Government backed public liability for construction?

Source: Daniel Wood, Editor, Insurance Business Australia. Published June 16, 2023

“I don’t think nationalising my industry would be in my interests”

Public liability insurance is currently suffering severe availability and affordability issues.

Earlier this month, Australian executives from global tech firm Xceedance, called on insurance industry stakeholders to consider a statutory – or government-backed – insurance scheme for public liability coverages. The proposal aimed to help SMEs in sectors including hospitality, entertainment and tourism.

Insurance Business is seeking industry views on the issue.

In whose interests?

This month, Hutch Underwriting released a new insurance offering for residential and commercial builders. In what’s likely a construction industry first, the offering includes a level of cyber coverage.

Apart from ongoing public liability issues, the construction sector is currently facing a sea of challenges including insolvencies, rising costs and ongoing supply chain issues. Given those challenges, what does Hutch CEO Robin Johnson think of a government-backed public liability scheme for the construction sector?

“I sell insurance for living, so I don’t think nationalising my industry would be in my interests but I don’t really think it would be in the country’s interests either,” said Sydney-based Johnson.

However, despite his personal view, Johnson said the answer to the question really depends on what the objective is.

“Liability insurance is getting particularly expensive for firms that have a poor track record and I suppose the question is whether that’s desirable,” he said.

Does expensive public liability promote better risk management?

Johnson said these cost and availability challenges promote a better safety culture by putting safety “front of mind” for higher risk industries like construction, healthcare and childcare. However, he said these issues do also stifle profits.

“If it [public liability insurance] were to be nationalized I think the likely outcome would be to transfer the cost from policyholders to taxpayers,” he said. “That’s what we’ve seen with workers comp with Icare continually being bailed out by the taxpayer.”

Johnson said if this is the intent then transferring this risk to a government-backed scheme “could be very successful.”

“I don’t think it would be very complicated,” he said. “I think you could just prevent workers’ comp insurers from recovering in worker-to-worker cases and then, bingo! You’ve transferred the liability to the state.”

Johnson said a government-backed scheme would “lose the nuanced pricing that prices risks in a competitive market.” This market, he said, penalises companies that are poor risk managers and rewards companies that manage risk well with lower premiums.

“I don’t see any government scheme possibly replicating the private market, in that respect,” said Johnson. “I think it’s actually a wonderful thing and it’s made the world a lot safer having mandatory insurance that’s priced by private companies.”

Construction industry challenges: MD and public liability

Nonetheless, the Hutch CEO said the construction market is facing very serious challenges.

“It is an extremely tight market and the reality is that over the 4-5 years, there’s been an enormous amount of capacity that has exited the market both on the material damages (MD) side but also on the liability side,” he said.

Johnson said the insurer losses on the MD side are “largely” a result of “massively” under-pricing risk on mega projects. “Then getting hit by a huge tail on these long and highly complex projects,” he said.

On the liability side, he said worker to worker claims have always been an issue.

“They’ve really blown out in the last five years and are really driving liability loss ratios and that’s driven a lot of capacity out of the liability market,” he said.

Johnson said “almost all” of the different public liability coverage offerings in the construction sector are backed by one Australian insurer.

“So we’re hoping to bring a bit of healthy competition back to the market and hoping we can select and price our way through some of the difficulties,” he said.

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