Date: 7 February 2013

Item No. Report title: Classification: Open Ward(s) or groups affected: From: Date: 7 February 2013 Meeting Name: Deputy Leader and Cabinet Member for Housing Management GW2: Leasehold and Ancillary Properties Buildings Insurance All wards Strategic Director of Housing and Community Services RECOMMENDATION 1. That the Deputy Leader and Cabinet Member for Housing Management approves the award of the Buildings Insurance Contract for Leasehold and Mortgaged Housing Premises to Zurich Insurance for a period of three years, commencing 1 April 2013. There is an option for two 12 month extensions at the council s discretion. BACKGROUND INFORMATION 2. The leaseholders and ancillary properties buildings insurance contract relates to flats and maisonettes sold under long lease terms by the council. The terms of our current leases require the council, as freeholder, to insure the property against a range of standard risks to the full insurance value. The most advantageous approach is to place a contract with a single insurer who will both fund the cost of claims and provide a claims handling and management service. 3. The contract was last awarded in 2009, commencing on 1 April 2010. The contract was for an initial period of three years ending 31 March 2013, with the option to extend the contract for two years following annual reviews. As noted in the Gateway 1 report ( Foreword ) it was considered prudent to test the market prior to the end of the initial period of the current contract, rather than risk waiting to the end of the five year extended period. The procurement exercise has also opened the possibility of obtaining best value by seeking a fixed premium price. 4. The GW1 report recommended that the cabinet approve the procurement strategy for the leasehold and ancillary properties buildings insurance contract for a period of three years, with an option for two 12 month extensions. Estimated costs were 3.4m per annum, including 6% insurance premium tax. This gave a total estimated contract value of 10.2m, or 17m with extensions, with commencement on 01 April 2013. The estimated value was based on the existing contract, and it should be noted that the eventual cost of the tender received is lower than the estimate. This variance is believed to be due to a combination of market forces and due to the council s exceptional claims experience in the immediate period of securing the current contract (on which the estimate was based). The GW1 report was approved on 17 April 2012. The procurement strategy set out in GW1 was followed, with a number of differences in timing indicated below. 5. The GW1 report indicated that the contract would be advertised on 6 June 2012, with a deadline for return of tenders set to 3 August 2012: the timetable specified that the evaluation of tenders would be completed by 30 August 2012. It was noted that the council was operating under relatively tight time constraints due to

an absolute requirement to have appropriate insurance cover in place by April 2013. 6. We were unable, in the event, to advertise the contract until 3 August 12. This was largely due to the fact that the member of staff responsible for preparing many of the contract specifications left the council s employment in May 2012. The council subsequently set a deadline for return of tenders by 28 September 2012: while this was later than originally envisaged, it allowed sufficient time for evaluation. Procurement project plan Activity Completed by/complete by: Forward plan for GW2 decision 09 Jan 2013 Approval of Gateway 1: Procurement Strategy Report 17 April 2012 Issue Notice of Intention 31 May 2012 Invitation to tender 03 Aug 2012 Closing date for return of tenders 28 Sep 2012 Completion of evaluation of tenders 18 Oct 2012 Issue Notice of Proposal 11 Dec 2012 DCRB review 14 Jan 2013 CCRB review 24 Jan 2013 Notification of forthcoming decision Five clear working 01 Feb 2013 days Approval of Gateway 2: Contract Award Report 02 Feb 2013 Scrutiny Call-in period and notification of implementation of 12 Feb 2013 Gateway 2 decision Alcatel / Standstill Period 22 Feb 2013 Contract award 23 Feb 2013 Add to Contract Register 23 Feb 2013 Contract start 1 April 2013 TUPE Consultation period Publication of award notice in Official Journal of European Within 48 days of (OJEU) contract award Contract completion date 31 Mar 2016 Contract completion date if extension(s) exercised 31 Mar 2018 n/a KEY ISSUES FOR CONSIDERATION Description of procurement outcomes 7. The main outcome of the process is to ensure that appropriate insurance cover is in place for the 12,900 units of council leasehold stock from April 2013. This is an absolute requirement as failure to insure would place the council in breach of the lease terms. 2

