What is this Guide for?

This guide will give charity Insurance Buyers (and their CFOs) strategic questions to ask themselves to transform their insurance buying philosophy, Reducing Premiums, Substantially, Safely and Strategically

We will look at the common pitfalls in buying Public Liability insurance for charities, by way of common insurance strategy Q&As.

Public Liability Charity Insurance: “How to avoid the pitfalls!”

Introduction

Buying public liability insurance for charities is a minefield. Charities cover all aspects of society, from the arts and animals to social care and health, so the typical Public Liability risks faced by charities not only include the usual Public Liability risks (injuries, slips/trips etc) but may also extend to fundraising, conferences, lobbying, offering overnight accomodation, administering medications and looking after vulnerable people and children etc. It is this wide range of risks which adds complexity to charity insurance buying.

Public Charity Commission data shows that charity sizes vary enormously, with income ranging from <£100k pa to £1bn+ pa. The largest 50 charities typically have incomes of £150m+ pa, with typically 1000+ employees. So, a one-size fits-all Public Liability policy is rarely suitable.

Common pitfalls

Before our involvement, most clients:

  • jump to insurance (via the internet!) as the only solution
  • ask for the same/similar cover as last year (“renewing as expiring”)
  • send a spreadsheet of past claims to potential insurers

More sophisticated clients include multi-media risk presentations, EML (expected maximum loss) studies and/or actuarial opinions on their Insurance Funds. In almost every case, the client fell into one or more (usually several) of the pitfalls we describe below.

1.   How Do I Create An Insurance Strategy For My Charity?
  The primary purpose of any insurance strategy is to protect YOUR balance sheet/P&L/income statement from excessive (perhaps fatal, to your organisation’s survival) volatility if certain risks actually materialise.
  The key questions are therefore:
 
  • What financial amounts would be excessive (perhaps fatal) for YOU if they actually arose?
  • Which of YOUR risks could generate claims for these excessive (perhaps fatal) amounts?
   
2.   How Does Insurance Fit Into My Charity?
  In many cases, your funders accept significant volatility from uninsured/uninsurable risks. Your balance sheet (unique to you) is full of assets and liabilities, each of which can cause losses / unexpected developments / negative financial impacts:
 
  • Loans: higher interest rates (interest rate risk)
  • Assets/Investments: falling prices (market risk)
  • Debtors: defaults (credit risk)
  For example, one large UK charity (annual income £250m+) has a pension fund of £400m+, with c50% invested in “growth assets” (equites). Since equities can fall by 25% in a single year, that’s a £50m loss the funders are willing to accept in a single year. That far exceeds all but the most extreme catastrophic insurance scenarios.
  In simple terms, this means that buying insurance in isolation from the rest of the balance sheet is very inefficient, leading to excessive insurance buying.
   
3.   How Much Business Insurance Should I Buy For My Charity?
  Insurers hope that you focus on the potential financial impact of claims in the short-term. That can lead to emotional thinking, tempting you to buy policies even if premiums cost far more than your claims in the long run.
  Conversely, many charities have been in existence for decades, usually stated in their Annual Reviews: eg “the charity was founded in 1895… / … established in 1113..” etc. They expect to continue for many years, even in the current pandemic climate.
  In other words, they have a very long-term planning horizon to finance (recoup the cost of, from accumlated premium/IPT savings and retained investment income) future large claims.
  This means that there is a mis-match between your financial planning timeframes (often very long) and the main benefits of insurance (protection from short-term volatility).
  This usually leads to large organisations (especially charities) buying too much insurance
   
4.   How Do I Analyse My Charity’s Claims Data For Its’ Insurance Renewal?
  As above, many charities have been in existence for 50+ years. This means extensive historic claims data to determine claims trends, frequency of large claims etc vs their financial stability/donations/public-funding etc.
  Most clients simply focus on the last 5 years’ claims data; in reality, your claims are stable and predictable over much longer periods.
  You need to analyse your Core Risk Metrics (claim frequency, claim severity, average cost per unit exposure) over long periods (not just the last 5 years) – and separately for all large claims. You can then demonstrate that, whilst individual claims are not predictable, there are usually hidden long-term trends which you can use to present yourself to insurers as an informed risk.
   
