost savings that result from reform measures are passed through to consumers in the form of lower premiums. Following this I will touch on some of the issues raised in current discussions and the Commission s view on these. 3. ACCC s March 2002 General insurance review The ACCC s March 2002 report on general insurance review was prepared on the basis of provided a snapshot of premium increases from July 2000 to June 2001 and a broad review of the industry s performance through the course of the nineties. 3

4 During the preparation of this report the Commission also received numerous complaints and queries from the public concerning premium increases. The report commented on these complaints. Essentially, the data that the ACCC drew together and reported on was not ground breaking, but the report did provide a fuller context for the consideration of recent premium increases including a review of the performance of the industry as a whole and the performance of different classes of risk. Too often the public remarks on the causes for premium increases have been short on details and made without sufficient care that they are placed in context the result is added confusion for policyholders. The report did not look to judge if particular classes of insurance had been charging too-high or too-low premiums, but noted that the general insurance industry as a whole had had low return on equity over the past nine years. The low returns had occurred due to a mix of factors for particular groups: inadequate premium rates (domestic motor vehicle insurance; fire and industrial special risks; professional indemnity; product and public liability; and travel) catastrophes such as Sydney hail storm and South East Queensland flood (fire and industrial special risks; domestic and commercial motor insurance; householders/homeowners insurance) realisation of the extent of past losses as liability provisions increase to reflect emerging claims (professional indemnity; product and public liability) low investment returns (which represent a significant and important component of insurance profit - liability classes) increasing reinsurance premiums resulting from continuing low profitability of the international reinsurance market. (While largely uninfluenced by domestic catastrophes, increased reinsurance rates have 4

5 occurred at a similar time as domestic catastrophes - fire & industrial special risks; and householders/homeowners insurance) liquidation of the HIH Group potentially removing a barrier to price increases (professional indemnity) By outlining the various contributory factors influencing the pricing of different classes of risks the report disaggregated the insurance experience. Not that this was necessary for insurance insiders, but for the broader community, that is the vast majority of people who don t make claims against their policies and are left scratching their head as to why their premiums continue to increase. The level of public awareness regarding insurance may be gradually improving but the industry should not expect that one off accounts should suffice. The final section of the report stressed the importance of the industry improving the manner it communicates with insureds - especially small business, community groups and the private consumers the following points were made: consumers should receive simple information about the general trends for particular classes of general insurance, and the reasons behind the trend; This is a point has been echoed by the recent Trowbridge report. review the language used in insurance contracts to demystify the process. A checklist could detail the policy and outline what is, and importantly was is not covered using simple language; easier to understand policies to allow consumers to effectively compare the services offered by different insurers there is the potential for insurers to seek authorisation from the Commission for the use of some measure of standard wording where it would be of benefit to consumers. 5

6 4. ACCC s July 2002 General insurance review and beyond As I mentioned earlier, and as you are probably well aware the ACCC is in the process of preparing a follow up to its March general insurance report which will include an account of premium increases across the industry including public liability, since June This will essentially provide a further snap shot on premium movements industry wide that will again be set against the performance of the industry and the performance of the different classes of risk. The Commission has also been requested to provide an analysis of the competitiveness of the public liability and professional indemnity sectors of the market. The Commission s work on both of these issues is well underway and although it is to soon to offer any substantial comments I can say that the report will have a stronger emphasis on examining industry structure and performance issues including efficiency in its various dimensions. The report will also review the influence of the various cost drivers in the PI (professional indemnity) and PL (public liability sectors) however an in depth analysis of this will be picked up in subsequent reviews. Following the second ministerial forum on public liability insurance held down in Melbourne on 30 May the ACCC has been called on to provide a detailed account of premium pricing and the impact of reform measures to specifically address the cost and availability of public liability insurance. To do this task effectively the Commission will necessarily need to move on from the snapshot approach that it has taken to date, as the level of analysis to track cost savings will be substantial. 6

7 From my personal experience having been the Commissioner responsible for the Commission s role in the implementation of the GST and in particular the Commission's work in tracking cost savings arising from the implementation of the GST in the insurance industry I can say that the ACCC is aware that this is a considerable undertaking. A role that will necessarily entail it to work closely with the industry to develop a reporting framework, including the capturing of data that insurers may not be currently recording. These reporting requirements provide an additional imperative that the process commences soon. However, the primary imperative is that a reporting process of the type outlined by the government is an important stimulus for the industry, in response to the reform measures that have and will be implemented, to realise the benefits that the reforms deliver and to pass these through to consumers. The underlying point is that consumers do need confidence in knowing that premiums are appropriate for the risks that policies are covering without confidence the numbers of people opting out from private insurance or under insuring will continue to deteriorate. 5. Current issues From the perspective of the Commission there are a number of factors that are contributing to the current public liability crisis that are yet to be properly detailed and understood. Here I refer to the drivers that are responsible for the increase in the cost of PL coverage which in turn influences pricing decisions and market participation. 7

