Department for Education and Skills

1
Department for Education and Skills

• Alternative Risk FinancingFeasibility Study
  Phase II Final Report
• June 2005

2
Table of Contents

• Introduction Page 3
• Business case from Phase I Feasibility Study 4
• Objectives deliverables for Phase II 5
• Executive Summary 6
• Alternative Risk Ranking proposition 11
• Additional evidence and supporting
  information 29
• Appendix A Aon IRMG Data Analysis from Phase I
  study
• contained in separate Excel file

3
ARF represents a significant potential
opportunity to reduce the cost of schools
insurable risk

• Introduction
• In October 2004, the DfES appointed Capgemini to
  conduct an 8 week feasibility study to identify
  the drivers behind the increasing cost picture
  and to identify initiatives of how to reduce the
  cost of schools insurable risk
• ARF was identified as an opportunity area with
  sizeable potential for reducing costs and Aon was
  engaged to undertake actuarial analysis of
  statistical data provided by a sample of 18 Local
  Education Authorities which confirmed a high
  level business case for a national ARF vehicle
  supported by DfES
• As a result, Capgemini/ Aon were asked to look
  beyond the financial benefits to identify the key
  barriers, enablers and clear decision-points for
  establishing an optimal ARF facility. This was to
  confirm there were no showstoppers and avoid
  waste of time and resources in a phase of
  detailed financial evaluation of a national
  approach to ARF.

To make ARF a success, it was recognised that we
also needed to ensure that other propositions
reduced the underlying claims cost prior to
implementation of ARF
4
Based on the sample of authorities, a high level
financial case for ARF was established
Create an Alternative Risk Financing vehicle for
EL/PL and Property

• Summary of ARF results

• Key assumptions EL/PL
• Loss ratios of 40 (pessimistic) to 25
  (expected)
• Reinsurance premium of 7m, 7.2m, 7.4m per year
• Administration costs of 10
• Investment income of 4
• 100 adoption rate by LAs

EL/PL Benefits by Year, 2005/6-2009/10
Total benefit 27.0m-55.7m

• Key assumptions Property
• Loss ratios of 60 (pessimistic) to 50
  (expected)
• Reinsurance premium of 10m, 10.3m and 10.5m
  per year
• Administration costs of 10 to cover
• Investment income of 4
• 100 adoption rate by LAs

Property Benefits by Year, 2005/6-2009/10
Total benefit 15.3m-49.9m
This financial case would need to be tested more
rigorously in a subsequent phase before an
investment decision was committed to
5
The objectives of the phase II ARF study were to
develop the proposition and roadmap for ARF
Objectives of ARF proposition development
Deliverables

• Roadmap defining a phased approach to
  establishing an ARF facility
• Identified and prioritised critical enablers and
  key dependencies
• Establish project plan and timetable for
  addressing these enablers
• Detailed proposition(s) and structure of
  operating model(s), tested with key stakeholders
• Point of view of impact of ARF facility on
  overall insurance and reinsurance market
• Recommendations to mitigate key barriers to
  change
• Detailed recommendation of Way Forward

• To develop roadmap of Go/ No Go decisions,
• Looking beyond financial benefits
• Identify the key barriers, enablers and clear
  decision-points for establishing an optimal ARF
  facility
• To define options for proposition structures and
  how it should operate, e.g.
• Classes of cover to be included
• Optimal risk retention and transfer levels
• Proposal for funding and capitalisation
• Define optimal administration structure
• How the preferred option should look feel
• To understand LAs concerns and evaluate barriers
  to change , e.g.
• Political issues such as degree of compulsion for
  Local Authorities
• Impact of legislation, e.g. EU procurement issues
  
• Local Authorities insurer management concerns
• Potential negative reaction from insurance market

The concept and structural options were explored
with a subset of Test Panel Members
6
Executive Summary - Approach

• Process commenced with the exploration of the
  critical success factors, which are identified in
  slide 14
• Four LA insurance managers, along with
  representatives from DfES, tested each of these
  factors to determine their priority and ranking
• Further research outside of these workshops
  enabled Aon/IRMG to provide a more focussed
  proposition that was again reviewed by the Test
  Panel
• After detailed review, the broader Test Panel
  decided that the potential solution was now too
  broad for the DfESs remit and that a new
  sponsor(s) should be sought.