5.   Is My Charity Exempt From Business Insurance?
  Yes, you are, all charities are exempt from Public Liability insurance, it is not compulsory
  Thus it is often “bundled” with other (compulsory) insurances, such as EL (Employer’s Liability) & Motor, so it can be helpful to check if you are exempt from these also
  Little-known exemptions from EL/Motor are “being under the control of a Secretary of State” (incorporated by Act of Parliament, “statutory charities”) or “under the control of the Crown” (incorporated by Royal Charter, “Royal Charter charities”); such charities include the National Trust, the PDSA, NSPCC, RSPB, RNIB, RNLI, the universities of Oxford and Cambridge (and their colleges) etc
  Many charities are funded or directed by central government and thus may be eligible for exemption; clues are usually in their published accounts: “aims and objectives set by DCMS”, “required to disclose information in accordance with Government Financial Reporting Manual”/ “the assets are held in trust for the nation’s benefit..”
  Bespoke legal advice on exemptions should always be taken for your specific circumstances, but if you are exempt, you have much more efficient ways than insurance to finance risk.
   
6.   What Is A Good Risk For Charity Insurance Purposes?
  You want to say “Look at us, we are a good risk” (and hence deserve a low premium!).
  You typically do this by saying:
 
  • “we have had no/few claims..” and/or
  • “we think our risk management is brilliant/it has never failed in the past”.
  This may convince internal stakeholders/funders but it gives the opposite message to potential external risk financing partners. You are just “not on their wavelength.”
   
7.   Is Charity Insurance Worthwhile?
  Insurance is access to an insurer’s balance sheet. This is not needed, or not needed as much, if you are financially strong – and you are the good risk that you say you are!
  Their business model is receiving premiums in advance of paying claims, often even before the policy commences. They invest premiums over the lifetime of potential claims (80+ years for industrial diseases). This upfront cash cost can be a significant chunk of your donations/Gift Aid, even before considering Insurance Premium Tax (currently 12%), payable on top (passed to HMRC)
  Have you ever looked back at your historic policies, assessing claims made vs premiums paid? Well that’s a start, but it’s woefully inadequate as a measure of the efficiency of your insurance programme. You need to factor in IPT costs, the investment income you could have made had you retained the premiums, plus the improved risk management which naturally comes from self-insuring a risk rather than insuring it.
  When you do this, you see that, over the long-term, insurers usually come out better than their policyholders!
   
8.   How Can I Show Insurers That Our Charity Is A Good Risk?
  Saying “We are a good risk because…we have had no/few claims / our risk management is brilliant/has never failed” just doesn’t work. Insurers are highly sophisticated and technical risk-takers, and need much more information than this.
  Premiums are the risk of the insurer paying future claims. Your past claims are only relevant only if they help predict future claims. For instance, if you’ve made no claims, then that, on it’s own, does very little to predict whether you will make one in the future or not.
  Good risks market themselves effectively by answering 3 specific questions to fit into the insurer’s business model:
  A.When/how often the policy will pay out? (“claim frequency”)
 
  • Show that the chance of a claim (above your excess) is low.
  • Analyse your speciifc policy wording vs your policy excess, documenting the types of scenarios in which you would make a claim. For example, with a £5m excess, only very extreme scenarios would pay out.
  B.How will you keep payouts as low as possible? (“claim severity”)
 
  • Show that you can control a claim (above your policy excess) if it does, in fact, happen
  • For the scenarios in A) above explain your Disaster Recovery Plan to minimise costs.
  C.How much financial pain will YOU have before making a claim? (“you are a good risk!”)
 
  • This means explaining your policy Excess!
  • Show how much the policy would pay out in B); compare this to your own financials. If you could have easily afforded the claim yourself, the insurer won’t believe you are a good risk, otherwise, you would have self-insured.
  • In a real example, a client thought that a £100k XS was high, but relative to their net assets of £100m, it was very low indeed (0.1%). So, the insurer reasoned that they must be a bad risk because they were only putting 0.1% of their balance sheet at risk for each large claim (which their long-term data showed were very rare indeed!).
   