8 The relative paucity of reliable data from which to gauge claims experience is one of the key points that does need to be addressed immediately even though the benefits that it will deliver are not going to be available for some time. In the absence of a clearer picture the Commission is cautious in its commentson the importance to be attached to different influences and, in turn, the likely effectiveness of suggested measures to remedy the current situation. Today I would like to discuss three reform proposals that the Commission has concerns with primarily because of the wider implications that these proposals may involve. Here I refer to: Proposals that may involve amending sections of the Trade Practices Act ; Proposals on reforming the legal system and the conduct of lawyers, including lawyer advertising and no win, no fee work; and Proposals for group buying and group selling arrangements for public liability insurance Before I go further I should say that the comments that I offer represent the Commission s preliminary views based on the limited amount of information that is currently available and are made in the context of the understood aim of the proposals to contribute to stabilising and reducing claims costs in order to make public liability insurance more affordable and available for consumers than it is currently. The Commission looks forward to further discussion of these proposals in the light of increased understanding of the factual position and deeper analysis. 8

9 Proposals involving potential amendments to the TPA There has been some enthusiasm for proposals that effectively seek to limit the right of individuals to claim damages for personal injuries except in circumstances that involve conduct that amounts to gross negligence. The Commission understands that these proposals may require possible amendment of the Act, in particular to limit or allow consumers to opt out, or even be exempt, from the regime of implied conditions and warranties contained in Part V Div 2 of the Act. The Commission acknowledges the possibility that exemptions from the operation of Part V Division 2 of the Act may contribute to a solution, which addresses the rising premiums for public liability insurance. Claimants may rely on Part V Division 2 of the Act to seek redress for injuries if exemptions are provided from the law of negligence. However, the Commission has a number of concerns with such an approach, namely: That the problems identified are complex and any suggestion which involves the alteration of important consumer rights should to be considered in detail, including an assessment of the evidence available about the use of these rights in litigation. That risk may be shifted away from the persons in the best position to assess the extent of the risk and onto the persons least able to do so. That the evidence currently available does not represent a conclusive case for curtailing avenues for litigation. 9

10 Part V Div 2 of the Trade Practices Act In making these points I think it is appropriate to outline the important aspects of Part V Division 2 of the Trade Practices Act. Primarily Part V Div 2 implies certain conditions and warranties into all consumer contracts. These include section 74, which implies a warranty that services will be rendered with due care and skill and that services supplied (including materials used) will be reasonably fit for the purpose for which the consumer has made known to the supplier. Section 68 of the Act has the effect that implied conditions and warranties, such as those in section 74, cannot be excluded, restricted or modified other than in accordance with section 68A. Section 68A allows a corporation to limit its liability in certain ways only where the goods or services are not of a kind ordinarily acquired for personal, domestic or household use or consumption. It should be noted that any remedies for a breach of such an implied condition or warranty are not found in the Act, but are contractual and subject to a contractual claim being brought in state or federal courts. Exemptions generally The Commission has concerns about exempting certain activities from the operation of Part V Division 2 of the Act, as experience has shown that problems arise when exemption-based solutions are attempted, especially when changes are rushed without consideration given to the possible consequences. In seeking to contain costs great care needs to be taken to ensure that important consumer rights are not curtailed without sufficient justification. 10

11 An approach which provides exemptions from the Act may not just close off the possibility of actions for negligence-type claims which rely on the provisions in Part V, but also restrict important and very specific remedies for consumers for whom services have not been provided with due care and skill. The reality also is that once such changes are legislated, they are very difficult and time consuming to unwind or further amend. Risk allocation The consequences of any amendments, which provide exemptions from Part V Division 2, are difficult to foresee. One of the problems which may arise from such an exemption under the Act is the possible abuse of bargaining power by owners/operators/suppliers of services. The provisions in Part V Division 2 of the Act imply certain contractual conditions and warranties into contracts as a risk allocation measure the owners/operators of certain activities are in a better position to assess these risks, and reduce them accordingly, than consumers. In other words, the party with the greatest knowledge of the risk involved in the activity and ability to minimise those risks is best placed to reduce those costs. The effect of the proposals may involve a significant departure from this principle. If the consumer is placed in the position of assuming all of the risk associated with certain activities, certain inherent risks may no longer be factored into risk management by operators or organisers. Operators or organisers will largely be exempt from liability and consumers will not be able to bring claims for injury or death, which rely on provisions such as those in Part V Division 2. 11