8. The award of the contract should both offer the greatest economic advantage to the council and its leaseholders, based on the standard evaluation to determine the most economically advantageous tender (MEAT), and guarantee sufficient quality of service to meet the council s requirements. As also indicated in GW1, the contract should guarantee a fixed premium price (subject to links to the house rebuilding cost index). This is a change to the current contract s provisions and should protect both the council and leaseholders against unforeseen increases in the premium price. 9. Further requirements have been stipulated as a result of consultation with leaseholder representatives, with a full list detailed in GW1, paragraph 12. These requirements were included in the tender documentation. Key/Non Key decisions 10. This report relates to a strategic procurement and a key decision. Policy implications 11. Due to the size of the contract, the council has been obliged to issue a Notice of Intention and Notice of Proposal to leaseholders (see also paragraphs 29-30 of GW1). Dates of issue of these documents are given in the Project Plan, above. Tender process 12. The GW1 report commented (para.13) on the desirability of ensuring that the council had a direct relationship with the insurers. However, after further clarification with leaseholders, it was decided to seek tenders both from brokers and directly from insurers so as not to restrict the options available in seeking best value. 13. Given the restricted nature of the market, the Open tendering procedure was followed, with all parties who responded to OJEU and UK adverts invited to tender. The contract notice was placed on the Tenders Electronic Daily supplement to the OJEU on 08 Aug 2012 with reference 253212-2012. A deadline of 28 Sep 2012 was specified for return of tender submissions. 14. A total of 12 Invitations to Tender were sent out. 3 submissions were received, from Insurers A, B and C (as designated in paragraph 23). Few companies have the specialist knowledge, capacity and funding necessary to administer such a contract, so a low level of submissions was to some degree expected. It should be noted that although the current contract was widely advertised in 2009, only four submissions were received. 15. Of the 9 organisations who did not bid, 2 confirmed their intention in writing. Tender evaluation 16. The council set up a tender evaluation panel consisting of the Revenue and Income Manager, Home Ownership Services; the Preassignment Manager, Home Ownership Services; and the Corporate Risk and Insurance Manager, Finance and Corporate Services. 17. Submissions were initially assessed on the basis of the Business Questionnaire, intended to ensure that organisations demonstrate their adequate economic and 3

financial standing in order to be considered. Applicants were required to achieve the minimum criteria set out in the table below, with each submission at stage 1 evaluated in the order given in the table: Criteria Minimum requirements Minimum Pass Threshold Economic & financial standing i) The Tenderer and/or insurance provider must be FSA registered ii) The Tenderer and/or insurance provider must have at least an A rating from Standard & Poor (or equivalent) Pass/Fail Health & Safety Evaluation of company policy and Pass /Fail practices Equalities Compliance with legislation Pass /Fail 18. If a submission failed to pass on any of the above criteria, applicants were permitted two clarifications per section, each with a response time of two working days. A failure to pass after clarifications would result in the elimination of the organisation from the procurement process. 19. The three organisations who made a submission all achieved a Pass at stage 1 on all three criteria and no eliminations were made.. 20. At stage 2 submissions were assessed on the basis of Quality and Price, with a weighting of 30% Quality, 70% Price. This was in accordance with the standard evaluation methodology used by the council to determine the most economically advantageous tender (MEAT), as specified in GW1, paragraph 68. 21. The quality assessment was based on the information received from tenderers in response to questions set out in Appendix B of the Form of Tender. Each quality element was scored from 0 (no submission) to 5 (excellent). Each score then received a further weighting, as shown below, in order to calculate the final score on quality: QUALITY 30% Criteria Weighting 1. Experience of similar contracts in the public sector 10 2. Qualified personnel which would be made available to 5 the contract 3. Claims handling strategy 5 4. Information technology and data exchange capabilities 5 5. Quality control procedures for managing the services 5 delivered through the contract either via direct staff or subcontractors Total (Quality) 30 22. The price assessment was carried out based on the information provided in Appendix A of the Form of Tender. Individual price elements were weighted as follows, according to what was considered to be the economic advantage to the council and its leaseholders over the 3 year life of the contract: 4