ARF is a viable solution in the long term but the
optimal structure will involve a wider group than
the DfES alone.
7
Executive Summary - Results

• An ARF facility is expected to provide
  significant financial and intangible benefits to
  the insurance procurers
• The ability to make this alternative structure
  compulsory through the Local Authority (LA)
  system is still unresolved
• Forming the facility and insuring through it is
  legal (there is a precedence), although the
  preference for an offshore solution is unresolved
• The Panel considered that it was unworkable for
  the ARF facility to insure school risk only and
  that it would need to insure a risk class (e.g.
  property) for the LA as a whole
• Reaction was to only insure Property initially
  and follow with Liability to reduce risks of too
  much change impacting an LA at the same time
• A further more relevant sponsor group is required
  to replace the current DfES steering group
• The key conclusions and next steps follow in the
  next section

Phase 2 defined the structure that can offer the
optimal financing mechanism for Local Authorities
in England Wales
8
A number of key conclusions were reached which
have implications for how we take ARF forward

• The initial findings from the sample data
  analysed in phase I of the feasibility study
  indicates the potential for significant savings
  in developing an ARF facility for education risks
• Whilst there are a number of challenges to
  establishing an ARF vehicle there are no legal
  barriers or showstoppers that would prevent the
  set up the question remains how and what.
• The consensus amongst the test panel LA managers
  was that we should consider ARF for both Property
  and Liability on an optimal scale based around
  Local Authority groupings which have similar risk
  exposures e.g. County Councils, subject to a full
  business case being provided (even if to get it
  off the ground the initial focus could be on
  Property only)
• The Test panel believe that the ARF vehicle can
  only work if a seamless solution provided for the
  Local Authority is created. The Childrens Act
  and other partnership issues will make it even
  more difficult to split out the education only
  risk and will limit the potential to achieve cost
  reductions

• The

The key implication is that we need to establish
a sponsorship group that represents the interests
of the wider LA rather than purely education
9
Key next steps for taking the ARF stream forward

• The first step is to identify sponsor bodies for
  the wider scope of the ARF project to ensure it
  can apply to all authorities for specific risk
  classes, establish their willingness to proceed
  
• Once identified, we need to establish whether
  they will sponsor a full study or do we seek
  volunteers?
• The initial business case was conducted on the
  basis that it would apply solely to Education
  risks. In order to produce a fully developed
  business case for the savings potential on this
  revised scope it will be necessary to conduct
  further actuarial analysis.
• Can data provision be compulsory per group, or
  voluntary? (depends on sponsor)
• It will take at least 4 months to collect,
  analyse and report
• The Test Panel feel that the difference in LAs
  functions, environment and risk exposures make
  the formation of one risk retention group
  unrealistic. We need to look at an approach that
  considers the main 3 or 4 groupings
• County Councils (SCT are already pursuing but we
  need a national approach)
• Metropolitan Boroughs and London Boroughs,
  possibly including,
• Other Unitary authorities
• District and Borough councils
• Resolve political issues surrounding choice of
  regulatory environment and in particular seek
  views on whether the insurer should be regulated
  in the UK by FSA, or by a more relative captive
  domicile, such as Guernsey, Ireland or the Isle
  of Man

ARF offers significant potential for reducing the
cost of insurance premiums and in the context of
the efficiency review further evaluation of ARF
is necessary
10
Department for Education and Skills

• Alternative risk financing proposition

11
Proposition SummaryAlternative risk financing

• Proposition Definition
• For reasons detailed in Executive Summary, the
  proposition does not cover all deliverables on
  how to implement ARF within education. However,
  the following output can be used by others
  deciding on ARF or as a starting point by a wider
  sponsor group representing all LA insurance
  services.