12 One consequence of this shift of risk on to the consumer may be that suppliers have a reduced incentive to manage risks appropriately, which may in turn lead to a growing culture of unsafe practices in risk management by owners/operators. It is for these reasons that the Commission welcomes the Government s decision to appoint an expert review panel to fully consider whether proposals to amend the Act are appropriate. There is of course additional wider but related issues that need to be taken into account when legislative reform of the scope that is being considered is being debated. Social Costs and Benefits The Commission is as yet to view convincing evidence that increased litigation has been such a significant contributor to increasing premiums that an over haul of the current system is warranted. There is more to consider than just quantifying the level of litigation, observing that it is trending one way or the other and determining that remedies are or are not essential to halt the trend and restore the sector to profitability. There also needs to be considerable thought given to the wider societal costs and benefits that are derived from legal action. It will not be until these broader benefits and costs are accounted for, that a conclusion on the adequacy of the current level of litigation can be drawn. The insurance system does not operate independently of other sectors of the economy and the community. So it should be expected that changes to systems that interact closely with the insurance industry and vice versa should be taken in to account when an assessment of the potential efficacy of reform proposals is being posited. 12

13 Alternative mechanisms such as regulatory regimes and the social welfare system are important elements of the successful management of public safety issues but in themselves are not sufficient to deliver both social and economic desirable levels of risk. There will always remain the need for additional incentives to encourage parties to manage their exposure to risks appropriately and to change their behaviour where necessary. It is at this point that a certain level of expenditure of resources on litigation will act as an added and important spur for parties to avoid or reduce their risk exposure. I would now like to turn to the related matter of advertising of personal injury legal services. Advertising of personal injury legal services It is currently the Commission s view, that strong links have not been demonstrated between the provision of no win no fee services by legal practitioners or the advertising of legal services and the reported increases in the payout of claims and increases in premiums for public liability insurance. It should be remembered that ultimately, it is the courts that determine the validity and amount of claims. The issues of specific concern to the Commission are access to legal services and advertising. To date a number of initiatives have been taken to restrict advertising of the legal profession to limited factual matters and selected media. 13

14 The Commission agrees that there are legitimate concerns if advertising is misleading or is not a true reflection of costs associated with the legal service, e.g. in the case of no win no fee services, if the consumer was liable for outlays or the other party s legal expenses and that fact was not disclosed. However, the Commission considers that current laws and regulations prohibiting misleading and deceptive conduct, including the Trade Practices Act, state/territory consumer laws, state/territory legal profession legislation and/or regulation can adequately deal with this issue. Those laws should be applied before any additional regulation or restrictions on advertising are imposed. The elimination of restrictions on advertising by legal practitioners appears to have contributed to the community being better informed about the services provided by the legal profession. Generally, advertising is a useful way for practitioners to publicise their services to the community. As long as it is honest and accurate, advertising contributes to consumers ability to make a genuine and informed choice about legal services. Restrictions on the form and content of advertising material beyond the existing prohibitions may prevent consumers from receiving useful information about particular services and practitioners. Such restrictions also make an unnecessary paternalistic assumption that everyone in the community effectively receives and understands information from the same form or medium of advertising. The restriction of advertising could have equity consequences. Individuals with legitimate claims but little income would be less likely to know where to obtain services, such as no win no fee services. 14

15 For these reasons, and in the absence of any empirical information justifying the need for such restriction, the Commission opposes restrictions on the medium of advertising. The Commission s concerns about misleading or deceptive conduct clearly extend beyond advertising. Even if advertising for legal services was restricted, other types of misleading or deceptive conduct can occur for example - oral representations made during a meeting with a legal practitioner. Restricting advertising generally does not prevent misleading or deceptive conduct by unethical practitioners, but it does prevent ethical practitioners informing consumers about their services and others from informing consumers about legal services and practitioners. The Commission is also concerned that restrictions on certain advertising by practitioners may adversely affect competition in this sector. We may find that restrictions will result in consumers being less likely to know of the smaller firms specialising in legal services relating to personal injury, and therefore less likely to choose them. These firms would be less able to compete with larger firms. Access to legal services The Commission would be concerned if all consumers did not have access to legal services or if those services were prohibitively expensive. A so-called no win no fee policy allows all parties with a legitimate claim to take a matter to Court, regardless of their financial position. That is, it would provide all people equal access to legal services and the justice system. In relation to no win no fee arrangements generally, it must be remembered that a law firm that implements a no win no fee policy would not necessarily take on every case that is brought to it. 15

