Local government insurance has to deal with emerging risks. How is it adapting as competition increases?
An ageing population, more fragmented families, flooding and air pollution are just some of the challenges facing local authorities, which will have to change the way they operate in order to cope with future risks, according to a Social Market Foundation report entitled Local public services 2040. Insurers will want to cater for councils’ evolving needs, so how can they remain relevant?
Andrew Jepp, managing director of Zurich Municipal, the UK’s largest public sector insurer, comments: “The sector must have robust plans in place to minimise and mitigate the risks and threats that will materialise over the long term. We are already using the report to start conversations with our customers as they begin to plan today for the risk landscape of 2040 and for us to understand how our products and services need to evolve to provide effective solutions.”
Appetite and flexibility
With local government employment falling, and net borrowing increasing, will insurers have the appetite, and the flexibility, to meet the challenges ahead? Take the terrorism threat, a changing risk requiring cover which reflects local authorities’ unique needs, as opposed to a one-size-fits-all approach.
Rhiannon Bates, managing director of The Risk Factor, explains that councils’ needs differ, in terms of required outcomes, from those of a commercial business, but there is insufficient competition in the market to drive innovation: “Our clients have told us they wanted some form of cover, but didn’t feel the market was giving them what they wanted; there was no real ‘fit’. We faced a challenge in getting underwriters to look at the risk afresh, instead of tweaking a Pool Re or commercial terrorism wording.”
The public sector terrorism issues cross geographical boundaries, explains Bates, and include clean-up issues, support for local emergency services in a time of unusual demand, making people feel safe, and rebuilding the community and its trade. “It’s not all about repairing a damaged building, and covering loss of profits, as a purely commercial entity might focus on.”
Her company found the answer with a partnership between speciality managing general agent Fiducia and Lloyd’s insurer Atrium Underwriting, which launched a terrorism policy in July that takes account of the latest types of terror threats. They were able to devise a product exclusively for the public sector, which fitted the bill for Bates’ clients.
That apart, more competition is needed in the local authority sector insurance market, comments Bates, who reports that the impact of Norwegian insurer Protector Forsikring entering the market has already been felt. “We have seen established markets sharpening their pens, and putting together more innovative risk packages. But it seems to be focused on ways to win the bidding process, rather than innovating in the cover itself or addressing future risks.”
Local public services 2040
In its report entitled Local public services 2040, the Social Market Foundation identifies five key challenges local government will face over the next two decades:
- an ageing population will put increasing pressure on health and social services
- more fragmented families will live in more dispersed communities, and have higher expectations of service quality
- localised environmental risks around flooding and air pollution will grow significantly
- huge opportunities created by technological advances will cause disruption to local job markets
- greater fiscal devolution will present opportunity for councils to control their destiny, as well as risks around the resilience of their local tax bases
Bates says The Risk Factor favours a “transparent fee-earning basis” for its advice to public sector bodies. “It allows us to align our interests with those of the client. Not to have a potential conflict of interest due to earning undeclared income elsewhere in the chain. It is nice to not have to be concerned about losing income when we successfully reduce a client’s premium.”
Bates observes that brokers, risk practitioners and insurance advisors are in an unusually influential position because the public sector rely on them to design the insurance programme. But they frequently also run, or are an integral part of, the team that run the tender process. “If, as advisors, we design the insurance programme, write the terms of the invitation to tender, score the bids and make recommendations on the award of that contract, we have a significant impact on that process. And if the very same broker/advisor (or part of the same company group) is also putting forward one of the bids being assessed, where the earnings may be very different for the group company depending on the outcome of the tender process, can we really say there isn’t at least the potential for a conflict of interest?”
The industry needs to innovate on insurance products, and on how it engages with the public sector, she argues. “Transparency of total earnings is sorely lacking. The potential for conflict of interest to creep in, where the authorities are not fully aware of the way their insurance advisor earns their money, high barriers to entry, partner panels and how those function, these are all things that need to have a light shone on them.”
Some risk areas won’t change much in the next two decades, comments Jepp, who expects continued claims in traditional areas, such as safeguarding, highways and fires, although the Grenfell Tower blaze is likely to create a different environment for the future, he observes.
