Finance Department Municipal Offices, 222 Upper Street, London N1 1XR

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1 Finance Department Municipal Offices, 222 Upper Street, London N1 1XR Report of: Executive Member for Finance Meeting of Date Agenda Item Ward(s) Executive 11 January 2007 E8 All Delete as appropriate Non-Exempt Subject: Establishment of London Insurance Mutual Limited 1. Synopsis 1.1 Having adequate insurance protection is an essential component of providing robust, sound and effective services which is a fundamental tenet of the Council s One Islington strategy. This report outlines the proposal to establish a mutual insurance company controlled by, and run for the benefit of, participating London Authorities. 1.2 The Mutual is an example of boroughs working together to provide services and generate efficiency savings under the Gershon agenda, and therefore optimising the benefit of resources invested in this area. Membership should deliver for Islington financial savings and certainty of insurance protection in the longer term which will promote achievement of the council s overall aims and objectives. 2. Recommendation 2.1 To note the contents of this report. 3. Background Introduction 3.1 The insurance market for local authorities has for many years been dominated by one provider, Zurich Municipal, with little competition. Consequently, it has been difficult to ensure that value for money was being obtained in procuring cover. In response, London authorities have considered alternative ways of funding insurable risk and, in particular working together when purchasing insurance. Individual boroughs including Islington would be able to have stronger buying power and access to a wider insurance market. In principle, the Council would be able to maximise cost savings and have greater control 1

2 over the insurance purchasing process. A steering committee of London Treasurers, assisted by working groups of London Borough Risk managers, and acting through the London Borough of Croydon, has been evaluating a proposal to create an insurance mutual. The project has been supported financially by the London Centre of Excellence (LCE). 3.2 An insurance mutual is a joint venture controlled by its members. The members insure with the mutual, instead of with commercial insurers and they pool risks and share costs. 3.3 The steering committee and the LCE commissioned Charles Taylor Consulting PLC (CTC) to carry out a feasibility study using data from 26 authorities - London Boroughs, the City of London and the GLA. CTC reported that a mutual would offer its members savings of between 15% and 20% on average on insurance premiums for liability and property insurance and accumulate surpluses between 8.3 million and 15 million over the first five years of trading. The surpluses would be available to members and could be used to reduce premiums further. 3.4 In part, this saving reflects the cost sharing characteristics of a mutual. In part it reflects the weakness of the current market for local authority insurance. There is very little competition in the market. 3.5 A mutual offers this authority advantages over and above reductions in annual premium. Underwriting profits are retained for the benefit of the members of the mutual, not paid away to third party shareholders. The financial incentives to make an underwriting profit enhance the value of and rewards the risk management endeavours of this authority. A mutual offers this authority the opportunity to determine underwriting appetite and develop policies, which are focused solely on and meet the needs of local government in London. A mutual structure offers the prospect of greater pricing stability and will attract support from sectors of the reinsurance industry who would not entertain individual local authorities. A collaborative endeavour across London Boroughs links in with the agenda to maximise cost efficiencies and with the National Procurement Strategy of collaborating in the purchase of services. Details of the Council s current insurance arrangements are contained in the exempt report, however, in general terms the Authority would continue with the same covers except that the Mutual would be the provider as opposed to the external insurance market. Top level risk protection would be purchased by the Mutual from the re-insurance market. 3.6 The advantage for the authority in participating in a mutual is the economic benefit both to the authority itself and to its area as a result of the reduction in premiums which reduces the budget requirement or results in additional money becoming available for other purposes. There is an additional advantage for all the participants, because the mutual can develop risk management standards for its members to encourage better risk management practice, and reduce unmanaged risk. The mutual could offer financial inducements to participating authorities that met these standards. 3.7 A mutual called London Authorities Mutual Limited (LAML) has been set up as a shell company, but is not yet operating. It can only operate when a sufficient number of London authorities agree to take part and when FSA registration has been completed. This report forms the critical final part of the establishment process, without sufficient numbers in support of the mutual the mutual will simply not happen. Ten boroughs have given a firm commitment to take reports recommending the Mutual to their Executives and of those 2

3 nine have obtained formal Executive approval to join, a sufficient number to make the Mutual viable Day-to-day management of LAML, including administration, issuing annual policies, arranging reinsurance and investing LAML s funds will be handled by an experienced firm of pool providers. LAML will procure these services by competitive tender. There will be no employees of the Mutual itself There can be a maximum of eleven directors on the Board but must be at least five, two of which must be independent directors. This is a requirement of the FSA and of the Code of Governance for mutuals of this kind. The independent directors will have experience of the insurance industry. Their role is to ensure that the company operates properly for the benefit of its local authority members. They will be paid for performing these duties, but the local authority nominee directors will only receive their reasonable incidental expenses. Procurement 3.20 The Lead Authority, London Borough of Croydon has engaged Weightmans solicitors to advise on setting up LAML. Specialist procurement Counsel has advised, for the benefit of the London local authorities that wish to participate in the mutual, that because LAML is controlled exclusively by the participating local authorities, and carries out the essential part of its activities for them, there is no requirement to comply with the European procurement rules or the Public Contracts Regulations 2006 to set up and participate in LAML on the basis indicated in this report LAML itself will be obliged to comply with the 2006 Regulations when it places contracts. Next steps 3.22 FSA registration as an insurer is being sought. It is anticipated that this will be confirmed by meeting date The initial Directors will formally establish the company as a mutual and appoint independent Directors The company will formally procure the appointment of pool providers and reinsurance. These formalities can be completed in time for LAML to issue policies from 1 April In the event that LAML cannot issue policies until 1 April 2008 because of some unforeseen delay, authorities with long term insurance agreements expiring before that date could either arrange an extension, procure short-term cover or ask LAML to arrange/ purchase cover, thereby benefiting from a consortium purchasing arrangement. 4. Implications 4.1 Financial Implications Full implications are discussed in the exempt report (Item H4). However, the feasibility study projects that there are potential savings to be had in the short and long term by joining the Mutual. 3

