Thirty years onJun 5th, 2018
It was my 30th birthday on 6th July 1988. However, that is a memorable date for a far more important reason. On that day, a massive explosion at the Piper Alpha oil platform, approximately 120 miles north-east of Aberdeen, killed 167 people. The total insured loss was reported as about £1.7 billion. It is the worst offshore oil disaster in terms of lives lost and industry impact.
That catastrophic event, and concerns about other potential large exposures, led to the withdrawal of unlimited reinsurance cover for employers’ liability insurers. Since 1995, most insurers have provided a standard indemnity limit of £10 million.
Insurers do not have to provide the minimum prescribed by law: the statutory minimum cover for employers’ liability was established at £2 million 1971, then raised to £5 million in 1988.
So what? For one thing, £10 million does not go as far today as it did in 1995: if adjusted for CPI inflation, it would be equivalent to around £18.5 million in 2018. For another, it was set with lump sum compensation in mind, not periodical payments.
As you know, a lump sum for future losses represents its net present value, which must ignore future inflation. Future losses in the form of periodical payments do not have a net present value: just an accumulated payout that includes inflation. It is this that counts towards the policy limit.
The simple message is that you cannot safely assume a policy limit that will be adequate to cover a lump sum claim will be sufficient to cover a lifetime of periodical payments. Even for clients injured in middle age, with today’s levels of annual care costs, the indemnity may be insufficient.
We have been saying this for years, but the message is not getting through. It is even more relevant with the current statutory discount rate. If you want to avoid getting into hot water, get us to run the numbers before you do a deal involving periodical payments in any case with a policy limit.