Are You Over-Insured?
Some experts challenge the usual insurance-buying practices of local (including police) authorities, Apparently, the majority of authorities are indeed over-insured. Therefore, they miss the opportunity to make significant savings by cutting down on the premium.
It’s estimated that annual spending on external premiums amounts to more than £1m per authority, even before adding the additional 12% in insurance premium tax (IPT), paid to the government.
And more importantly, policy deductibles aren’t the same across the board. If the insurance-buying practices change, the resources could be allocated to where they’re needed more.
This write-up takes a closer look at the current practices and hints at possible solutions that could make over-insuring more resource-efficient.
The Current State of Affairs
The classes of insurance motor third-party and employers’ liability aren’t compulsory for local authorities and public bodies. Nevertheless, every year the authorities usually purchase a lot of polices in these classes.
These include, but are not limited to, personal accident, public liability, the aforementioned motor third-party, property, employers’ liability, etc. This is where the authorities spend in excess of £1m every year and, as indicated, the deductibles may vary drastically.
For example, a liability claim excess may also amount to more than £1m annually. On the other hand, there’s nil excess for ground-up covers such as school trips, travel, or personal accident. It begs the question – why are there such discrepancies, since they both have the same financial impact to the authority’s balance sheet?
Pinpointing the exact reasons isn’t easy. However, it appears that the authorities should have a better understanding of excess insurance purpose and strategies.
Excess Insurance Purpose and Key Strategies
The basic idea behind insurance is to safeguard the public bodies’ revenue and balance sheet from excessive claims. This applies to all insurance classes for any given year. In addition, normal volatility is covered with sizeable contribution rates.
At first glance, there’s nothing wrong with this strategy, as it provides a safety net that keeps the authorities solvent. But to make savings, the public bodies should employ a more efficient methodology when purchasing the insurance they’re exempt from.
It would be best if they carefully analysed the insurance requirements. In this respect, there are four key aspects that should be addressed. Here’s a quick overview.
- Critical events – The question is – what needs to happen to instigate the excessive claims, and the answer should be all-encompassing. Ideally, it should cover the events across different insurance classes and single class claims. For example, insurance needed and outcomes in the event of catastrophic damage to property such as an explosion (causing Property claims) with significant employee and public injuries (causing Employer’s Liability claims and Public Liability claims)
- Annual spending – Once the authorities understand the events that may lead to excess claims, they should gauge the annual insurance cost accordingly. The calculation needs to factor in the projected maximum losses and, most importantly, whether material to the authority’s income and expenditure.
- Risk management – This is the key to cutting claims and the authorities need to employ a pre-loss strategy to mitigate risk and prevent catastrophic events. Or at least, reduce their frequency.
- Post-loss control – By design, post-loss control is there to limit the impact of catastrophic events and minimise the financial strain. To do this, the authorities should employ some sort of a business continuity plan.
The Main Takeaways
When all the key aspects are analysed, the authorities gain an upper hand for catastrophic events risk management. What’s more, they get a better understanding of the risk level, such as catastrophe stop loss and annual aggregate limit.
Armed with this knowledge, the public bodies can determine which insurance is worth retaining across the board (all business classes). In turn, this would allow for some, albeit limited, recoveries in case of emergency expenditure that cannot be insured (Bellwin scheme).
Financial support is needed only in years that are bad overall. However, it’s not necessary when the bad year in one insurance class is offset by a good year in another. Insurance is just one way to finance risk and the authorities may consider purchasing catastrophe bonds.
With catastrophe bonds, a fixed amount is paid in when the index trigger goes above the set threshold. For example, this may be the rise of water levels during a flood. The limitation of these bonds is that the claim might not match the payout, but there are other ways to remain secure.
For example, the NHS authorities that are contributors to the NHSLA pool utilise risk pooling. The benefit is that the arrangement employs a pay-as-you-go scheme. Therefore, one public body doesn’t stand as a guarantor to others.
When all is said and done, compulsory insurance exemption indicates that a financial safety net works best if the insurance classes are combined. Consequently, traditional policies may fail to provide optimal protection for each £1m of premium spent.
Actions to Be Taken
Aside from analysing insurance requirements, the authorities should shift their cultural attitude towards this type of financial protection. Take catastrophe stop loss, for example – where a recovery payment may be expected perhaps once every ten to twenty years.
As things are, the authorities pay some of these claims every year according to the less than optimal structure to finance risk. At best, public bodies would review the insurance programs at the core in order to take full advantage of the value that comes with risk financing.
Without a doubt, the current economic situation is challenging and the political instability ripples across the public sector. All this hints at the urgency to make some fundamental changes and introduce more responsible, if not smarter, insurance-buying practices. Whether this is going to happen or not remains to be seen.