When Richard Sheikh speaks, the security industry listens – with good reason. As chairman and chief executive of influential insurance broker Camberford Law plc, Sheikh used the pages of last month’s Security Management Today to voice his deep-seated concerns regarding the crisis that’s affecting the liability insurance market.
“In a nutshell,” opined Sheikh, “the premiums for appropriate cover are either heavily loaded, or the cover is not available – particularly if there has been a history of claims” (‘Insurance in crisis’, Letters, October 2002, pp20-21). “By its very nature, liability insurance is long-tailed, and claims are paid for cases where premiums were collected years ago. The insurers are not prepared to sustain losses under the insurances. It’s fair to say that all of them want to show a return of 10-15% on capital and profitability to their shareholders.”
The scale of the problem facing security companies should not be underestimated. Premiums for employers’ liability policies have risen by up to 1,000%, with those for public liability increasing at almost the same rate.
It’s a tangible worry for many security company managing directors, several of whom have been talking to Security Management Today (SMT) and the industry’s premier web site for news of the manned guarding sector – Infologue.com – about their increasing concerns.
The contractors’ views
“Our insurance costs have tripled this year, and we’ve been powerless to avoid such a dramatic increase in overhead costs,” said John Wright, managing director of London-based contractor Trident Safeguards.
Also speaking on Infologue.com, Andrew Harper – chairman of north west-based security company Anchor Security – added: “Our premium seems to have gone up disproportionately to the increase in our turnover.”
SMT contacted the managing directors of leading contractors including Securiplan, Legion Security, Noble Security Services (UK) and First Security so that they could air their views.
Securiplan managing director Phillip Ullmann seemingly shares the concerns of Richard Sheikh. “We recently renewed our liability insurance, and have had to suffer a five-fold increase in the premium,” he stressed. “Insurance costs have risen from 0.2% of turnover to 1%. We’ll be looking to recover that increase from our customer base at the next price review meeting.”
Ullmann also pointed to the fact that the number of insurance companies servicing the manned guarding industry has been “dramatically reduced”. Ullmann, who was only able to obtain one quote for his company, told SMT: “Sadly, I don’t think there’s a great deal the industry can do with regard to the problems surrounding employers’ liability insurance. The insurance market has changed a good deal in recent times, but it’s a legal requirement to have this type of insurance. We’re left with no choice but to obtain it.”
David Evans, managing director of London-based contractor Legion Security, has seen his company’s premiums for the year ending 30 September 2003 shoot up by 20%. Evans believes that the insurance problem facing the industry is two-fold. “First off, September 11 has obviously had a huge impact for us all,” stressed Evans. “Look at companies like Securicor. They have an aviation division, a business which is now particularly vulnerable to higher premiums.”
Evans rounded on the issue of efficacy insurance. In essence, this is the insurance which covers the job a security company has contracted to undertake as determined by the assignment instructions. “Traditionally, this has always been the most expensive type of insurance for us, and one where we try and define the limits with our customers. For example, if we’re contracted to provide the security for a GB pound 10 million office development, it burns down and we’re subsequently held to blame for not performing as contracted, how much is the security company good for?”
Evans continued: “Contracts are then pulled out, limits of liability checked and the insurers take over. The problem is that the industry used to have two insurers for this type of policy [namely Iron Trades and Royal Sun]. I believe that Iron Trades has gone out of business, and that Royal Sun has withdrawn from this type of market. Darwin Clayton used to co-ordinate ‘an industry cover’ which benefited all. In other words, if one company suffered a major ‘hit’ its premiums in the following 12 months would not be catastrophically high.”
Security takes another ‘hit’
Noble Security partner Geoff Deane had some strong words to say about the current problem. “Are we part of the security industry, or part of the doormat industry?” questioned Deane. “Once again the industry has taken a huge ‘hit’, and it’s the security companies that are paying the price.” Deane believes that premiums have “rocketed” because “the two main industry dictators” have failed to keep their own houses in order.
Deane told SMT: “The end users drive margins down. At the same time, the insurance companies singularly fail to put measures in place that will stop willy-nilly claim after claim being put in by these people. People who continue to view security as a grudge purchase. The security companies need to fight back now while they’re only wounded. It’s prudent of SMT to air this issue.”
As managing director of First Security, Jonathan Levine is facing up to more increased costs than most – including London Mayor Ken Livingstone’s much-maligned congestion charge that’s about to hit central London. “Public liability insurance is an issue that will not go away,” stressed Levine. “Clearly, the current state of affairs can only have a negative impact on profitability, may well impact on investment and even affect service delivery in the longer term.”
