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Hampshire County Council
Land Sub Committee
11 June 1998
Review of Insurance Arrangements and Management of Risks
Report of the Chief Executive and the County Treasurer
Contact: Christine Buckett: Extension 7313
Sheila Little: Extension 7521
1. Introduction
1.1. The Sub-Committee received a report in respect of the review of
insurance arrangements and management of risks at its meeting on the 24th
July 1997. At that meeting it was agreed that consultants be appointed
to undertake a risk review as the first stage in the process of reviewing
insurance and risk management arrangements.
1.2. At its meeting on the 6th October 1997 it was resolved that Richard
Oliver International Limited be appointed as consultant to carry out the
risk review.
2. Insurance funding arrangements
2.1. Part of the work undertaken by the consultants was an analysis of
funding requirements to provide for insurable losses which have either
been incurred or will be incurred by Hampshire County Council up to April
1998, and a forecast of losses for 1998/99. The consultants were
also requested to provide advice and guidance on the options for
reducing risk exposure by means of catastrophic or stop loss cover. They
made three recommendations which are shown in Appendix 1.
2.2. Review of fund liabilities
It was recommended that a review of fund liabilities should be carried
out on an annual basis to identify the outstanding liabilities in respect
of existing and potential claims. Based on data as at 30th September 1997
it was assessed that as at the 1st April 1998 an amount of £9.5 m
would be required to meet these liabilities. This broadly confirmed the
assumptions made by Jardines, the insurance broker who advised the
County Council in assessing the value of outstanding liabilities at Local
Government reorganisation. The consultant recommended that resources
should be set aside to meet the assessment of outstanding liabilities
each year.
2.3. Proper accounting practice requires provision to be made in the County
Council's accounts for the assessed value of outstanding known
liabilities. In the longer term the extent to which a specific reserve
is set aside to cover liabilities which are as yet unrecognised is a policy
issue - dependent upon the level of the County Council's general reserve,
its willingness to cut spending in response to major unanticipated losses,
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rather than hold reserves, and the level of any external insurance cover
held. However, in the short term, the County Council continues to be
exposed on a substantial scale to new claims in the city areas arising from
incidents prior to Local Government reorganisation but without the
benefit of any 'premiums' paid by services operating in the city areas.
The maintenance of a reserve to cover the settlement of those claims in
the city areas is therefore necessary if service budgets are to be
protected. The position at the end of 1997/1998 is being reviewed by the
Chief Executive and County Treasurer and will be considered by Policy
and Resources Committee in July.
2.4.Claims handling information
It was identified during the process that there is a need for a more
sophisticated claims handling system to be purchased and maintained by
Chief Executive's Department to ensure that data is more readily
available both to assess liabilities and to monitor and review claims
trends. Better management information is a critical factor in
developing a risk management strategy.
A specification for a claims handling system is being drafted and site
visits to view suitable systems will take place shortly. The estimated
cost of the initial purchase is £30,000, plus yearly maintenance and
support in the region of £3,000, which would be met from the insurance
fund. It is also likely that some additional staffing resource will be
required to input data on the system.
2.5. Catastrophe/Stop-loss cover
Based on the Council's claims history, existing levels of expenditure,
forecasts of future liabilities, and, market probability value; Richard
Oliver International examined the implications of obtaining insurance
cover to cap future losses on individual claims and in aggregate at pre-
determined levels. In examining the options there are a number of
variables to consider:
* the level of self-insurance retention on individual claims (ie excess
borne by the Council);
* the aggregate level in any one claim year, above which insurance cover
will apply;
* the ceiling of any cover.
In view of the County Council's successful record of self-insurance and
recent trends in the local authority insurance market, the options
examined assumed that the County Council would continue to bear the
majority of risk.
One option examined by Richard Oliver would have provided cover for
claims in excess of £4m in aggregate in any claims year (up to a ceiling
of £25m - £30m) with an excess of £1m on individual claims.
2.6.A comparison of payments under the existing self-insurance arrangements
with estimates of payments under insurance on this basis over a 5 year
period 1992/3 to 1996/7 show the Council would consistently have spent
between £2m and £4m per year on claims and insurance premiums more than
under Self-insurance arrangements (excluding the Digital claim). Over
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this 5 year period the cost of insurance to meet a Digital-type claim
could have been the same as picking up the total insured cost. Digital
was the first such claim for the County Council since 1974, and even
allowing for the cost of this claim, self-insurance is estimated to have
saved the County Council approximately £1.5m per annum, at current
prices, since 1974.
2.7. To be certain about the cost of obtaining insurance cover would require
competitive quotations to be sought. However, the County Council's
recent experience suggests that the prospect of obtaining insurance cover
at competitive rates will be greater once the County Council has a
corporate risk management strategy in place and has introduced a new claims
handling system which will enable the insurance market to assess its risk
exposure in providing cover to the County Council with greater
confidence. Though the Chief Executive is proposing to test the market
for catastrophic risk cover, it is likely that in the short term it will
be in the County Council's interest to maintain self-insurance. The aim
would be to review the options for transferring some risk to the insurance
market on a 'best value approach' to risk management. The implication of
retaining self-insurance will need to be considered as part of future budget
strategy.
3. Risk Review Process
3.1. The Risk Review process was carried out in two parts, the compilation of
a risk profile for the County Council and an analysis of funding
requirements and forecasting of future liabilities.
3.2. Richard Oliver International Limited worked with senior officers of the
County Council to produce a key risk profile which focused attention on
the threats to the achievement of the County Council's objectives. A
countywide approach was deployed with two half day workshops with senior
managers representing most of the departments, focusing initially on the
specific committee areas of Policy and Resources, Planning and
Transportation, Recreation and Heritage, Social Services and Education.
3.3. Each workshop produced a list of specific risks which were then given a
priority rating based upon their impact and probability. The types of
impact that were considered were financial impact, environmental impact,
reputation impact and service delivery impact.
3.4. The consultant then reported to the Chief Executive with a 'Common risk
agenda', being those risks which they had identified as being common to
more than one Committee. This information will be issued as the starting
point for developing the Risk Management Strategy. This exercise will also
be linked with the Health and Safety Strategy currently being developed.
3.5. The consultants made a number of recommendations, both in relation to
the key risk profiling and the risk strategy. These recommendations are
summarised in Appendix 1 and were considered in detail by the Corporate
Management Team. It was agreed that the workshop exercise should be
revisited to establish the validity of priorities and their relative
priority, such work to be taken forward by each member of the Corporate
Management Team within their own departments, each risk being reviewed and
improvements made by the implementation of action plans.
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3.6. The consultants also advised on the appropriate risk strategy to be
adopted by the County Council, which would include establishing risk
management aims and objectives and developing suitable performance indicators
for those objectives. This work is being led by the Chief Executive as part
of the review of the County Council's objectives and consideration of the
'best value approach'.
4. Recommendations to Policy and Resources Committee
That:
4.1. The Chief Executive and Corporate Management Team review and develop
action plans in respect of the major risks identified in the risk review
process.
4.2. The Chief Executive utilise the outcomes of the risk review in
developing a corporate risk management strategy for the County Council.
4.3. The Chief Executive report back with detailed proposals for purchase of
a claims handling system with the costs to be met from the insurance fund,
to provide data for use in reviewing the Council's liabilities.
4.4. The Chief Executive, when appropriate, obtain quotations for insurance
cover for catastrophe risks in order to validate the continuation of a
self- insurance policy, but in the meantime the County Council continues to
bear its insurance risks in house and to formulate the budget strategy
accordingly.
4.5. There be provision for a review of the Council's management of its risks
and liabilities on a regular basis.
22L0598
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