Archived decisions

Hampshire Fire and Rescue Authority Item

Wednesday 6 June 2007

Insurance arrangements - Fire and Rescue Authorities Mutual Limited (FRAML)

Report by the Chief Officer

Contact: Wendy Lambert, Head of Financial and Office Services Tel: 02380 644000 Ext 5006

1

Summary

1.1

At its meeting on 13 December 2006 the Authority agreed in principle to becoming a participating member an insurance mutual, subject to the Clerk, Treasurer and Chief Officer being satisfied with the detailed contractual and governance arrangements. Good progress has been made with the proposal and a company has been registered in the name of `Fire and Rescue Authorities Mutual Limited'. At the time of preparing this report, Financial Services Authority approval was being sought with the aim of the mutual operating with effect from 1 July 2007 - the original target date.

1.2

The officers are now able to report that they are satisfied with the detailed arrangements. These are very similar to those already in place for the insurance mutual that was established on 1 April 2007 for the benefit of the London Boroughs. The Authority is therefore recommended to formally approve its participation in the insurance mutual and to note that David Howells, Director of Corporate Services, will become a director of the Company.

2

RecommendationError! Bookmark not defined.s

2.1

That, the Authority confirms its participation in and becoming a Member of the Fire and Rescue Authorities Mutual Limited (FRAML) with effect from 1 July 2007, or as soon thereafter that FRAML begins operating, and can provide the necessary insurance and reinsurance cover for the Authority.

2.2

That, the Authority notes that the Director of Corporate Services will become a director of FRAML.

2.3

That the Authority authorises the Director of Corporate Services to sign any documents to effect the recommendation in 2.1 above.

3

Introduction Error! Bookmark not defined.and Background

3.1

At its meeting on 13 December 2006, the Authority approved in principle a recommendation of the Finance and General Purposes Committee that the Authority should become a participating member of the proposed insurance mutual. At the meeting Members may recall receiving a short presentation from representatives of Charles Taylor Consulting plc (CTC) and Public Risk Management Limited (PRM) - the two firms that had been engaged by Firebuy (the procurement arm of the Fire and Rescue Service) to work on the detailed arrangements for the mutual.

3.2

Following a tendering and selection exercise undertaken by Firebuy, CTC has since been appointed as the managing agent for the next three years. CTC has considerable experience of running mutuals and will act as professional adviser to the participating authorities as well as providing the day to day functioning of the mutual. CTC was also successful in becoming the managing agent for the London Boroughs' insurance mutual which began operating on 1 April 2007.

3.3

In approving in principle to participate in the mutual, the Authority also agreed to extend existing insurance cover arrangements until 1 July 2007 (or if proposed start date for the Mutual is delayed, on a monthly basis up to 31 March 2008). This has been successfully achieved.

3.4

The Authority also accepted that as a participating member, it would be required, along with the other participating fire and rescue authorities, to capitalise the company by way of an initial cash contribution (estimated at the time as about £26,000) and an additional financial guarantee (estimated at the time as about £287,000). The agreement in principle was subject to confirmation that the financial implications of the proposal did not alter significantly.

3.5

The mutual has now been registered as a company in the name of `Fire and Rescue Authorities Mutual Limited' (FRAML).

4

Current position

4.1

Membership

Eight fire and rescue authorities have agreed in principle to join the insurance mutual. Of these, five will be participating members (i.e. will receive insurance cover via FRAML) from 1 July 2007 - or as soon thereafter as practically possible. The other three will become participating members on a phased basis as and when their existing long-term insurance contracts expire. However, all eight authorities will be required to make the necessary financial contributions and guarantees to the capitalisation of FRAML in the first year

Constitutional arrangements

The company has been registered and all the necessary constitutional documentation, including the Memorandum and Articles of Association and company rules, have been prepared. Independent legal advice on the documentation has been commissioned from the law firm Weightmans LLP. This advice has been reviewed by the Authority's legal adviser (Clerk) and `Section 151 Officer' (Treasurer) and both have confirmed that the advice is sound and that there are no issues that cause concern.

Financial Services Authority (FSA)

CTC have held a number of meetings with the FSA and the constitutional and other documentation (broadly similar to that submitted by the London Boroughs' mutual) is currently being reviewed. It is anticipated that formal approval should obtained by 1 July 2007.

Appointment of directors

The constitution provides for a maximum of 11 directors and a minimum of 5 at least two of whom must be independent directors (with some experience of the insurance industry). The vetting of proposed directors is also being undertaken by the FSA. The Authority has previously approved that David Howells, Director of Corporate Services, would be the Authority's representative on the mutual and it is expected that he will be appointed as a director of FRAML. Given that directors of FRAML have an obligation to act in the best interests of the Company, which may not necessarily always be in the best interests of the Authority, it is appropriate that the Director of Corporate Services should formally declare this as a potential conflict of interests whenever insurance issues are being considered by the Authority. However, it should be noted that the Authority's Treasurer - and not the Director of Corporate Services - performs the role of `Section 151 Officer' (Local Government Act 1972) with formal responsibility for the proper administration of the Authority's financial affairs.