9.   How Can I Avoid Buying An Expensive “Package” Charity Insurance Policy?
  Public Liability premiums vary widely, depending on the nature of your risk, but group rates are typically £100k per 1000 employees (reflecting the very low risk of large claims for the most basic charities)
  A £100k premium barely pays for a typical large claim, thus insurers often “bundle” Public Liability with other, more expensive (profit-making) covers, such as EL (you may be exempt!) [cost: £50k+ pa per 1000 employees] or Personal Accident [PA] (cost: £10k+ pa per 1000 employees]) but typical PA claim rates are 1 claim per 50,000+ employees per year [Source: FCA Value Measure data]), so with only 1000 employees the chance of you making a PA claim is broadly only 2%!
  If you are offered bundled/packaged products (say EL, PL and PA), do you have a breakdown of the price for each?
  Furthermore, Public Liability cover is rarely sold as “plain vanilla”; there are usually “freebies” to increase its’ attractiveness, eg.:
  A. Compensation for employee’s court attendance to defend the Public Liability claim
  B. Reputational Damage (as a result of the Public Liability claim)
  Such claims are very unlikely – litigated claims (those most likely to cause court attendance or reputational damage) are rare and in any event, how do you quantify reputational damage?
  Nothing is free; all “freebies” increase premiums, even if by small amounts, with 12% IPT addded on top!
  So, have you been advised to buy the “widest” cover (more expensive) rather than the “best value” cover (lower premium, minimised irrecoverable IPT, minimised upfront cash cost)?
   
10.  How Much Cover Have I Actually Bought For My Charity?
  Let’s take a simple case: “Policy excess of £100,000, cover limit £100m per occurrence”.
  Most clients would say : “I’ve bought £100m of PL cover”, but they are wrong.
  As worded, the policy will (for claims above the policy excess), pay up to:
 
  • per claim/per event: £100m
  • per year: £no limit: [this is not usually stated in the policy; if there was an annual limit, it would be stated; this is common in “Claims Made” policies eg PI: £5m total limit per year]
  So, you actually have an unlimited liability policy, with a cap of £100m per event, but no limit on the number of events. So, you must expect an event causing £100m of PL claims happening every day throughout the policy year, no matter how impossibly remote that is. That’s over £30 bn of potential claims that you are putting the insurer on risk for, no matter how remote.
  In other words, you get few insurers interested in your risks and have little premium competition, because you are asking to potentially bankrupt insurers!
   
11.  Can Our Insurer Charge Our Charity Additional Premiums?
  YES, and not just for the usual reasons (increased head count etc)!
You need to ask a key question, not usually considered by Insurance Buyers:
“Has the insurer opted-out of part of the Insurance Act 2015 to (easily!) charge you more premium?”
  Here’s a real charity PL policy’s detailed terms of business (the small print!): “We have opted-out of part of the Insurance Act 2015 so that.. In cases of non-disclosure, if we would have charged an additional premium had we known the relevant facts, we will charge that premium and pay any claims in full rather than reducing claims payments in proportion to the amount of premium that would have been charged (the more usual approach).”
  Thus, whilst in the past, (accidental) non-disclosure may have led to a claim being declined, this insurer has chosen to pay the claim in full, but charge an (undisclosed) additional premium, with no limit on the additional premium charged!
   
12.  Are Our Charity Insurance Premiums Negotiable?
  YES, but the key (public) negotiation levers are not widely known (and hence not widely used – or talked about!): the Insurer’s Reserve Development and the Insurer’s Claim Payment Development
  An insurer’s Reserve Development profile significantly affects your quote. If your premium is based on the reserves for the previous year showing a claim cost (reserve) of 100, when in fact, the insurer’s published data shows that, ultimately, its’ claims settle for 90, that’s likely to make your premiums 10% too high. Do you challenge the insurer’s view of your claims experience, when most of your claims are not yet settled?
  An insurer’s Claim Payment Development significantly affects your renewals. At first renewal, you are just one year after the policy period, their published data can show only c25% of your claims are paid by then, the rest (reserves) remain invested. Do you challenge the insurer’s view of your account profitability, if they are earning significant investment income before paying your claims?
  All of this information is publicly available!
  Furthermore, as a large buyer, you may spend £1m+ on premiums; this also gives you negotiating power. The smallest charities can spend c£100 on PL cover (typically buying an EL/PL/PA package policy: typical premium breakdown: £60 [EL], £20 [PL], £20 [PA]); typically, an insurer would much rather sell 1 policy for £1m, rather than 10,000 policies for £100 each!
Conclusions

Many charities fall into common pitfalls when buying charity public liability insurance, rarely integrating Insurance with the rest of their organisation’s Treasury and Balance Sheet management. This leads to significant over-insurance.

Our InsuranceInspect product transforms your view of Risk & Insurance, both internally and externally, Reducing Your Premiums, Substantially, Safely and Strategically. A free, no obligation 45m video call (booked via our website) will help you start the strategic conversation with your CFO.

“Ask John to perform his version of search and destroy on your premiums”

“Ask John to perform his version of search and destroy on your premiums”