16 The Commission does not believe that no win no fee services encourage more claims, in fact, such services may provide a disincentive for lawyers to take on claims that have no merit or no chance to win as they would not be paid. In this case lawyers are more likely to reject potential plaintiffs than in the case where lawyers were to be paid regardless of the outcome of the case. The Commission recognises that safeguards need to be in place to ensure a no win no fee policy or uplift fees within non win no fee arrangements benefit consumers. Disclosure of all other costs that the clients may have to pay is essential. This includes the fee that will be charged to a client in the event that the case is won, and other fees clients will have to pay irrespective of the outcome of their case. This issue can be dealt with via the existing legislation that is in place as discussed above. Pooling arrangements - Preliminary comments Recent discussions about pooling arrangements have not clearly distinguished between buyers establishing arrangements to collectively purchase insurance - group buying - and insurers establishing exclusive arrangements for the joint supply of insurance -group selling. From the perspective of the Commission there are very significant differences in the effects on competition of group buying and group supply. Group buying Group buying where it involves insureds with similar risk profiles coming together to collectively negotiate policy rates, terms, and conditions with third party insurers are unlikely to contravene the competition provisions of the Act. 16

17 Group-buying arrangements involving price agreements are not under section 45A of the Act deemed per se to substantially reduce competition whereas group supply arrangements would be. Group-buying arrangements can promote competition by improving the bargaining position of insureds when dealing with large insurance providers in a competitive market. Such an arrangement could also benefit the insurers who provide the cover as the grouping together of like insureds will assist their ability to assess the risks and price them appropriately, spread risk and to reduce the transaction costs Group buying can involve a number of insurers supplying insurance to the buying group; however, this joint supply is unlikely to raise competition issues provided the insurers compete to supply that insurance. Group selling The Commission is aware that a group selling initiatives are being developed to address the current lack of affordable public liability insurance for certain groups of insureds, in particular the Not For Profits (NFP). These pooling proposals commonly involve insurers, who would otherwise be competing with each other, collectively agreeing on the price and contractual terms and conditions of a public liability insurance product. The Commission also understands that some proposasl involve insurers agreeing to only supply insurance to certain insureds through the pool. Eligible insureds will, therefore, have no choice but to purchase their insurance from the pool and as a result the pool will not be subject to competitive pressures. 17

18 The Commission considers that such collective supply arrangements are likely to breach the competition provisions of the Act. In addition, depending upon how distribution arrangements are structured, the arrangements may have the potential to raise concerns under the exclusive dealing provisions of the Act, particularly where consumer access to the insurance pool is conditional upon consumers acquiring services from nominated intermediaries. An authorisation for such conduct may, therefore, be needed to enable pooling arrangements to be made and implemented. Authorisation process Under the authorisation process, the Commission has the power to grant on public benefit grounds immunity from the competition provisions of the Trade Practices Act. The flexibility provided by this process ensures that the Act does not operate to prevent businesses from establishing arrangements that operate in the public interest. Naturally the Commission can only grant authorisation if arrangements satisfy the public interest test set out in the Act and the public consultation and other procedural requirements set out in the Act are complied with. In very general terms, to grant authorisation the Commission must be satisfied that the relevant conduct is likely to result in a benefit to the public that is sufficient to outweigh any likely anti-competitive detriment to the public resulting from the conduct. 18

19 The onus is on the applicant to satisfy the Commission that its proposal satisfies the authorisation test and to provide sufficient information to the Commission to support its case in relation to both the likely public benefit associated with the conduct and the likely anti-competitive detriment. In exceptional circumstances the Commission can grant inteim authorisation to arrangements pending their more detailed consideration. Potential competition and public interest issues Pooling arrangements involving collective agreement on the price of a product and restriction on the supply of a product have the potential to result in very significant anti-competitive detriment. A pooling proposal is more likely to pass the statutory net public benefit test and so be authorisable if the arrangements are designed to minimise their likely anticompetitive detriment. Ways to reduce the likely anti-competitive detriment may include, for example, ensuring that: any anti-competitive arrangements are no more restrictive than necessary to address the crisis in supply of affordable public liability insurance to NFPOs; the anti-competitive effect of the arrangement is short term; pooling arrangements are designed with adequate checks so that the Commission can have confidence that premiums will not be set at above competitive levels. This is particularly important if the pool is not subject to competitive pressures from businesses supplying public liability insurance to NFPOs in competition with the pool; pooling arrangements are not designed or implemented in a manner that gives an unfair competitive advantage to particular market participants, including particular 19

