Mutual option proves contentious for London boroughs
by Paul Gosling
Self-help, mutual insurance style, has been a long standing feature of local government. Municipal Mutual dominated the market for councils’ insurance market for most of the last century – until it collapsed in the 1990s. Now a group of London boroughs has gone ‘back to the future’ by setting-up their own mutual insurer.
London Authorities’ Mutual Ltd was formed by 10 boroughs, with another four joining in April this year. Brent and Harrow placed their insurance cover with the mutual from April last year, when LAML opened for business. As a mutual organisation, LAML is owned and directed by the councils themselves, with management contracted to Charles Taylors’ Non-Marine Mutual Department – which operates 20 mutual schemes for various groups of organisations. LAML has succeeded in cutting premiums by 15%, according to its sponsoring boroughs.
Martin Fone, chief executive of Charles Taylor’s Non-Marine Mutual Department, says: “The origin goes back to 2004/5, when there was quite a lot of dissatisfaction among the London boroughs about the state of the insurance market for their risks and exposures. The majority of London boroughs were insured by one company, who had over 70% of the external insurance premiums spent. There were concerns as they were required to demonstrate Best Value, which was difficult to do then as there were very few insurance companies prepared to consider their insurance.”
In adopting a mutual framework, the London boroughs reinvented history. Municipal Mutual was formed in 1903 to counter high premiums and lack of competition in the local authority insurance market and had 90% of councils’ business by the early 1990s. However, a spate of insurance claims meant that Municipal Mutual breached its solvency obligations and closed in 1992, with its administration taken over by Zurich Municipal.
Despite its collapse, Municipal Mutual is recognised to have been an effective system for local government insurance, which operated successfully over many decades. The creation of a similar system for London was promoted by the London Borough of Croydon and backed by the Department of Communities and Local Government and the London regional centre of excellence. Membership is open to all boroughs.
LAML’s members self-insure, or self-fund, initial losses, of at least £100,000. The next layer of losses are met by LAML from its reserves – up to £250,000 or £1m per claim, depending on the nature of the claim. If LAML’s reserves are fully drawn on, these liabilities become the responsibility of its members (excess reserves become profits that are payable to the members). The largest losses are placed by LAML with the reinsurance market.
One of the major attractions of a mutual approach was that with profits going to the boroughs – or losses financed by them – there was a strong financial incentive to improve risk management practices. Fone explains: “Through creating their own mutual they saw fundamentally an opportunity to further maximise the efficiencies and effectiveness of their risk management activities.” In addition, LAML has helped the boroughs to improve their claims handling processes. The creation of a mutual insurer has also enabled the boroughs to define the risks they want insured, moving away from a supplier-controlled commercial environment.
But the LAML initiative has drawn scepticism from parts of the insurance sector. Andrew Jepp, head of local government at Zurich Municipal, cautions that the long term exposures entered into by the mutual’s members may be much higher than they recognise. Insurers are now handling large volumes of claims for asbestosis from former council workers resulting from contact with asbestos 30 years ago, which would fall in the category of risk that is covered under LAML through collective self-insurance. Similar volumes of claims in another two decades or so – perhaps from passive smoking illnesses, or technology-related disabilities – might generate large calls on boroughs’ finances in the future, suggests Jepp.
Claims that councils are making savings of 15% are also disputed by Jepp. He points out that it is too early to say what long-term claims exposure the boroughs may be entering into and therefore what the total cost of the mutual will prove to be. Jepp argues that the comparison is against the last year of old insurance contracts: premiums have subsequently fallen substantially. One council that improved its risk management practices halved its premiums, reports Jepp.
But it is the way that the boroughs have gone about awarding contracts to LAML – without an open procurement procedure – that has really irritated the commercial sector. “They were set-up because of a perceived lack of competition – and now they refuse to compete,” says Jepp.
Brent’s legal powers to enter into LAML were challenged in the High Court by Risk Management Partners Ltd, an insurance agency that operates exclusively for AIG (the American Insurance Group) in placing cover for public sector clients. The judgement held that Brent acted outside its powers in halting an existing tendering process to enter LAML and in claiming that it was empowered to join LAML by Section 111 of the Local Government Act, 1972.
Jolyon Patten a partner at RMP’s legal counsel, Halliwells, says: “The judgement… establishes that whilst local authorities can purchase insurance they cannot participate in insuring the liabilities of others.” In a second judgement, the court told Brent that it could not avoid EU procurement rules in awarding a contract to the mutual.
LAML argues that while Brent “may have fallen out foul of procurement laws” in the way it joined LAML, it would have been legally empowered to do so had it done so differently. LAML says it is “confident” that a council does have the powers to join a mutual insurer under the wellbeing powers of Section 2 of the Local Government Act, 2000. It points out that the judge also said: “I do not think it follows from my above finding that no local authority has the power to participate in LAML.”
Clarity on the legal situation will depend on how LAML reacts to the court judgements. LAML’s Fone says: “It is not unreasonable to expect that Brent will appeal.” Only time – and the courts – will tell whether this latest incarnation of mutual insurance for councils will survive.