A Crisis of Our Own Making

Thankfully, judging from their comments at this week's Ministerial conference, our political leaders appear to have got the message that something is fundamentally wrong with the public liability insurance market.

The Ministers could have taken the populist route -- like Prof. Fels the nation's competition czar -- and blamed the big bad insurance industry.  But they did not and for good reasons.  While ructions in the industry have accentuated the crisis, they did not cause it.

As a recent study by the ACCC (Prof Fels' own agency) shows, the insurance industry has experienced large and increasing losses on its underwriting or claims business over the 1990s.  And these losses are expected to increase further without changes.

For most of the 1990s the industry was able to compensate for underwriting losses with high return on investments.  However, by the late 1990s this was no longer possible, as result overall returns in the industry have been unsustainably low for the past four years.

The worst results have been in the professional indemnity and product and public liability areas where return on capital has been negative since the mid 1990s.

As the ACCC study makes it crystal clear where the problems lie.  It says "the main cost driver of public and product liability [and professional indemnity] is the level of litigation, the awareness of the general community to making a claim and precedent-setting court cases;  e.g. a large claim setting a precedent for future claims".

Last year the domestic industry was severely disrupted by the collapse of HIH and the world insurance market was hit with its largest loss in history -- the bombing of the world trade center.  But while these shocks have forced up costs, they are not the underlying cause of the crisis.

The Ministers could also have taken the populist line and blamed "ambulance chasing lawyers".  While the legal profession may be the main beneficiary of the crisis and may be self serving in its defence of its lucrative niche, lawyers are in the end just facilitators, acting for clients within the law.

The main culprit is both the judiciary and us.

As Judge James Thomas, formerly of the Queensland Court of Appeal, "Some (judges) have enjoyed playing Santa Claus, forgetting that someone has to pay for our generosity.  We have allowed the test for negligence to degenerate to such a degree that people can be successfully sued for ordinary human activity".

For centuries the courts were the guardians that limited the powers of governments and adjudicate in an even handed manner the rights of all individuals, rich and poor.  Not any more.  For decades judges -- and the High Court is the main culprit -- have fallen over each other to be generous with other peoples' money and rights.  This in turn has lead in Judge Thomas' words to "a compensation-oriented society in which people know that a minor injury is a means of getting more money than they could possibly save in a lifetime".  Now the cost of such a society has caught up with us.

Thankfully it appears that the Ministers have got the message.

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