Cycle of abuse: out-of-home care deemed uninsurable

State governments are responding to lobbying from providers of out-of-home care with emergency tide-over indemnity after the last of the private insurers exited the complex and difficult space, with no sign they will return.

A short-term indemnity scheme has been introduced by NSW as a quick fix, and other states – apart from Victoria which has a two-decade scheme described as generous – are expected to follow suit.

The temporary NSW measure will “maintain essential service delivery,” a Department of Communities and Justice spokesperson says. The current cover only extends back to abuse incidents from 2017 and it intends that a long-term solution will be “implemented by December”.

The insurance market failure comes in the face of a surge in historical claims, egged on by advertising from no-win no-pay lawyers on radio and in prisons, leaving providers of foster and residential home care pleading that state governments step in and offer a backstop.

Charity-owned insurer Ansvar says it has exited the out-of-home space after its gross claims liability for what it calls PSA cover – Physical and Sexual Abuse – increased 350% in the last few years and now accounts for 66% of casualty claims provisions – up from 27% in 2017.

Out-of-home care makes up over 30% of all of its claims for PSA, which is still available for religious institutions, schools, aged care and other sectors.

“That is pretty material, the trends are very concerning,” Ansvar CEO Warren Hutcheon tells insuranceNEWS.com.au.

“There are specific nuances with out-of-home care,” Mr Hutcheon said. “It is very difficult to reduce or mitigate the risk. We’ve got to withdraw because the risk is uninsurable from our point of view, or you were going to be charging a premium or imposing terms that are unviable.

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

Ansvar has until recently offered PSA cover on an occurrence-based basis, meaning it will respond to a claim irrespective of when the claim is actually lodged, often many years after the original incident. CGU, Vero, 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.

Marsh MD Head of Placement Asia Pacific John Donnelly says securing this cover has never been easy in a “very, very narrow market”.

Almost all insurers withdrew from the space around 2018 after the royal commission into child sexual abuse – which made the PSA insurance niche “worse, but it was already terrible”.

“There have been elements of cover available from some carriers like Ansvar, like Catholic Church Insurance and one or two Lloyd’s syndicates, but around out-of-home-care – that is where you have the biggest problem,” Mr Donnelly tells insuranceNEWS.com.au.

“That market has all but disappeared and it does not look like it is going to come back any time soon.”

The crux of the issue is that there is no way for insurers to accurately assess and quantify the risk and charge adequately for it.

“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. They can’t work out what premium they ought to be charging,” Mr Donnelly said, estimating a $10-to-$20 million range as a premium pool.

“Given all these factors, they have determined it to be basically impossible,” Mr Donnelly said.

Residential care and foster care make up around 42% of all institutional abuse cases, the royal commission found, or around 25,000 survivors. While stressing it is committed to the care sector, Ansvar says it is repricing some of the cover it still offers to care providers, and increasing risk management requirements.

“We are looking at the rest of the portfolio. We are not withdrawing from any other aspects of PSA [aside from out-of-home] at this stage … We certainly are 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 said.

The latest meeting of the Insurance Council of Australia (ICA) Business Advisory Council focused on the crisis in cover, describing it as a “very difficult and complex area.”

It identified three main drivers for the “severe tightening” of the market: A “significant increase in the quantum” of common law claims for physical and sexual abuse, tougher risk mitigation requirements of reinsurers and insurers, and changes to liability settings.

It also noted the removal of limitation periods, which put insurers on risk indefinitely for occurrence-based policies, and that an intergovernmental working group with representatives from each state, territory and the Commonwealth has been established to identify a long-term solution.

Mr Hutcheon says Ansvar continues to provide protection for other care services and risk management support to clients.

“It is really the out-of-home care area we can’t proceed with. This has been a real challenge for us … we can’t see a way of mitigating the risk and therefore we can’t underwrite it, and we’re going to have to withdraw from it,” he said, adding he hopes the insurance industry can work with government and the care sector to help it “become a viable area to insure”.

The issue is a legacy one, with premiums priced decades ago in a different regulatory environment when no-one imagined scrapping of limitation periods and economic loss compensation.

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

Marsh’s Mr Donnelly says the only answer is government guarantee.

“The issue with this kind of business is the long tail – people in their 20s 30s and 40s all of a sudden start to make claims about abuse when they were children,” he said. “The number of links in the chain that can potentially abuse here is uncontrollable, so that risk is unassessable.

“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.”