PRICE - 70% Criteria Points Total Price over 3 year period (the lowest sum will receive the maximum score and the highest sum will receive a 30 score relative to the lowest sum using the following formula lowest sum / other sum x 30%) Guaranteed premium amount given per year - dependent on whether Long Term Agreement applies or not ( 30 Maximum 30 points: Fixed year 1 0-10, Fixed years 1 and 2 10-20, Fixed years 1, 2 and 3 20-30) Innovative pricing structure (points awarded based on range of alternative pricing structures offered for future 5 years) Additional Benefits (points awarded for policy extensions and other benefits for leaseholders) 5 Total (Price) 70 23. The overall final score was calculated by adding together the scores on quality and price, to give a final score out of 100. The outcome of the stage 2 assessment was as follows: Insurer Q P Total A (Zurich) 27 60 87 B 24 59 83 C 23 41 64 24. Award of the contract should be made based on the most economically advantageous tender, assessed on the weighted model of 70:30 price:quality. It is therefore recommended that the provider with the highest overall score in the assessment is awarded the contract, having also achieved the highest score in both price and quality assessments. Plans for the transition from the old to the new contract 25. Leaseholders will have been informed of the new arrangements in advance through the council s statutory consultation procedures. Dates of these communications are given in the project plan, above. There will also be opportunity to include details of the new contract as part of the standard yearly billing and quarterly statement runs to leaseholders. 26. The existing contract is managed by Home Ownership Services (see also paragraph 28, below) who also handle the initial processing of claims. Leaseholders will therefore see little change in terms of channels of communication. Procedures have been put in place within Home Ownership Services to ensure that a clear distinction is made between claims made under the old and new insurance contracts, in order to minimise any chance of disruption. 5

Plans for monitoring and management of the contract 27. The existing insurance contract is monitored by the Buildings Insurance Officer, supported by the Revenue and Income and Preassignment Managers. It is planned that this arrangement will be continued for the duration of the new contract. It is not anticipated that the council will see any substantial operational changes as a result of the new contract. 28. The contract will be administered in the first instance by council staff. They will send out claim forms, receive them back together with quotes from leaseholders nominated contractors and scan the documents to the insurer. The staff will liaise with leaseholders and act as a link between the leaseholder and insurer to resolve any queries. It is not anticipated that leaseholders will see any substantial operational changes to the service as a result of the new contract. 29. The assessment criteria specified that the council will have access to reports generated from the insurers IT systems; this will ensure that up to date monitoring information will always be available to council staff. 30. Monitoring meetings between relevant council officers and the insurer will be held at least quarterly, or more frequently if circumstances require. 31. Council staff will also liaise with housing services where claims have been caused by a failing in a neighbouring tenanted property e.g., where a leaseholder s property is affected by a leak originating from the flat above them. Staff will be requested to prioritise a repair to tenanted properties so that the authorisation can be given to leaseholders to instruct their nominated contractor to start repairs to their property. This will benefit leaseholders, as claims will be progressed more quickly, and it will assist in minimising the cost of the claim. As claim costs form the basis of bids from insurers, procedures in controlling costs from escalating will have a beneficial effect on future contracts. 32. Given the guarantee of premium levels, the financial risk will fall on the insurer should the value of claims exceed the contract sum paid by the council. Identified risks for the new contract 33. The risk log below lays out identified risks, with scoring following that used for GW1. Likelihood and impact ratings are scored from 1-5 with 1 being the lowest risk and 5 being the greatest. The overall score is the likelihood rating multiplied by the overall score. As in GW1, the maximum score, indicating highest risk, would be 25 with an unacceptable risk deemed to have a score exceeding 16. Risk Assessment and mitigation Likelihood Impact Overall score Insurer goes out of business Credentials and viability of insurers have been considered in assessment process. Monitoring through life of contract 2 5 10 6