For Levine, the difficulty does lie – to a large extent, at least – with the client base. “There are some customers who just cannot see the advantages of public liability insurance,” he said. “Those that do,” suggested Levine, “may not be willing to see such insurance reflected in increased fees. They’ll expect the manned guarding companies to absorb those costs themselves. Worryingly, the knock-on effect is that some contractors may look to cut corners on insurance. That can only store up problems for customer and supplier in the event of a claim.”
Root causes of the problem
What’s behind these enormous rises in premiums? The Association of British Insurers (ABI) believes that two main factors are at play.
First, what’s now happening is in part a direct result of the cyclical nature of insurance writing. If periods of low prices are accompanied by underwriting losses, then the industry will react by raising its charges in the next cycle (note that the same thing can happen in reverse). Underwriters have been making significant losses on employment-related business of late, and they’re now trying to make good those losses via increased premiums.
The ABI also points to changes in the personal injury laws. Changes that have encouraged not only a rise in the number of claims but an increase in the amount of compensation claimed and paid.
There’s also been an expansion in the number of conditions that individuals may claim for (for example, workplace-derived stress can now form the basis of a successful claim). Consequently, the industry has had to reassess the cost of providing cover.
Richard Sheikh rounds on the general “claims culture” of the British, the rise of ‘no win, no fee’ arrangements and the granting of higher awards as additional causative factors. “The brokers and underwriters themselves are at least partly to blame, as business has been placed on company books with inadequate premiums,” opined Sheikh. “The Act of Parliament pertaining to employers’ liability was passed some 23 years ago. Legislation must be upgraded to cope with the changing circumstances.”
Corrective action being taken by the insurance sector (of which more anon) is affecting business sectors of all types, but is biting some particularly hard – the private security industry being a good case in point. In what is obviously a high risk environment, contractors are now finding it harder to establish any cover at all. The very fact that they are private, going concerns adds to the potential damage that the crisis could cause, in relation to both the cash flow of a given security company and the long-term jobs of its members of staff.
It’s not universally understood that, of the two types of insurance mentioned here (ie employers’ liability and public liability), only the former is compulsory under law. It covers liability for injury, disease or death to employees sustained by them in the course of their employment. In this case, there’s a statutory minimum level of cover totalling GB pound 5 million.
Although public liability insurance – which covers the employer against claims from the general public – isn’t compulsory, in what is now an increasingly litigious cultural climate many firms consider it safer to take out such cover as well.
The need for corrective action
What should or can be done – or indeed is being done – to alleviate the crisis? For one, the Health and Safety Executive has formed a Steering Group comprising representatives from the Department of Trade and Industry, the Department of Work and Pensions and the insurance sector itself to consider whether employers with good safety records might become entitled to receive a discount on their premiums.
In a separate move, representatives of the British Insurance Brokers’ Association have held meetings with officials from HM Treasury to examine the possibilities for some form of Government intervention. The Association has proposed a number of possible solutions to the problem, including a ‘no fault’ system and capping the amount for which an employer may be liable.
Although the Association has placed the crisis on the Government’s ‘radar screen’, it’s reported that the Treasury made it clear to the insurance community that it doesn’t favour any sort of move to cap employers’ liability. Nor does it consider that public funds should be used to provide cover of last resort unless there is clear evidence of market failure. This does not appear to be the case, at least for the time being.
Richard Sheikh feels that brokers, insurers, policy holders, the major Trade Associations and the Government must all play their part. Sheikh told SMT: “Each security company should review the way in which it conducts its business, and seek to improve risk management procedures such that future claims and losses are reduced.”
Taking the CBI’s lead
As the industry’s major Trade Association, what perspective does the British Security Industry (BSIA) have on current events?
Speaking exclusively to Infologue.com, the Association’s customer relations director Stephen Adams said: “The BSIA is taking the Confederation of British Industry’s (CBI) lead on rising commercial insurance premiums, which is only right and proper.”
Adams is quick to point out that the CBI has recently sent a Briefing Paper prepared by the ABI to all of its members, explaining exactly why commercial insurance premiums have increased so much. A number of factors are cited – some of which have already been discussed here – alongside “general commercial pressures”.
Tellingly, Stephen Adams stated that, for their part, end users of security companies “must understand that contractors cannot absorb the entire cost of increased insurance premiums, in particular because of the low margins that exist in the industry”.
It’s a view supported by Richard Sheikh. Although Sheikh feels that contractors must accept the days of cheap premiums “are now long gone”, any increases may well be passed on to clients because of pressure brought to bear on margins. “It would be dangerous for the security companies to trade without adequate cover,” he said.