External audit

The proposal to form a mutual has been shared with the Authority's local external auditors. Although the Audit Commission does not provide an opinion on the merits or otherwise of setting up an insurance mutual, it will be keen to ensure that fire and rescue authorities, as accountable bodies, have taken appropriate advice on the legality and appropriateness of the governance arrangements and that any transactions properly recorded in accounts. For this reason, detailed information is being shared with the Audit Commission at a national level. Given that the Audit Commission is already familiar with London Boroughs' mutual and that the legal and accounting issues are very similar, it is anticipated that it will, subject to the usual caveats regarding its advice, provide a similar supportive response along the lines that, "it is not minded to challenge the legal position or proposed accounting treatment".

Fire and Rescue Services Act 2004 - Section 29

A Queens Counsel's opinion has been received in relation to fire and rescue authorities' powers to set up and participate in the running of a mutual. The QC concluded the requisite powers are properly found in Section 111 of the Local Government Act 1972 and, for combined fire and rescue authorities, in Section 5 of the Fire and Rescue Services Act 2004. This opinion has been reviewed by the Clerk and `Section 151 Officer' who both concur with the advice. However, the risk of legal challenge can never be ruled out and the QC questioned whether the Secretary of State might be asked to take action under Section 29 of the 2004 Act and be minded to endorse the insurance mutual's legitimacy so as to eliminate or reduce the risk of future challenge in the courts.

Such an approach is being made to the Secretary of State, but it is anticipated that the use of powers under Section 29 is something that the Secretary of State would use only in exceptional circumstances and not, as is the case with the mutual, where fire and rescue authorities are freely and willingly collaborating. Given, that the possibility of legal challenge is slim - and in the QC's opinion unlikely to succeed - it is suggested that the lack of Section 29 endorsement should not inhibit the successful operation of the mutual.

Financial position

Following a further and more detailed actuarial review of the risk data from participating authorities, competitive tendering arrangements have commenced to secure reinsurance cover for the higher levels of risk which will not be covered from the internal funds of the mutual. In terms of capitalising FRAML, it is not anticipated that the original estimated cash contribution (about £26,000) and financial guarantee (about £287,000) will be exceeded. Any updated information will be given at the meeting.

5

Risk Analysis

5.1

Three main potential risks have been identified in pursuing alternative risk transfer (i.e. the formation of insurance mutual):

5.2

The possibility of legal challenge as to the powers of fire and rescue authorities to form and participate in a mutual insurance company. This has been covered in paragraph 4.6 above and while challenge remains a possibility, the likelihood of the arrangements being ruled unlawful is considered low.

5.3

The insurance cover provided by the mutual being significantly different from that currently secured from the conventional marketplace. In this respect covers obtained from the mutual are the same or better than those currently in place and therefore there is no greater exposure.

5.4

The financial viability of the mutual itself. In this respect there are a number of measures in place which reduce this risk including the need to secure FSA approval and the use of the reinsurance market to provided external cover for major or catastrophic claims for both individual and cumulative levels of claim. Based on advice received from CTC, the Authority's financial exposure - if there was a deficiency in FRAML's operating funds - would be a supplementary call for contributions which would not exceed 100% of its annual premium (£475,715). In addition, the cash and guaranteed capital contributions £276,433) could be called upon. In total this would amount to £752,148. To put this possibility into context the risk would be the equivalent of a collapse of a major insurer. It is pertinent to point out that even in the conventional insurance marketplace nothing is ever guaranteed. As some Members may recall, the Authority - along with several other fire and rescue authorities and local authorities - suffered significant financial losses when the Independent Insurance Company went into liquidation in 2000/01.

6

Equality Impact Assessment

6.1

The proposals within this report are considered compatible with the provisions of the European Convention on Human Rights, the Human Rights Act 1998, and the Race Relations (Amendment) Act 2000.

7

Conclusion

7.1

Participating in FRAML is be a clear demonstration of the Authority's commitment to securing best value through collaboration with other fire and rescue authorities to achieve significant savings. Its success will clearly need to be assessed over the long term (at least three years) and it is hoped that once the initial set-up phase is complete other authorities will seek to participate. One thing is already clear; the proposal (alongside the London Boroughs' mutual) appears to have had a significant positive competitive impact on the level of premiums being offered by insurance companies even within the conventional marketplace.

Background Information (Section 100D of Local Government Act 1972)

The following documents disclose the facts or matters on which this report, or an important part of it, is based and has been relied upon to a material extent in the preparation of the report:

"None"

Note: The list excludes: (1) published works; and (2) documents that disclose exempt or confidential information defined in the Act.