Change of insurer has effect on internal processes and procedures during transition to ensure coverage is maintained. Regular communication at senior level with insurer. Ensure client team have robust processes in place to cover a situation where old and new claims are being processed by different insurers. Monitoring of processes continued through life of contract. 2 2 4 34. It should be noted that the majority of risks identified in GW1 will be removed by awarding the contract. In particular the risks around unexpected or large increases in the contract price will be removed by the guaranteed premium level, which specifies an annual increase linked to house rebuilding cost index, currently 3%. Community impact statement 35. This decision has been judged to have an impact on a specific set of individuals, namely on leaseholders and on a small population of freeholders who will contribute to the contract cost as an element of their annual service charges. The council has identified that individual leaseholders may see a small decrease or increase in their premium depending on the property type. Given the large number of property types, the final result is complex, but it should be noted that all of the most common categories of property will see a decrease in the amount paid by leaseholders. Economic considerations 36. The award of the contract may bring additional economic benefit locally: when making a claim against the policy, leaseholders will be able to obtain quotes from local contractors of their choice for carrying out internal repairs. Should the leaseholder not wish to obtain quotes, the contract permits the insurer to instruct their own nominated contractor. Social considerations 37. All tenderers were assessed on their implementation of policies regarding equal opportunities, equality and diversity and the results built into the scoring for the Stage 1 short listing criteria. The recommended bidder achieved a maximum score of 100% in this assessment. The council s requirement that organisations pay a London Living Wage did not apply. Environmental considerations 38. Exchanges of information over the life of the contract will be via email, conforming to the council s Paper-Lite policy. 39. Although not considered as part of the assessment process, the recommended bidder has pledged to identify ways of allowing customers to make green choices. 7

Market considerations 40. GW1 identified that Insurance premiums have been low as the global insurance market has been soft and experts consider that this will move into a hard market resulting in higher premiums, on all types of insurance policies following previous historical cycles (GW1 paragraph 19). It was, however, noted that it was hoped to secure a more competitive price than at the time of securing the current contract, when the council s claims experience had been exceptional. Staffing implications 41. No additional resource issues have been identified, as the Home Ownership Services structure includes a dedicated Insurance Officer responsible for monitoring the contract. 42. Other officers within the team have received training in dealing with insurance queries from leaseholders and queries from the insurers themselves. Financial implications 43. The annual cost of the contract is fixed with an annual inflation allowance, currently 3%, specified by the RICS house rebuilding cost index. 44. The cost of the contract is recharged in full to the leaseholders as a part of their annual service charges. The contract price includes a commission payable to the council to cover the cost of the administering the contract, paying the insurer in full at the beginning of the financial year and taking the financial responsibility for bad debts on the service charges. There are therefore no budgetary consequences as a result of this proposed contract award as there is a neutral effect on the Housing Revenue Account. 45. It should be noted that the figures given above may vary due to changes in the house rebuilding cost index and our stock levels. Index linking is a standard requirement for most mortgage lenders. 46. The cost to the council of administering the contract will be met from existing budgeted staff resources. Investment implications 47. No investment implications have been identified. Legal implications 48. The Landlord & Tenant Act 1987 allows leaseholders to request a summary of insurance cover. The council has to provide a summary to the leaseholder which includes the insured amount, name of the insurer and the risks covered. Leaseholders can then apply in writing to the landlord to afford reasonable facilities to inspect the policy, see evidence of payment of premiums for that and previous periods and take copies or extracts. 49. Further legal considerations are contained in the supplementary advice from the Director of Legal Services. 8

