My Lords, I thank noble Lords once again for their commitment to this Bill and for their amendments. Before dealing with this group of government amendments, I will make some general remarks and explain some of the work that has gone on since we last met in Committee.
In Committee, many noble Lords expressed concern at the close working with the insurance industry that this Bill has necessitated. The noble Baroness, Lady Masham, expressed particular concern that the appointment of a scheme administrator was already a done deal with insurers. I offer my assurance that this is not the case and that we intend to run an open competition for the contract of scheme administrator, which will be chosen through the open tender process according to our commercial criteria. I hope this reassures noble Lords.
Turning to the issue of poor record-keeping practice in the industry, I think we all agree that we must work not only to support those who have fallen foul of poor record-keeping and tracing in the insurance industry but to correct it and stop it happening in the future. The creation of the Employers’ Liability Tracing Office—ELTO—was a step in the right direction, but there are still insurers that are not tracing as they should be. Since we last met, I have had a very positive meeting with the Financial Conduct Authority. I have since received a very informative letter from the FCA. I found the following extract particularly positive:
“We are further strengthening our existing rules with new requirements for firms to have effective processes for conducting tracing searches for historical policies upon receipt of a request from a consumer or a consumer’s representative. These new rules will become effective from 4 December 2013. We therefore expect any firms that do not currently have adequate tracing mechanisms in place to develop them in advance of that date”.
In brief, if an insurer is expelled from ELTO for not tracing as it should or the FCA receives other intelligence suggesting poor or non-existent tracing, this will serve as an immediate red flag to the FCA. It will then put into place its enforcement action, which can include a supervision visit from the FCA.
One further step that the FCA is taking, which was detailed in the letter, gave me particular confidence that the appropriate mechanisms are in place to ensure compliance. The letter states:
“We also look to gather market intelligence to assist us in taking a risk-based view. We are exploring the possibility of a memorandum of understanding with ELTO that, subject to the legalities of this, would allow the FCA to access the data from ELTO’s own auditing process. This would allow us to concentrate our supervision resources on higher-risk categories of firms”.
I hope that noble Lords who have been following this so intently can agree that this represents very positive progress.
Another issue that we discussed in Committee was the establishment of an oversight committee. We welcome this proposal and have been exploring with stakeholders how it might operate. As ever, there is a range of options that we need to consider, and we continue to do so. We would prefer a non-legislative solution if possible but we are aware that noble Lords may wish to see something on a more statutory footing. I ask noble Lords to consider the issues associated with trying to establish a new non-departmental public body as we discuss oversight further.
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Another issue that rightly received significant attention in Committee was that of the rate of payments to be made. Perhaps it will help if I outline how we have arrived at where we are on this matter. Insurers have made it clear that paying an amount equal to 3% of employer’s liability gross written premiums is affordable, to the extent that they should not then need to pass these costs on to employers. The costs of the scheme in the first few years will be higher because all eligible people diagnosed between 25 July 2012 and the start of the scheme will be paid alongside people diagnosed at the time— contemporaneously—so we have introduced a four-year smoothing period to ease that initial spike in cost.
The ABI’s analysts advised it that paying people 70% of average civil compensation equates to the 3% of employer’s liability gross written premiums which they maintain it can absorb, whereas our analysis shows that the 70% tariff equates to less than 3% of written premiums. This is because the ABI’s analysts and our own forecasts on numbers of applicants coming to the scheme also differ, and we have been unable to reconcile these discrepancies. I should mention at this point that when we refer to a percentage of average civil damages, the figures we are using are those published by the National Institute of Economic and Social Research. We have already published an ad hoc statistical report, setting these figures out.
In Committee, the Government proposed that the scheme should start paying people at the rate of 70% of average civil compensation. I stated previously that our intention was that the figures obtained from this equation will be uprated annually, in line with CPI. In addition, I have agreed that the amounts of civil compensation in mesothelioma cases must be current if we are expressing scheme payments as a percentage of civil compensation. I suggested that a review of the data every five years would enable meaningful trends to appear, given the relatively low volume of such cases.
We will certainly be reviewing the level of civil compensation in mesothelioma cases on a regular basis and amending scheme payments accordingly. Nevertheless, I understand noble Lords’ desire to pay people at a rate higher than 70% of civil compensation.
Following the debate in Committee, I have been in further discussions with insurers and have been able to secure an agreement to pay 75% of average civil compensation. This is more than the industry wanted to pay but, using the government analysts’ figures, it halves the gap in the percentage of employer’s liability gross written premiums between what was originally offered and the full 3%. I take this opportunity to thank noble Lords and to acknowledge that the pressure in this House on this matter has been a key driving force in achieving the increased rate. I know that noble Lords would like the scheme to pay even more than the 75% we have now achieved. However, we need to be certain that the industry can afford to pay more without passing disproportionate costs on to employers. The insurance industry guaranteed to us that if we keep the levy within proportionate limits, it will not increase premiums. We would need more clarity on the numbers of applications to and costs of the scheme as a percentage of gross written premiums.
Since we last met, we have been working on a proposed review process for the scheme, which I know noble Lords will welcome. I expect to be able to present firm details of such a process when we take this Bill to the other place but, for the time being, I will outline my ideas. We intend to look at the actual number of applications and real costs once the scheme has been running for long enough to give us reliable data. As I indicated when we previously discussed increases in average compensation payments, looking at numbers too soon would not provide us with stable data, nor would it show us much by way of trends.
The initial four-year costs-smoothing period would give use an ideal opportunity to collect actual numbers and costs. We would then be able to see what the real cost of the scheme is, compared to the current expectations about the percentage of gross written premium it will take up. We would also be able to assess whether or not costs had been passed on to industry and to what extent. That would put us in much better position to carefully consider whether we have set scheme payments at the right level and how far current actuarial assumptions have been borne out in practice. We have to be prepared for the fact that the ABI’s analysts may be nearer the mark here, as we are dealing with behaviours in making applications to the scheme which are not easy to predict. We also need to bear in mind that costs to insurers will eventually reduce anyway as the numbers coming to the scheme will fall as time passes and fewer people are diagnosed with mesothelioma.
To summarise, we intend that scheme payments will rise in line with CPI each year. In addition, if the level of civil compensation also changes, we need to look again at the amount of the scheme payment to see if it should be changed in line with that of civil compensation. The initial four-year costs-smoothing period gives us an ideal opportunity to collect actual numbers and costs and to look at the level of scheme payments in a much clearer light. It will also give us an opportunity
to assess any reaction by the insurance industry that there might have been over the first four-year period. These proposals show that the current level of scheme payments strikes the right balance between paying people with mesothelioma and levying an amount from insurers that will not inevitably be passed on to employers. I also trust that I have reassured noble Lords that the Government are committed to considering necessary changes when an increase is justified.
I reiterate that the Government’s intention is to support eligible people suffering from this terrible disease and to start making payments as soon as humanly possible. Indeed, timing is paramount. Mesothelioma deaths are expected to peak in 2015 and we aim to have a scheme in place by April next year. I ask noble Lords to keep this in mind during today’s debate. Any delays will affect the very people we are trying to help. I hope noble Lords will forgive me for taking up time on these issues but they are critical as we consider the detail of the Bill.