• Deliverables
• Answers to preliminary LA insurance manager and
  DfES concerns
• Major challenges and critical success factors
  highlighted
• Review of preferred ARF vehicles

• Scope
• All classes of insurable risk except supply
  teacher insurance
• Education only

• Target Audience
• Local authorities considering ARF.
• DfES steering group to decide how best to take
  ARF forward
• Prioritisation for Implementation
• Ideally, by local authorities with similar risk
  profiles across all insurance services within a
  local authority

• How it links to the other propositions
• ARF is a way of reducing premiums if insurance
  premiums do not fall in response to reductions in
  claims delivered by Risk ranking, weighted
  premiums and Risk management toolkit

• Dependencies
• Changes in regulation of insurance industry
• Outcome of the Society of County Treasurers ARF
  project (also done with Aon)
• See executive summary

12
Alternative risk financing will generate a number
of benefits to Local Authorities and Schools
Key benefits to local authorities
Key benefits to schools

• ARF would reduce the cost of risk financing
  through a saving in the costs of an insurance
  transaction, such as insurer profit and Insurance
  Premium Tax
• Creates a stronger link between risk management
  and insurance pricing and a greater incentive for
  risk improvement. Risk reduction will mean return
  of surpluses to schools rather than profits for
  insurers.
• Increases control (flexibility of cover and
  service standards)
• Increased transparency of pricing model.
  Policyholders will have full disclosure of the
  underwriting model.
• Enables reinvestment of surplus funds for benefit
  of members, either in the form of premium
  discounts, dividend payments or risk improvement
  grants.
• Creates opportunities for other savings for
  members and for pooling ideas and developing
  Best Practice models

• Increases financial stability for schools
• Protects schools from substantial swings in the
  price of insurance capacity as a smaller
  proportion of risk financing is purchased from
  the commercial insurance market
• LAs will be able to increase risk management
  investment in schools

The LA benefits have been validated by members of
the Test Panel
The real value of ARF comes from increasing the
transparency and accountability of claims costs
and in doing so reduce the total cost of premiums
paid to insurers
13
Proposed ARF Structure showing examples of
funding limits
Risk Transfer Reinsurance protection to
required limits
5,000,000
Layer of risk to be financed by ARF vehicle
Aggregate Stop Loss
100,000
LEA Central Insurance Provisions and Reserves
Aggregate Stop Loss
100
Non ranking deductible school funding
14
A number of specific critical dimensions were
identified for resolution in order to validate an
ARF solution
Secondary
Claims Settlement Philosophy (a)
Compliance
Strategy (f)
Investment Policy
Capital Adequacy
Management Structure
Mandatory / Voluntary
Claims Administration
Operating Model
Critical
Geographical Diversity
Segregation of Funds (e)
Regulation
Optimal Administration Structure
Accountability of Funds
Entry / Exit Criteria
Who is Included Compulsion (i)
Legal Entity Ownership?
Treatment of Surplus
ARF Vehicle(g)
Method of Contribution
Premium Structure (k)
Political Issues (d)
Underwriting Philosophy
Pricing Structure
Which Classes?
Legal Powers (c)
Proposal for Funding Capitalisation (h)
Availability Cost of Reinsurance
Legal Identity of Schools vs LAs
Education vs LA Portfolio
Value for Money (B. Case)
Rating (j)
Potential Negative Reaction from Insurance
Market (i)
Extent of Standardisation of insurance funds
Procurement Issues (b)
Optimal Risk Retention Transfer Levels
Alignment of LAs Renewals
Note a) e.g. Why buy insurance if claims are
always paid? b) e.g. Each LA have to go to tender
OJEC c) Do they have the legal right for setup?
Can LAs pool risk? d) e.g. Risk appetite or
degree of compulsion e) Money is ring-fenced or
pooled? How much returned to LAs from investment?
f) Use of funds investment returns g) e.g.
Mutual, pool, captive, discretionary, mutual
protected company etc.. h) Centrally funded or
via LAs? I) Insurance Cycle Proofing avoid
allowing a reaction from insurance market to
alter long term goal j) Underwriting criteria k)
Degree of cross-subsidisation
15
Feedback on Critical Dimensions (1)

• Should participation in the ARF facility be
  compulsory or voluntary?
• Test Panel views were divided but all agreed that
  entry should be at LEA level, individual schools
  then have choice to opt in/ out
• Benefits of compulsory
• Not easy to undermine
• Greater economies of scale
• Premium volume would be maximised and savings
  therefore greater
• Uniform application simplifies ARF proposition
• Introduces competition as insurance companies
  interested in the whole
• Concerns of compulsory
• Goes against ethos of choice (however portfolio
  approach may be the only way to drive efficiency)
• Subject to legal challenge over conflict between
  compulsion and Fair Funding initiative
• Schools could opt out and insurers target them
  (if ZM underwrite the whole then may not go after
  individual schools if left with poorer schools
  not a disadvantage because would have insured
  them anyway
• Powers for making the ARF compulsory. Can DfES
  instruct or is change in law required?
• Next steps
• Perform a What if financial analysis based on
  previous history to evaluate the impact of
  compulsory v voluntary approach is needed in
  Phase III
• Look at pilot design in Phase III to identify
  risk of facility being undermined if introduced
  on a voluntary participation basis