Consultation 50. Consultation with leaseholders was carried out during the tendering process as detailed in the Project Plan, above. The date of consultation closure was 14 January. Leaseholder representatives, nominated by the Homeowners Council, were also involved in the assessment and evaluation process as detailed in GW1, and their requirements were incorporated into the contract specifications. SUPPLEMENTARY ADVICE FROM OTHER OFFICERS Head of Procurement 51. This report is seeking approval from the Deputy Leader and Cabinet Member for Housing Management for the award of a building insurance contract for leasehold and mortgaged housing premises. 52. The report confirms that the procurement strategy set out in the previously approved Gateway 1 report has been followed with a full open EU competitive process being undertaken. 53. Paragraphs 16 24 of the report describe the evaluation process that was carried out and that tenders were evaluated using a weighted model to determine the most economically advantageous tender (MEAT). The report confirms that the highest scoring provider has been recommended for award. 54. Paragraphs 27-32 describe how the contract will be managed and monitored throughout the life of the contract. 55. With cost certainty featuring strongly in the price evaluation model, this process has helped to secure a guaranteed fixed premium price (subject to links to the house rebuilding cost index) which should go some way to protect both the Council and leaseholders against unforeseen increases in the premium price. Director of Legal Services 56. The Director of Legal Services (acting through the Contracts Section of the Corporate Team) has advised officers throughout the procurement of the proposed contract and notes the content of this report. The report confirms the steps which have been taken to ensure that the procurement process is compliant with all relevant requirements of the EU Procurement Regulations and domestic law, including compliance with the council s Contract Standing Orders ( CSOs ). 57. The decision to approve the report Recommendation can be taken by the Deputy Leader and Cabinet Member for Housing Management in line with a delegation approved by the Leader pursuant to the council Constitution and confirmed in the Gateway 1 report. 58. CSOs require that no contract may be awarded unless the expenditure has been included in approved revenue or capital estimates, or has been otherwise approved by, or on behalf of the council. Paragraphs 44 and 46 above explain how this requirement is to be satisfied. 9

Strategic Director of Finance and Corporate Services (FC/13/103) 59. The Strategic Director of Finance and Corporate Services notes the recommendations in this report for the award of the Leasehold and Ancillary Properties Buildings Insurance contract. It is noted that the annual cost of the contract is fixed with an annual inflation allowance, currently 3%, specified by the RICS house rebuilding cost index. 60. The costs of the contract will be influenced by changes in stock levels, the level of IPT and the rebuilding cost index. 61. The cost of the contract is recharged in full to the leaseholders as a part of their annual service charges. The contract price includes a commission payable to the council to cover the cost of the administering the contract, paying the insurer in full at the beginning of the financial year and taking the financial responsibility for bad debts on the service charges. There is a neutral effect on the Housing Revenue Account. 62. The cost to the council of administering the contract will be met from existing budgeted staff resources. Head of Specialist Housing Services (For Housing contracts only) 63. Following the GW1 process we have now been out to tender to procure a new three year comprehensive building insurance policy for our 12,900 leaseholders. The contract has an option to extend for two further years, making a possible 5 years in total. Following the tender returns, the preferred contractor was chosen based on price and quality. We have served a S20 Notice of Proposal dated 11/12/2012 consulting with all of our homeowners to allow them to provide their observations before we accept one of the tenders. 64. The contract will become active from 01/04/2013. However, we need to invoice for the annual service charges for the period 01/04/2013 to 31/03/2014 by the middle of February 2013 to ensure the invoices are received by the 01/03/2014 to adhere to the terms of the lease. 65. It is therefore imperative that we adhere to the time frame contained within the GW1. BACKGROUND DOCUMENTS Background documents Held At Contact Gateway 1 - Procurement Strategy Home Ownership PAQ Manager Approval Leasehold and Ancillary properties Buildings Insurance Services Invitation to Tender Same as above Same as above Business Questionnaire for Leasehold and Mortgaged Housing Premises Buildings Insurance Same as above Same as above 10

APPENDICES No None Title AUDIT TRAIL Lead Officer Report Author Version Martin Green, Divisional Manager, Specialist Housing Services Leon Boardman, Project Officer, Specialist Housing Services Final Dated 7 February 2013 Key Decision? CONSULTATION WITH OTHER OFFICERS / DIRECTORATES / CABINET MEMBER Officer Title Comments Sought Comments included Head of Procurement Director of Legal Services Strategic Director of Finance and Corporate Services Head of Specialist Housing Services Cabinet Member No No Contract Review Boards Departmental Contract Review Board Corporate Contract Review Board Cabinet No No Date final report sent to Constitutional Team 7 February 2013 11