Care cover crisis

Care cover crisis

NSW and other states are scrambling to find solutions after the last insurer dropped ‘uninsurable’ abuse cover

By Miranda Maxwell

State governments are racing to devise a long-term solution to an insurance sector collapse that has exposed care providers to significant financial and reputational risk, threatening their ability to offer essential services to vulnerable Australians.

The issue has arisen after Ansvar withdrew from offering providers of foster and residential housing programs – services known as out-of-home care – cover for claims of physical and sexual abuse (PSA).

PSA insurance enables providers to deliver essential services to vulnerable children, people with disabilities, the disadvantaged, the aged and other groups.

Ansvar’s withdrawal from out-of-home PSA cover follows the departure of almost all other insurers from the space after the Royal Commission into Child Sexual Abuse reported in 2017.

The niche has been deemed uninsurable by underwriters after a surge in historical claims, egged on by advertising from no-win no-pay lawyers, and has left care providers pleading for state governments to step in and devise a backstop.

A short-term emergency tide-over indemnity scheme has been introduced in New South Wales as a quick fix, and other states – apart from Victoria, which has a had a “generous” scheme in operation for the past two decades – are expected to follow suit after extensive lobbying by concerned organisations such as such as Anglican Insurance & Risk Services (AIRS).

An intergovernmental working group has been established to identify a long-term solution, which NSW hopes will be in place by December when its Short-Term Indemnity Scheme stopgap measure expires. That scheme only covers claims related to abuse after mid 2017, limited to $5 million.

Child Protection figures reveal around 1% of children aged under 18, or just over 45,800 children, are in out-of-home care. Around half are in “kinship care” with a relative or friend, 39% in foster programs and 6% in residential care, which is a home staffed by carers.

While well intentioned, underwriters say the model is proving a recipe for claims.

“Abuse risk in the sector rests in people’s homes, which is largely out of the control of agency providers,” says AIRS Chief Executive Neil Bull, who tells Insurance News out-of-home care claims are “hugely disproportionate per participant” to the rest of the community sector.

Under post-royal commission legislative reforms, sexual abuse claims no longer have time limitations to the bringing of litigation, and reopening of past settlements may be allowed across most states.

On top of that, the NSW Government changed its position on enjoining agencies to legal actions, with a recent court case finding an agency 20% liable.

“Historically the NSW Government picked up the whole tab, so insurers have not really collected premium for this,” Mr Bull says.

An AIRS discussion paper, Abuse Insurance Crisis in the Out-of-Home Care Sector, estimates the potential claims exposure from writing new PSA cover in out-of-home care is around $1.3 billion, based on previous claim payouts of $250,000.

The claims exposure estimate is based on Child Protection evidence that one in every five girls and just under 5% of boys have been sexually abused, signalling a potential claimant pool of 5198 (4122 female and 1076 male).

Adding legal costs, the exposure surpasses $2 billion, while insurance experts estimate the premium pool for the sector tops out at just $20 million.

“Without insurance cover, agency providers are exposed to large financial losses,” the report says. “Most do not have the financial reserves to survive a claim.

“Agency boards now face the possibility that directors and officers are personally exposed if they are shown to be negligent in their governance role, particularly for the provision of securing adequate insurance for their respective organisations.”

It’s understandable why insurers are shying away from this type of exposure, AIRS says.

The general insurance market started to “change its attitude” toward out-of-home care in late 2020 after a dramatic increase in court-awarded payouts, a willingness to apportion liability vicariously and significantly increased insurance claim frequency.

Ansvar’s gross claims liability for PSA cover increased 350% in the past few years to account for 66% of casualty claims provisions – up from 27% in 2017.

Out-of-home care makes up over 30% of all of Ansvar’s claims for PSA, which it still offers to religious institutions, schools, aged care and other sectors.

“The trends are very concerning,” Ansvar Chief Executive Warren Hutcheon tells Insurance News.

“There are specific nuances with out-of-home care. We’ve had to withdraw because the risk is uninsurable from our point of view.”

He says the alternative was to charge an unaffordable premium or impose terms that were unviable.

“We cannot afford to continue paying these claims and we can’t, even with the sector’s involvement, work out a way to mitigate the risk. There has been a withdrawal and a failure of that part of PSA.”