16
Feedback on Critical Dimensions (2)

• Would an ARF facility be lawful for schools/LEAs
  to establish and operate?
• ARF is legal. Society of County Treasurers (SCT)
  consulted Elizabeth Appleby QC. Panel was keen
  that once we are sure of preferred option a
  declaration of legality is sought from Court of
  Chancery
• There was some unease about going offshore
  concern that government views should be sought
• Next steps
• Feedback to be sought from SCT as appropriate
• Clarification of government view of using
  offshore captive
• What form would ownership take?
• No problems are anticipated with the principle of
  ownership of an ARF facility
• How the vehicle is funded introduces politics
  issue of voting (1 vote1 LEA as long as
  education only, is the preferred option)
• If ARF option goes beyond school risks it is
  potentially more complicated
• Capitalisation Some element of investment would
  be required, dependent upon anticipated premium
  volume. This ensures that risks can be
  underwritten with more confidence. This would not
  represent any changes to current budgeting
  process
• Need to establish whether DfES would contribute
  towards set up costs and/or capitalisation
  requirement
• IRMG would need to draft Memorandum and Articles
  of Association in Phase III
• External provision of internal audit would be
  required LEAs do not have the experience to do
  this

17
Feedback on Critical Dimensions (3)

• What are the requirements for Regulation?
• Schools will require a formal insurance contract
• Offshore facility preferred provided it can be
  justified FSA compliance is complex and
  expensive and offers no benefits in this
  situation
• Offshore regulation if we can convince members,
  we can justify to all stakeholders
• Next steps Aon IRMG to set out benefits of
  offshore v onshore
• No problems anticipated with investing in the
  facility
• Discretionary vehicle not favoured as an option
• Education or Whole LA?
• The Panel considered that it was unworkable for
  the ARF facility to insure school risk only and
  that it would need to insure a risk class (e.g.
  property) for the LA as a whole
• Benefits of insuring whole LA
• Dont have to disaggregate functions and
  responsibilities which would be too difficult
• 80 property insurance cost is education anyway
  only 20 relates to other LA services
• Introduction of Children's Act would dictate
  joined up approach of education and other
  services
• Dont have to deal with non-education balance
  which could become more expensive to insure
• Reduces disagreements about what is in or out
• Keeps it simple
• Concerns
• Liability cost is only 20 for education. The
  option could be to concentrate on property only
  where proportion of insurance cost is higher.
• Very difficult to combine different types of
  local authority in the same ARF facility as they
  have different risk profiles. Facility should
  concentrate on authorities with LEA function or
  even authorities of same type

18
Feedback on Critical Dimensions (4)

• Which classes of risk property only or property
  liability?
• If property only, schools may continue to cross
  subsidise other services not benefit as much as
  they could
• Needs to link in liability methodology
• Benefits of Property and Liability combined
• Capitalisation requirement reduced as liability
  premiums can be used to finance shorter tail
  property losses if necessary
• Higher investment income to the ARF vehicle
  because of higher premiums
• Do not have to deal with liability separately and
  risk increased pricing in the commercial
  insurance market
• Diversification of portfolio will assist ARF
  vehicle through spread of risk
• Less risk of impact by negative reaction from
  insurers
• Wider risk coverage creates potential for greater
  economies of scale
• Increased potential for efficiency savings
• Concerns
• Property risks in isolation are short tail and
  therefore easier to fund and outcome of insurance
  year is quicker and easier to evaluate
• Combining property and liability risks will drive
  up costs and complexity of apportioning premiums
• More complicated to set up and underwrite
• Longer tail liability risks are a concern to Test
  Panel members
• Property is where the big savings are. Harder to
  get buy in from LAs for combined property and
  liability facility
• Greater the scope, the greater the change too
  much too soon?
• Gut feel voting 4 LAs for property only and 2
  for both property and liability

