Insuring Risks of Liability

Business organisations and individuals in Ethiopia vary in terms of their stance on the subject of electing insurance as a risk management tool. Practice and figures show that although insurance policies are availed to guard businesses from apparent life, property and liability risks, most prefer self-insurance or other risk management tools instead of traditional insurance.Specifically, the insurance coverage granted for liability risks has not developed considering its potential. However, growing concerns for liability issues associated with the construction industry, manufacturing and the service sectors are expected to boost the demand for liability insurance.
The question is should liability risks be shielded using insurance and, if so, which type of liability insurance is best? These questions should be among the most debated issues. For many, the need for liability insurance is largely indiscernible. Indiscernible, that is, until it materialises and puts the total earnings of the person or the corporation at risk. Obviously, the insurance industry covers liability risks, while it usually underwrites liabilities arising from negligent torts rather than deliberate wrongs or breach of contract, including vicarious liabilities.
Liability insurance can take many forms. It comprises product liability – under which manufacturers, suppliers or others who manufacture or make products available to the customers are held responsible for the injuries their products cause. It also includes professional liability, which protects professionals against liabilities that arise out of errors and omissions in performing their professional services; and employer’s liability, providing coverage to the employer for the liability risks associated with workers. The policies can be availed as stand-alone or combined polices to suit the needs of customers.
For example, the insurance industry, among others, has responded to the unique complexities and liability risks exposures of the health industry with insurance as a solution. Although there are various liability insurance types, at least medical institutions in Ethiopia should have insurance types that cover their liability for professional acts, errors or omissions.
The point here is that medical workers are often on the hook for their negligence and malpractice. Other professionals could also have professional indemnity insurance to safeguard their businesses from liabilities and lawsuits. The coverage and the product could vary depending on the type of profession, for example, it can be customised for lawyers, accountants, doctors, brokers, agents, errors and the omissions of managers.
Liability insurance is common in other parts of the world. According to a report by Sigma, entitled “Liability Claims Trends: Emerging Risks and Rebound in Economic Drivers 2014,” commercial liability premiums were about USD160 billion in 2013, or 10Pct of the total global non-life market. Although high-growth markets offer longer-term business potential, current demand stems predominantly from advanced markets. Liability insurance is far more prevalent in advanced economies than in emerging markets. The advanced markets accounted for 93Pct of global liability premiums in 2013, while their share of global non-life premiums was 79Pct.
The report states that the United States is by far the largest market, with 51Pct of the global liability premiums written in 2013. This is due to the size of the US economy and the high penetration of liability insurance (0.5Pct of GDP). In 2013, US businesses spent USD84 billion on commercial liability covers, of which USD50 billion was spent on general liability, including USD12 billion for Errors and Omissions (E&O) and USD5.4 billion for Directors and Officers (D&O). US businesses spent another USD13 billion on the liability portion of commercial multi-peril policies, including USD 9.5 billion for medical malpractice and USD3 billion for product liability covers.
According to the report, liability issues appeared to be the fastest growing worry for businesses globally, with medical cost inflation, legal liability and computer technology ranking as the three risks that increased most over the past five to 10 years. Moreover, third-party liability is one of the most important insurable risks that firms need to manage. Faulty products, wrongdoings and negligence can cause harm to third parties, who are compensated under the rules of tort law. Tort events are relatively rare but when they do occur, the awards can be high, which is why insurance is purchased. Even if the firm is found not liable, legal defence costs can be significant.
Regarding the current performance of the insurance industry, although detailed data is not available by product type, the Ethiopian insurance industry has generated a gross premium income of over ETB189 million, during the year 2015 from liability insurance. The trend shows growth and this figure does not include the premium generated from employer’s liability or workmen’s compensation insurance.

Challenges

Some liability risks are uninsurable, and it can be challenging to distinguish between what is and isn’t insurable. A key factor limiting the insurability of liability risk is the difficulty of projecting claim costs, which is essential for the pricing of risk, according to Sigma.
The uncertainties may be more acute due to a lack of historical claims or related data, or to imperfect scientific knowledge about the risk. Another key challenge is that liability risk evolves with economic and social conditions. More so than natural catastrophe or mortality risks, liability risks involve human behaviour and complex societal relationships, which are difficult to predict with quantitative models. In addition, the law is constantly changing, making past experience a poor predictor of the future.
What is insurable in the market can change over time. On the other hand, if an insured risk has sharp increases in frequency or severity in ways not envisioned by the insurer, the additional substantial losses may even bankrupt the insurer.
Underwriting liability insurance is challenging for professionals due to its very nature. Liability insurers have always faced the need to innovate their product in response to the changes created by new technology, changes in risk awareness and acceptance by the public, new legislation passed by parliaments and new case law created by court systems.

Forward-looking statements

The liability insurance market is untouched in Ethiopia. Considering its potential, one can say a lot is left to be desired. Businesses, big or small, might face total closure due to liability lawsuits. Therefore, responsible organisations should manage the risks associated with their profession and safeguard their risks against liability damages using liability insurance. In most countries, the premium generated from liability insurance registered growth when it becomes mandatory. Therefore, most liability insurance types need to be made compulsory by the government.
Furthermore, the Ethiopian insurance industry needs to change its product mix, adjust its pricing or introduce new terms and conditions to attract customers. New liability insurance products need to be designed and the existing ones need to be modified since the size of insured liability claims is primarily restricted by policy limits, which are calculated to allow for unexpected events.
Finally, the insurance industry should also promote the products in order to catch the attention of prospective customers.


4th Year • December 16 2015 – January 15 2016 • No. 34

Fikru Tsegaye Wordofa

Fikru Tsegaye holds MBA in Marketing and MA in Human Resource and Organizational Dev’t. He is currently working at Ethiopian Insurance Corporation as Marketing and Strategic Management Team Leader. He can be reached at fikru.tsegaye@yahoo.com


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