After the Grenfell conflagration, was there an increase in fire sprinkler installations in local authority-owned high-rise blocks? Keith MacGillivray, CEO of the British Automatic Fire Sprinkler Association, says many blocks had already been surveyed and quoted for before the fire: “However, it does take some time, from enquiry to commencement of installation, due to various financial checks and tendering processes that councils and housing providers have to go through, which can typically take six months.”
Municipal Mutual Insurance
This mutual insurance company was established by local authorities, and incorporated on 13 March 1903, limited by guarantee and not having a share capital. It became responsible for insuring most public sector bodies, including councils, police and fire authorities. Between 1990 and 1992, it suffered substantial losses, with assets reduced to below the minimum level for solvency, and ceased to renew and write new general insurance business. In 1993, Zurich Insurance purchased the right to offer renewal terms to MMI customers. The newly formed Zurich Municipal then entered a contract to provide a claims administration service for MMI.
Local authorities are also faced with changing weather patterns that test the resilience of their communities and infrastructure. The increase in the number of significant events, such as storms and flooding, has found many councils modelling the level of risk their populations could face, not only in 2040, but in just 10 years’ time, comments Judith Barnes, a partner at law firm Bevan Brittan: “This means ongoing planning for civil emergencies and detailed assessments of how long vital services could be affected, or put out of action altogether.”
Areas of exposure
Another area in which exposures are growing is cyber risk, notes Jepp, as public services make greater use of digital self-service opportunities, automation and artificial intelligence to improve efficiency and respond to changing demands.
Towards a new local government mutual?
A mutual is a company that is owned by its members and provides them products and/or services. Members elect the directors who are typically drawn from the membership. A mutual does not have shareholders. Any surplus of mutual trading funds belong to the members and must be used for their benefit, or as the membership may agree.
The Local Government Association is exploring options to set up a local government mutual. The aim is for the mutual to be available as an alternative form of risk transfer for councils from 1 April 2018, when the majority of current local authority insurance arrangements fall due for renewal. “The mutual will only be successful if enough local authorities join it. A large number of councils have expressed an interest,” says LGA chairman Gary Porter.
But Bates points to gaps in cyber cover from the public sector viewpoint, including in respect of lone worker risks, increasing demand on services with reduced funding, cyber terrorism, and abuse via hacked ‘carebots’. These are specifically designed to assist elderly people, and are part of a booming industry, with the global personal robot market estimated to reach $17bn (£13bn) by 2020, according to a report by Merrill Lynch.
The gradual introduction of such technologies to support public services, in response to changing needs, an ageing population, finite budgets and escalating costs, has potential legal implications, comments Barnes: “When services are delivered remotely, perhaps via an app or the touch of a button, what’s often not clear is how legal liability can be assessed in the event of negligence. It may only be a matter of time before a court hears a claim for negligence where no public service or healthcare worker was directly involved, perhaps because technology has replaced their jobs.”
Such changes would require proper risk management. Many councils don’t have the necessary resources for that. “They are often required to deliver statutory services on a limited budget,” observes Ron McKnight, senior risk control consultant at Travelers. “Some may have good levels of reserves to put more resources toward their risk management functions, while others do not. When budgetary constraints are combined with councils often losing experienced workers, operating successfully and safely can be difficult.” This might directly impact on risk management plans, leading to reduced inspection and maintenance regimes, and new or inexperienced employees undertaking unfamiliar roles.
More fragmented families will mean care roles traditionally undertaken by relatives might have to be delivered by the market and/or the state, the SMF report suggests. Karen Arthur, schemes and trading underwriter at Aviva, says the insurer has forged a new partnership with Anchor Housing, England’s largest not-for-profit provider of housing and care for older people. This will help provide iPads and training in more than 1000 locations: “The vision is to provide life-changing digital and financial access, skills and confidence that will increase income and reduce social isolation, to generate evidence and stories to influence government policy. Both initiatives will allow us to support customers into the future.”