4 4.2 Legal Implications Leading Counsel instructed by Croydon, the lead authority for the LAML project has advised that section 2 of the Local Government Act 2000 enables London authorities to participate in the mutual. Under Section 2, a local authority has power to do anything, which it considers is likely to achieve the promotion or improvement of the economic, social or environmental well being of its area In exercising the Section 2 power, the Council must have regard to guidance issued by the Secretary of State and to its community strategy. The guidance issued by the Secretary of State does not specifically address the question of whether local authorities may combine to form a mutual, but it is strongly supportive of the concept of mutual co-operation and assistance between local authorities The authority therefore needs to satisfy itself that the anticipated financial and risk management benefits from participation in the mutual are likely to achieve the promotion or improvement of the well-being of the area, the economic well-being of the authority, and, from the application of savings to other services or to a reduction in local taxation, the economic, social and/or environmental well-being of the area or of persons resident or present in it In addition to Section 2, the Council may reply upon Section 111 of the Local Government Act 1972 to effect insurance against risks arising from the exercise of its statutory functions through the establishment of a mutual. That section permits local authorities to do any thing which is calculated to facilitate, or is conducive or incidental to the discharge of any of its functions As set out in paragraph 3.20 above, the Council may award insurance contracts to the mutual without the requirement for a competitive tendering exercise under the Public Contracts Regulations This exemption is derived from the Teckal case and is conditional upon: 1. the procuring authority exercising a control over the supplier similar to that which it exercises over its own departments, and 2. the supplier carrying out the essential part of its activities with the controlling local authority (ies) The draft constitutional documents for the mutual now meet above conditions Whilst the advice received from Counsel confirms that participation in the mutual is lawful nevertheless there is a small risk of challenge from an aggrieved party such as an insurance company which would lose business. In practice, a challenge seems unlikely from such companies as they may well wish to tender for the reinsurance contracts In deciding whether to participate in establishing the Mutual, the Council needs to ensure that it has taken all relevant factors into account (including its fiduciary duty to local tax payers to act responsibly with its funds), ignored irrelevant considerations, and come to a rational conclusion. In particular, regard should be had to the financial benefits of participation as set out in the exempt report and the 4

5 Financial Implications and the potential risk of a supplementary call upon the Council Normally a contract with the mutual for the provision of insurance would require competitive tendering in accordance with the Council s Contract Standing Orders (the Procurement Code). However, paragraph 23 enables the Executive to waive this requirement if satisfied that there are special circumstances. 4.3 Equalities Implications Any savings realised will be for the benefit of all communities of Islington. 4.4 Risk Analysis The Steering Committee have commissioned a full risk analysis on behalf of participating boroughs including financial and legal risks which has shown that there is a sound base for the creation of the Mutual, and excellent prospects for development in future years. Whilst an element of risk is entailed with any new venture, the safeguards built into the arrangements, provide good assurance that adequate controls are in place. Councils in the Mutual may be called upon to make supplementary payments should the company have financial difficulties. It will, however, purchase insurance protection of its own and will be required at all times to act prudently in the best interest of its member councils. In addition, the investment strategy of the Mutual will follow public sector guidelines and prudence. Legal opinion, as already outlined, has determined that authorities can opt to place insurance directly through a mutual of which they are a member, but this position may be subject to challenge. The conclusive opinion obtained makes such a legal action unlikely to succeed. 5. Conclusion 5.1 With the committee endorsement of the prospective member authorities and the anticipated go-ahead from the FSA, the idea of a London Mutual is becoming a reality. From 2008, Islington can start to benefit from the projected savings in premium. Members need to be aware that in committing to the Mutual the Council is entering into a long-term arrangement and any benefits apart from the initial saving will be realised only after several years membership. In addition, robust systems of claims handling and operational risk management will to be implemented and maintained to ensure Islington can control losses and thus maximise the financial gains to be achieved from membership. The Mutual project is a clear example of councils working together to produce innovative solutions to the needs of efficiency under the Gershon agenda. 5

6 Final report clearance Signed by Executive Member for Finance Date Received by Head of Democratic Services Date Responsible Officer : Mike Curtis, Director of Finance Report Author : David Clay, Risk Manager Tel : Fax : david.clay@islington.gov.uk 6