Wednesday, 13 June 2012
UK public sector market shows signs of hardening as budget cuts take hold
The public sector insurance market is in the midst of challenging times, with the rising cost of liability claims and soft market conditions causing one of the largest insurers in the sector to pull out.
London City Hall
Last month, Chartis announced that it was withdrawing from public sector insurance, citing soft market conditions and a deteriorating claims trend. The insurer said that it had been unable to secure ‘adequate and sustainable terms’.
Zurich Municipal, the largest public sector insurer in the UK, said that it remained committed to the market and would quote for Chartis’ business when it comes out to tender.
A spokesman for the insurer said that it is too early to tell if the situation will impact market conditions. However, early indications are that the status quo will be maintained because QBE Insurance Europe has stepped in to replace Chartis in the market.
The market for liability business had already shown some signs of hardening, with insurers taking a tougher stance to aggregate limits, according to insurance broker Aon.
“After a lengthy period of declining rates we are starting to see signs of market hardening for public sector risks, in particular for motor and liability,” said Nigel Cooper, Public Sector Practice Leader at Aon Risk Solutions.
This is more noticeable in liability lines, with cross class aggregate caps being increased as insurers adopt a more technical approach to underwriting, rather than through premium increases, he said.
Two consecutive harsh winters in 2009/10 and 2010/11, as well as increasing frequency and severity of personal injury claims, were also behind the hardening in liability insurance, said Mr Cooper. Insurers are also taking a more technical approach to flood risks, looking more closely at how they underwrite and price flood insurance, he said.
“There has been a sea change this year with insurers changing their approach to underwriting, with financial modelling holding more sway,” he said. “There are potential long-term implications from this relatively new trend in public sector insurance, and as it gains traction it could impact costs going forward.”
Public sector organisations, faced with deep cuts in their budgets as part of a wider government austerity drive, are looking to save money, with insurance, risk management and maintenance budgets all legitimate targets.
But there has not been a noticeable change in the amount and scope of insurance purchased by public sector organisations, despite the pressure on local authority budgets, said Andrew Jepp, Director of Public Services at Zurich Municipal. “Local authorities have been on an efficiency drive for some time and have already picked the low hanging fruit with regards to insurance,” he said.
Some public sector bodies have reviewed their coverage levels with some increases in deductibles, while others have reduced them, said Mr Jepp. “They are looking to find a balance of cost savings vs the uncertainty on the balance sheet of higher deductibles,” he said.
While still buying core property and casualty insurance, some public sector bodies are foregoing peripheral coverages, like personal accident to cover assaults on staff, said Mr Cooper. There is also little money to buy new coverages, such as cyber insurance, despite a relatively high awareness among public sector bodies of the risks from data breaches, he said.
However, public sector bodies looking to save money on insurance are likely to struggle. The market is at the bottom of a pricing cycle and most organisations will not want to expose themselves to higher levels of self-funded risks, he said.
Spending cuts are also encouraging more collaboration between public sector bodies when buying insurance, such as consortium and other collaborative approaches to insurance purchasing, said Mr Jepp. But collaborative approaches to procurement will not necessarily lead to premium savings, he said. Premiums are predominantly a reflection of claims and management costs, and collaborating on procurement does not cover these components, he said.
“Rather than focus on the procurement process, risk managers would be better to look at what they can do to reduce the cost of claims, which could drive sustainable improvements in premiums,” said Mr Jepp.
Changes in the public sector are having both a positive and negative effect on exposures and premiums, said Mr Jepp. Consolidation, outsourcing and disposal of public sector services and assets–such as reduced staffing levels–are negating or eliminating some risks.
“The flipside is that public sector bodies are being asked to do more with less, and this can increase risk,” said Mr Jepp. “We are looking carefully to see if there is a genuine reduction in risk, for example from a reduction in headcount. Or if there is in fact an increase in risk as the remaining staff are stretched and placed under more pressure,” he said.
“We are advocating caution when it comes to the long-term impacts of short-term thinking,” said Mr Jepp. There is some concern that cuts in highway maintenance and inspections could result in an increase in claims and premiums further down the line, he said.
Budget cuts are reflected in the emerging risks faced by public sector organisations, said Douglas Ure of Marsh Risk Consulting. These include reputational risks caused by poor service delivery, outsourcing and change risk, as well as those risks associated with employees.
Traditional risks are still an issue, but emerging risks are often perceived as more immediate and damaging, said Mr Ure. “There is a risk that organisations could take their eyes of the ball, especially when resources are stretched,” he said.
In the current climate of reducing government debt and spending, public sector bodies are being asked to deliver more services but with less resources, said Mr Ure. And in some cases this demand to do more with less extends to the risk and insurance management function, he added.
Risk management resource is under pressure, although some organisations that have taken a more risk-managed approach to dealing with cuts have increased their investment in the function, said Simon Davis, Chairman of public sector risk management association Alarm.
“Typically risk management departments have been reduced or maintained at the same levels, but with greater demands. Risk managers are also being asked to take on additional responsibilities, and potentially have less time to spend with each department to understand new and emerging risks,” he said.
However, the government spending review also represents an opportunity to reinforce the value of risk management within an organisation, said Mr Davis. Although it can be difficult for a risk manager to ensure their voice is heard against the noise of financials and budgets, he said.