Building more houses
Another issue raised by the SMF report is that, if home ownership continues to decline, and housing or rental costs remain relatively unaffordable in places like London and the South East, local authorities could be required to provide more council homes, leading to more local government involvement in housebuilding.
Local authority risk
Main areas of local authority risk
- Employers’ liability: claims for personal injury/disease to staff, arising from their employment
- Public liability: claims for personal injury or damage to private property suffered by members of the public and external organisations
- Council officials Indemnity: claims for financial loss by a third party as a result of an error or omission by a council officer
- Motor: claims for a council’s commercial fleet and leased cars
- Property: claims for damage to premise
Aviva has been working with social landlords and brokers for over 20 years to support provision of affordable, accessible contents insurance for social housing tenants, and works with more than 90 local councils, registered providers and other landlords nationwide. “The tenants’ policy is tailored to the requirements of the consumer – lower sum insured; not individually rated; nil excess; and flexible payments,” Arthur explains. “Helping people and communities become more financially resilient can make a huge difference. Affordable and accessible insurance is an important part of the jigsaw.”
Local authorities currently spend more than £650m nationally on insurance, and opt to ’self-insure’ some risks. Daniel Shipman, a member of the sales team at3 Sixty Systems – 15 Squared, part of DWF, explains that a lot of local authorities self-insure low-value risks and handle claims below the policy excess themselves, using software from suppliers like DWF.
London Authorities Mutual Limited
Following the run-off of Municipal Mutual Insurance, 10 London boroughs used the well-being power under the Local Government Act 2000 to create the London Authorities Mutual Limited to insure their corporate property, terrorism and liability risks. The aim of LAML was to reduce the cost of premiums and to raise the standard of risk management. It entered into a management agreement with Charles Taylor. The initiative was challenged by Risk Management Partners, and deemed unlawful. The Court of Appeal held that the well-being power did not enable the entering into of the complex and somewhat speculative attempt to save money, which was the mainspring of the LAML arrangement. Further, the public procurement rules were breached in awarding the insurance contract to LAML.
A Supreme Court judgment in 2011 relates only to the procurement aspect of the case.
Meanwhile, the Local Government Association is exploring options to set up a new mutual, with the aim of reducing costs by using in-house claims handlers. The model is thought to be different from the Municipal Mutual Insurance scheme, which went into run-off in 1992.
Research by the Association of Insurance and Risk Managers has found Airmic members view traditional insurance models, which are geared towards protecting physical assets, as not fit for some emerging risks. According to the survey, most plan to manage intangible risks in-house, either by reducing or retaining them. Also, risk managers are struggling to articulate the value of insurance to executive management and across the business.
“The insurance industry recognises that traditional insurance is losing relevance in face of today’s more complex and harder-to-define risks,” comments Julia Graham, Airmic’s deputy CEO. “And yet our members want support in understanding and dealing with these modern risks, both in terms of innovative products, but also in terms of broader support. The insurance industry must provide more than just risk transfer; this requires a shift in thinking but everyone will benefit.”
Similar misgivings might surface in the public sector. And if Bates is right, they already have with terrorism cover. So how are local government insurers going to address the challenge to their own relevance?
Travelers already assists customers to limit their exposure by offering complimentary risk control support that helps address their biggest issues, says McKnight: “Customers have access to The Risk Control customer website, which provides information and risk management steps on a variety of topics. Our Risk Control team uses the risk assessment review process, which is conducted by experienced risk managers with a background in local authority work, to help identify customer-specific vulnerabilities and opportunities. We also offer pragmatic assistance and effective risk management recommendations that enable corrective actions and foster effective loss control practices.
“Additionally, by attending our safety academy programmes, such as the fundamentals of insurable risk, which is designed for new and less experienced council employees, councils can look to mitigate the risks they face on a daily basis.”
That’s a relief – but let’s hope that is enough.
A huge well done to all involved with organising our Remembrance Day event on Friday, including our Corporate Real Estate team. One of them, Ibrahim, took this incredible footage of poppies dropping as he (along with others) leaned (safely!) over the gantry to let them go. pic.twitter.com/pSbapkWBBR— Lloyd's (@LloydsofLondon) November 12, 2018
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