20 insurance companies, brokers or other intermediaries. In this context, competition issues in relation to the process for determining which insurance companies can participate in the pool and the proportion of their participation will need to be considered. In assessing whether to grant authorisation to pooling arrangements, the Commission would also look in particular at the impact of any pricing policies, eligibility criteria and other contract terms under the scheme on the affordability of the public liability insurance for customers In this context, the Commission may also need to consider the effect of establishing guidelines as a condition for entry to any public liability insurance pool created for NFPOs. 7. Conclusion In conclusion, I would just like to emphasise that the Commission recognises that there are serious problems in relation to public liability insurance that need to be dealt with in the short term. Pressures on politicians to obtain instant fixes are considerable. It is important however that the longer-term implications of proposed actions taken are well understood and that there is a clear focus on achieving the best outcome for society as a whole. 20

21 TRADE PRACTICES ACT SECTION 68 Application of provisions not to be excluded or modified (1) Any term of a contract (including a term that is not set out in the contract but is incorporated in the contract by another term of the contract) that purports to exclude, restrict or modify or has the effect of excluding, restricting or modifying: (a) the application of all or any of the provisions of this Division; (b) the exercise of a right conferred by such a provision; (c) any liability of the corporation for breach of a condition or warranty implied by such a provision; or (d) the application of section 75A; is void. (2) A term of a contract shall not be taken to exclude, restrict or modify the application of a provision of this Division or the application of section 75A unless the term does so expressly or is inconsistent with that provision or section. 21

22 TRADE PRACTICES ACT SECTION 68A Limitation of liability for breach of certain conditions or warranties (1) Subject to this section, a term of a contract for the supply by a corporation of goods or services other than goods or services of a kind ordinarily acquired for personal, domestic or household use or consumption is not void under section 68 by reason only that the term limits the liability of the corporation for a breach of a condition or warranty (other than a condition or warranty implied by section 69) to: (a) in the case of goods, any one or more of the following: (i) the replacement of the goods or the supply of equivalent goods; (ii) the repair of the goods; (iii) the payment of the cost of replacing the goods or of acquiring equivalent goods; (iv) the payment of the cost of having the goods repaired; or (b) in the case of services: (i) the supplying of the services again; or (ii) the payment of the cost of having the services supplied again. (2) Subsection (1) does not apply in relation to a term of a contract if the person to whom the goods or services were supplied establishes that it is not fair or reasonable for the corporation to rely on that term of the contract. (3) In determining for the purposes of subsection (2) whether or not reliance on a term of a contract is fair or reasonable, a court shall have regard to all the circumstances of the case and in particular to the following matters: (a) the strength of the bargaining positions of the corporation and the person to whom the goods or services were supplied (in this subsection referred to as the buyer) relative to each other, taking into account, among other things, the availability of equivalent goods or services and suitable alternative sources of supply; (b) whether the buyer received an inducement to agree to the term or, in agreeing to the term, had an opportunity of acquiring the goods or services or equivalent goods or services from any source of supply under a contract that did not include that term; (c) whether the buyer knew or ought reasonably to have known of the existence and extent of the term (having regard, among other things, to any custom of the trade and any previous course of dealing between the parties); and (d) in the case of the supply of goods, whether the goods were manufactured, processed or adapted to the special order of the buyer. 22

23 TRADE PRACTICES ACT SECTION 74 Warranties in relation to the supply of services (1) In every contract for the supply by a corporation in the course of a business of services to a consumer there is an implied warranty that the services will be rendered with due care and skill and that any materials supplied in connexion with those services will be reasonably fit for the purpose for which they are supplied. (2) Where a corporation supplies services (other than services of a professional nature provided by a qualified architect or engineer) to a consumer in the course of a business and the consumer, expressly or by implication, makes known to the corporation any particular purpose for which the services are required or the result that he or she desires the services to achieve, there is an implied warranty that the services supplied under the contract for the supply of the services and any materials supplied in connexion with those services will be reasonably fit for that purpose or are of such a nature and quality that they might reasonably be expected to achieve that result, except where the circumstances show that the consumer does not rely, or that it is unreasonable for him or her to rely, on the corporation's skill or judgment. (3) A reference in this section to services does not include a reference to services that are, or are to be, provided, granted or conferred under: (a) a contract for or in relation to the transportation or storage of goods for the purposes of a business, trade, profession or occupation carried on or engaged in by the person for whom the goods are transported or stored; or (b) a contract of insurance. 23