19
Feedback on Critical Dimensions (5)

• Political issues?
• Who needs to agree to the establishment of an ARF
  vehicle?
• LA Insurance managers
• Treasurers of Local Authorities
• Local Authority Cabinet members (usually guided
  by Treasurers)
• Insurers/ Re-insurers of the facility and those
  writing cover for local authorities outside of it
• DfES
• How to influence Treasurers?
• Would be most interested in the financial aspects
  of the benefits case (Phase III)
• More detailed proposition is required including
  structure and data analysis
• Do it same time as insurance managers to show
  early involvement
• How to mitigate perception of threat to risk/
  insurance managers?
• No real change to Insurance Manager roles
  perhaps increased role as members will need to
  become involved with management of the ARF
  facility. This needs to be emphasised.
• Details of proposals and impact will be drawn up
  and shared with Risk/ Insurance managers
• Possible mechanisms include ALARM conference
  SCT, CIPFA? SOLACE?

20
Feedback on Critical Dimensions (6)

• Will the ARF facility deliver Value for Money?
• The Panel agreed that we need to develop what
  if scenarios for the business case once the key
  decisions on scope and structure were made.
  During phase III we should include detailed
  analysis on loss ratios
• Is it necessary to ensure segregation of funds
  for each local authority?
• The Panel agreed that it was not necessary to
  segregate funds
• There does need to be minimum exit criteria to
  ensure commitment from members over a minimum of
  three years
• Entry criteria should be based on risk exposure
  and claims history and a risk management standard
  should be drawn up to set expectations for risk
  improvement
• Premium structure?
• Premiums would be paid to the facility at LA
  level
• Premium contributions would be set according to
  risk exposure loss history sound underwriting
  criteria to be used
• Management Board of LA members would agree how
  surplus is to be used
• There needs to be capacity to deliver variations
  in deductible but not too many (2 or 3 options is
  optimum) or economies of scale will be eroded
• LAs to decide level of non-ranking school excess
• Timing is now a good time to establish an ARF
  facility?
• The Panel questioned whether the ARF facility
  should be established now when a softening market
  is predicted, but accepted that now was as good a
  time as any to break free from the effects of the
  pricing cycle. The facility will take some time
  to establish and reinsurance costs will be
  cheaper in a soft market. The facility will
  then be operational and stable when hard market
  returns.
• Next step Aon to collate evidence, if any, on
  the softening market for LA risks

21
Key conclusions reached on critical dimensions of
any ARF solution

• There are no reservations about the legality of
  ARF but a declaration of legality should be
  sought from Court of Chancery once ARF
  proposition is fully developed
• No problems are anticipated with ownership or
  structure of the ARF vehicles
• Members will require a formal insurance contract
• An offshore facility is preferred, provided it
  can be justified in terms of demonstration of
  benefits achieved over the onshore option
• The ARF facility should insure a specific risk
  class for participating LAs with an education
  function not cover all risks arising from
  purely school related activities
• On balance the Test Panel preferred ARF to focus
  on property risks rather than property and
  casualty but further work is required to analyse
  impact of this decision.
• It is not necessary to segregate funds of
  individual members
• Sound underwriting criteria must be used to
  calculate contributions
• The model must provide for a minimum level of
  commitment to the facility by members in order to
  ensure survival in the longer term

22
The ARF stream looked at each of the five main
structural options and worked to resolve key
issues and narrow the focus of the project

The stream identified the major parameters for
further development and validation with wider
test panel
23
Evaluation of offshore v onshore solution
satisfying critical success factors
24
Comparison of key benefits to be realised from
insuring property only v property and casualty

• Property Only
• Addresses risk class where competition for
  business is currently weakest
• Short tail exposure enables accurate assessment
  of profitability of ARF vehicle within very short
  time of end of year.
• Schools may potentially continue to subsidise
  other service areas although this is a premium
  allocation issue rather than underwriting
• reduces the level of potential savings that can
  be achieved by ARF
• Property and Casualty
• Liability costs for education authorities is
  only about 20 of total insurance costs
• Diversification of portfolio. Long tail casualty
  risks could subsidise volatility of property
  risks in early years
• Higher levels of investment income
• Higher levels of potential savings to be made
• More complicated to set up and underwrite
• Perceived as too big a step, too soon
• Less risk of negative reaction from existing
  insurers

