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Insurance 'solutions' raise the risk

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  • Insurance 'solutions' raise the risk

    Insurance 'solutions' raise the risk
    Date: August 21 2002

    Proposals to shift liability in accident insurance may result in more deaths and injuries, says Ross Gittins.

    If we're not careful, the politicians' panicky scramble to find solutions to the crisis in liability insurance could have an unintended but tragic consequence: a surge in the number of sporting accidents causing personal injury or death.

    Let me tell you about a disturbing aspect of the insurance crisis that's had little publicity. At present, the Trade Practices Act requires all companies to give a warranty that the goods or services they supply are safe. It also provides that any term of a contract that attempts to waive or modify that warranty is void.

    But there's a bill before Federal Parliament that would allow companies supplying "recreational services" to modify their warranty so that they no longer accepted liability for their customers' personal injury or death.

    The idea behind the bill seems appealing: rather than have extreme sports die out because of the prohibitive cost of liability insurance, it should be possible for people mad enough to want to go bungy jumping to waive their right to sue the business if something goes wrong.

    But the first problem with this it-seemed-like-a-good-idea-at-the-time is that the definition of recreational activity is remarkably broad, covering "any activity that involves a significant degree of physical exertion or physical risk" that is "undertaken for the purpose of recreation, enjoyment or leisure".

    So it would not only cover extreme sports such as bungy jumping, parachuting or white-water rafting, but also much less risky activities such as skiing, horseriding, using a gym, doing aerobics, swimming or even dancing.

    Though the Liability for Recreational Services Bill is before Parliament, it's not being pushed through. It's awaiting the report of a panel set up to review the bill and the law of negligence generally, and chaired by Justice David Ipp of the NSW Supreme Court.

    The second problem with the bill is explained in the Australian Competition and Consumer Commission's submission to the review panel: the bill's approach contravenes the first principle of the economics of accident (part of a long-established branch of economics called "law and economics").

    The first principle of the economics of accident says the liability for the cost of accidents should be assigned to the party that could most easily and cheaply take the actions needed to minimise the risk of accident. In other words, you don't just lumber the party with the deeper pockets, nor do you have Labor governments sticking it to business and Liberal governments shifting it onto consumers.

    You don't even leave it to be resolved in the marketplace by bargaining between the parties. Rather, the government steps in and assigns the responsibility to the party with the greater ability to manage the risk.

    Why? Because that's the most efficient way for the community to minimise the cost of accidents. And, regardless of the high-flying economics, it makes obvious sense - it's the way to minimise the number of people who are killed or injured by their participation in recreational activities.

    In this case, as in most cases, the responsibility for managing the risk of accident should rest with the business supplying the activity, not the people who consume it.

    This is what the Trade Practices Act does at present, but if the bill is passed in its present form, any business providing a recreational activity involving "significant physical exertion" will be able to duck its responsibility for safety merely by adding a clause to its contract.

    Why is it the business that's best placed to bear the responsibility? For a start, because it's best placed to know what the risks are. As a business, it's engaged in the activity day in, day out, and in some cases will have had professional training in the area. In contrast, a lot of the customers may be beginners or take part in the activity infrequently.

    But as well as having more information, the business obviously has greater control over the conditions in which the service is provided. Each customer can't erect their own safety handrail, for instance, but the business can easily erect one handrail for use by all customers.

    It's likely that in general, customers will tend to underestimate the risks involved in an activity. Often, the probability of a bad accident happening to an individual user will be extremely low, even though the cost of such an accident, should it happen, is very high.

    For instance, the probability of someone being thrown from a horse at a particular angle and at a sufficiently high speed to have his or her neck broken may be very low. But if it happens, the cost in terms of reduced amenity of life and earning capacity is huge.

    Mathematicians and economists know that, in such cases, you have to multiply the low probability by the high cost to make an accurate assessment of the risk (the "expected loss"), but ordinary mortals are likely to underrate it.

    For a host of reasons (most having nothing to do with the law of negligence), many businesses have faced a big jump in the cost of their liability insurance. The proposed change to the act would make it less necessary for recreation businesses to hold such insurance.

    But insurance is a useful thing. The premium represents an expert's assessment and quantification of the cost of the risks involved. And the insurance company will keep pressure on the business to do what it can to reduce the risk of needing to make a claim on the policy.

    If the law is changed to shift the risk from the business to its customers then, in theory, they can insure themselves against that risk. In practice, however, the extra administrative costs alone would be prohibitive. It makes obvious sense for the insurance to be taken out by one business rather than a thousand customers.

    By shifting the legal liability, the proposed change will give the suppliers of recreational activities less incentive than at present to minimise the risk of accidents. So we could expect that over time, there'd be an increased number of injuries and deaths arising from commercial sporting activities.

    Were that to happen, a lot of additional costs would flow back to governments (read taxpayers) in the form of higher hospital and medical costs and more people on the disability pension.

    But that part of it, of course, would be the least of our worries. Our pollies need to stop panicking about insurance, pull themselves together, and think calmly about finding solutions that don't do more harm than good.

    This material is subject to copyright and any unauthorised use, copying or mirroring is prohibited.

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