Ansvar’s net combined ratio surged above 130% as the high volume of new abuse claims struck. Its UK-based parent, Ecclesiastical, stepped in with capital injections and is also providing significant intra-group reinsurance protection, including renewal of a PSA excess-of-loss cover and the placement of a new stop loss program.

“We are certainly refocusing and re-looking at our wording, and we will be moving more likely to a claims-made wording, which is more traditionally provided in the market,” Mr Hutcheon says.

Ansvar has until recently offered PSA cover on an occurrence-based basis, meaning it will respond irrespective of when a claim is lodged. CGU, Vero and QBE all declined to offer out-of-home care PSA cover some years ago – and had mostly limited cover to claims-made policies when they did.

The royal commission estimated there were 19,000 residential and 6000 foster care PSA abuse survivors, making up around 42% of all institutional abuse cases.

Mr Hutcheon says the trend of the past decade is for more young people to enter out-of-home care. Many are from very difficult circumstances where alcohol, drug or sexual abuse and enduring homelessness has been experienced.

“That is very sad in a society like Australia where you have this growing demand for children going into out-of-home care,” he tells Insurance News. “It says a lot about our society, but these are the facts.

“You are combining all of those unfortunately damaged individuals into a group home which is still a very, very challenging environment. Unless you can supervise that 24/7, the risks are very high.”

The latest meeting of the Insurance Council of Australia’s (ICA) new Business Advisory Council described PSA as a “very difficult and complex area” and identified three main drivers for the “severe tightening” of the market: a “significant increase in the quantum” of common law claims, tougher risk mitigation requirements of reinsurers and insurers, and changes to liability settings.

The council noted the removal of limitation periods put insurers on risk indefinitely for occurrence-based policies.

Marsh Managing Director Head of Placement Asia Pacific John Donnelly says securing this cover was never easy in a “very, very narrow market”, and the royal commission fallout made it “worse, but it was already terrible”.

Elements of cover were available from some insurers like Catholic Church Insurance and a few Lloyd’s syndicates, but out-of-home-care was always the trickiest sector for PSA cover.

“That market has all but disappeared, and it does not look like it is going to come back anytime soon,” Mr Donnelly says.

He says insurers have no way to accurately assess and quantify the risk and charge adequately for it, with the only possible answer being a government guarantee.

Those in the field say even with the best checks and balances, abuse in out-of-home care is especially difficult to eliminate, one recounting an incident in which a ward of the state was abused by friends of the children of “exemplary foster parents”.

“The number of links in the chain that can potentially abuse children is uncontrollable, so that risk is unassessable. [Insurers] can’t work out what premium they ought to be charging and they have determined it to be basically impossible,” Mr Donnelly said.

“You cannot get enough premium pool, you cannot assess and quantify the extent of the risk, and it is going to run over such a long period of time.

“It is more an indictment on society than it is anything else. It is a real mess but it is not an insurance industry problem. They just got swamped with claims.”

Ansvar sent out an alert to brokers last year advising that out-of-home care PSA risks would no longer be renewed as “both the risk landscape of physical and sexual abuse in organisations as well as PSA insurance cover in Australia have fundamentally changed”.

It detailed substantial increases in both the “frequency and the quantum” of claims from sexual abuse victims in the previous two years, driven by a preference for civil litigation over redress schemes to resolve historical incidents and “restitution and justice to abuse survivors in a manner that is at least comparable to that of other injured persons”.

Employers are now more likely to be found vicariously liable for the criminal acts of their employees, with organisations expected to satisfy higher thresholds of reasonable care.

Ansvar has been underwriting PSA cover for more than 20 years and the vast majority of its PSA claims stem from events 20-30 years ago.

Mr Hutcheon says the issue is a legacy one, with premiums priced decades ago in a different regulatory environment when no-one imagined legal limitation periods could be scrapped and additions such as economic loss compensation added.

As an example, a 2020 case in Western Australia brought by an individual against an orphanage was decided with $600,000 in economic loss as part of the $1.4 million settlement.

“You now have economic loss – John could have been a lawyer but for what occurred, and now he’s ended up as a drug user. Such settlements weren’t really considered 20 years ago.”

“How do you price for paying a claim in 20 years’ time when you have no certainty around what the environment that you will be paying the claim in looks like?”