When considering ARF vehicles the project team
should evaluate to what extent these benefits are
realised
25
Option 1 Captive insurance company

• A captive insurer would take the form of a
  Company limited by shares and owned and managed
  by the shareholder policyholders
• A captive can be located in country / domicile of
  choice, but will typically be based offshore in
  domiciles such as the Isle of Man, Republic of
  Ireland or the Channel Islands
• Each captive is subject to authorisation by the
  regulatory authorities in the domicile concerned
  and is required to comply with insurance
  legislation and regulation in this domicile
• The captive Company is controlled by a Board of
  Directors nominated by policyholders with some
  directors appointed from residents of the
  domicile territory
• Company is managed by a professional service
  company specialising in this area
• Voting rights will be agreed by shareholders and
  policyholders
• Rules in the form of Memorandum Articles of
  Association with cover operational issues such as
  underwriting process, treatment of surplus funds,
  voting rights etc.
• Entry exit from the captive is at discretion of
  Board although entry and exit criteria would be
  set out in the Memorandum and Articles of
  Association

There are around 4,000 captives globally making
this the most common alternative risk financing
vehicle
26
Key criteria between operating the facility in
the UK or in a non-UK regulated environment

• Ownership - there are two main options
• One owner of the facility perhaps DfES /
  central Government
• Multiple owners probably the individual local
  authorities insured
• Capital will depend upon the premium written and
  risk retained
• FSA will expect approx double the EU minimum
  requirements, but not specified
• Offshore requirements can be this strict for
  primary insurance, but less so for reinsurance
• Timing there is a vast difference between
  onshore and offshore
• UK application process will take approximately
  one year, but with no guarantee of timescale
• Offshore process will take approximately one
  month for a reinsurance captive and six months
  for an insurance facility
• Costs, both formation and annual operating vary
  depending upon scale, type of company, in-house
  or outsourced management, classes insured, etc.
• Offshore costs will be much less than UK, due to
  relevance of legislation and regulation
• Taxation the question of political issues
  regarding tax avoidance need to be considered
• UK corporation tax rate is 30
• Offshore rates vary, but will be less than 12.5,
  possibly nil

During Phase 3, detailed financial projections
will be provided to substantiate the business case
27
Offshore v Onshoree.g. UK v Isle of Man
the major differences between two domiciles
IPT and VAT implications are the same for both
domiciles
Source Aon best estimates for a simple company
28
Option 2 Pooling is a more generic term to
cover a number of legal forms for sharing of
resources through to a mutual insurance company

• At the informal end of Pooling this could be
  operated by a group of Education Authorities with
  a central purchase of reinsurance. However, the
  DfES is potentially too big and complex to
  operate without the pool taking on a separate
  legal entity. In view of the size and complexity
  of the retention group a formal structure would
  be required.
• It is envisaged that the ARF facility would be a
  Company limited by shares or guarantee
• There is still a choice over domicile offshore
  or onshore
• The company would be required to comply with
  insurance legislation and regulation in this
  domicile, probably in the UK but could be
  offshore
• Company controlled by Board of Directors or
  Management Committee
• Company managed by professional service company
  or by Full Time Employees
• Voting to be agreed by shareholders and
  policyholders
• Rules in form of Memorandum Articles of
  Association as agreed, e.g. underwriting,
  dividends, etc.
• Entry exit at discretion of Board / mgt
  committee

Pooling can be achieved in many ways, but the
potential size of the DfES pool would require
formation of a legal entity, which leads us back
to the question of offshore v onshore
29
Additional Evidence and Supporting Information
30
Evidence of the Softening insurance market for
Local Authorities

• Aon has sought to establish the extent to which
  local authorities with education function are
  seeing insurance costs change over 2004 and 2005
  renewals, and whether there is evidence of a
  softening market, and if so whether education
  authorities are seeing different price changes
  than local authorities without an education
  function
• Aon were seeking to measure both premium changes
  as well as changes to deductible and aggregate
  stop levels
• There is some evidence that the softening market
  is not feeding through to public sector clients
  to the extent that rates are softening in the
  commercial sector. This suggests that the price
  of insurance is not reducing for local
  authorities either because of insurers risk
  perception or because of limited competition in
  the sector
• Generally, 2005/6 terms show increases for
  inflation only
• Terms conditions (e.g. deductibles) appear
  constant
• There is a little more competition to ZM
• Arson (threat actual) continues to
  differentiate education risks
• Where claims experience is good, savings are
  possible for schools (10 - 20)

31
Overview of Recent and Current ARF initiatives

• (SEERPIC) Police Authorities in the South East of
  England group of 10 Aon clients
• Established a feasibility study to review
  Employers Liability and Public Liability in 2004
• Although potential savings were identified the
  financial arguments were not convincing for ARF,
  especially due to reinsurance costs
• Local Authorities in the North West Yorkshire
  (Group of 10 authorities a mix of Aon clients
  and other brokers clients)
• Mixture of city councils, metropolitan and
  borough councils
• Feasibility study looked at Employers Liability
  and Public Liability in 2004
• The historical loss profile was very poor
  conventional insurance market offers best
  opportunities as historically loss ratios are
  very high
• County Councils Society of County Council
  initiative (34 Councils - 10 in the pilot study
  - mix of Aon clients and other brokers clients)
• Reviewed first phase review of Property Insurance
  2004
• Actively pursuing second phase in 2005

32
Where ARF models have worked in the UK - UMAL

• UMAL Universities Mutual Association Ltd is a
  company limited by guarantee - 100
• Discretionary mutual for UK universities formed
  in 1992, owned by its members and is not
  therefore subject to DTI or FSA regulation
• Managed by a Board of Directors drawn from
  membership predominantly Directors of Finance
• UMAL is a non profit making association of 53
  higher education institutions who pay
  contributions into a common fund, from which
  claims are paid at the discretion of the Board
• Contributions from each member are rated
  individually according to risk exposure and loss
  experience
• UMAL bears the first 250,000 of any claim.
  Excess cover and/or reinsurance is purchased by
  UMAL on behalf of the membership
• IPT is not payable on the mutual element of
  contributions
• Maintains staff of 15 including Executive
  Director, of which 8 have an insurance role and 7
  an administrative and accounting function
• UMAL states that operational cost ratio is 13
  compared to 30 for a commercial insurance company

33
Where ARF models have worked in the UK - UMAL

• Surplus funds from individual insurance years may
  be returned to members provided they are still
  members when the surplus is allocated. This has
  occurred in past years
• UMAL may at any time require a supplementary
  contribution to be made by each member, for any
  insurance year as the Board may decide. Former
  members are also liable for supplementary
  contributions for all years during which they
  were members of UMAL
• All claims are co-ordinated from UMALs office
• Members have access to claims records via UMAL
  website which also provides claim forms
  information and guidance to members
• UMAL operational costs are built into the rating
  structure so members pay these within premium
  contributions
• Members must give notice to UMAL in writing,
  three months ahead of the renewal date, of any
  intention to withdraw from membership. This would
  be needed in the event that tenders are sought by
  members. Otherwise members are bound to accept
  UMAL renewal terms.
• UMAL seeks tenders for reinsurance/excess
  insurance annually

34
The Experience of Pooling in Australia - Westpool

• Westpool was formed by 6 local authorities in
  the region of Sydney, Australia to provide cost
  effective liability and professional indemnity
  insurance for its members, and to share and
  develop risk management best practice models
• The pool was established prior to 1988 and was
  managed by employees of member authorities until
  CEO appointed in 1997
• Excess for all members is A20,000 each and
  every claim. Pool pays between A20,000 and
  A500,000 per claim. Maximum limit of liability
  is A50,000,000 purchased in the external
  insurance market
• Since 1996 insurance in excess of Pool cover is
  insured at Lloyds markets have more confidence
  in risk management approach of the pool and
  willingness of the Councils to assume ownership
  of costs below the catastrophe level.
• Westpool initiatives include-
• Adoption of risk management as integral part of
  each Councils Corporate Management Plan
• Common methodology developed for the
  identification and evaluation of risk
• Developed common system for prioritising
  inspections of public areas and use of
  maintenance budgets
• Sharing or risk information and development of
  best practice models for risk management
• Benefits for members have included significant
  reduction in premium costs