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30 July 2018
Insurance is a complicated business, and sometimes it’s even more complicated. Take for example last week’s report by the Victorian Auditor-General, Andrew Greaves, who has questioned the value councils are getting from mutual insurance schemes.
The report focuses on whether councils have been “procuring insurance that represents value for money”, and sets its sights on the lack of tendering in the process.
Its conclusions have resulted in the councils’ peak representative body joining with JLT, the broker that administers the Victorian mutual schemes, to refute the Auditor-General’s conclusions.
Mr Greaves’ report suggests significant savings could be made by councils prepared to put their insurance requirements out to the private market.
But the mutual model has plenty of supporters, and they argue such savings are illusory, and at best temporary.
They say that even if cost reductions could be achieved in a single year, the mutuals are there for the long term – unlike the private market which has form for walking away when the going gets tough.
The mutual supporters also take issue with the report’s lack of consultation – JLT was not even contacted – and the use of an adviser that had “a direct pecuniary interest” in the outcome.
The report is the latest in a long line of attempts to discredit the mutual arrangements. A 2015 study from the previous Victorian Auditor-General, John Doyle, made similar points.
Earlier this year law firm Quinn Emanuel Urquhart & Sullivan said it was investigating a potential class action against JLT over premium levels paid for cover provided through mutual schemes administered by the company.
JLT, for its part, insists there is no basis for such an action.
The latest report looks specifically at Victorian councils’ arrangements for public liability and professional indemnity cover – the two largest insurance purchases – and uses seven councils as case studies.
In 1993, the Victorian Government instructed the Municipal Association of Victoria (MAV) to offer councils public liability and professional indemnity insurance through a mutual scheme, now known as Liability Mutual Insurance (LMI), following the withdrawal of commercial insurers from the market.
In the same year the Local Government Minister also decided councils could join LMI without tendering.
Councils can choose to insure through LMI or commercial insurers, but the vast majority continue to obtain their public liability and professional indemnity insurance from MAV.
According to the report, in 2017/18 68 of Victoria’s 79 councils obtained their cover through the mutual scheme.
However, it concluded councils are “not always giving the purchase of their insurance the thorough consideration it deserves”.
“At best, this means they may be paying more than they need to and, at worst, if there are gaps in their coverage it may significantly impact their operations should an undesirable event occur.”
While accepting that MAV has delivered “significant value to the sector over 25 years” the report says competitively tendering for broking, services and insurance is better practice.
“We found that generally councils that undertook an open and transparent tender obtained premium reductions for their property and public liability/ professional indemnity insurance, resulting in better value for money outcomes.”
The report is also critical of MAV for not putting out to tender its broker and service provider, which is currently JLT.
“MAV has never tested whether alternative brokers could provide better terms for its services and reinsurance because it has never tendered for LMI’s broker and service provider – of its 2016/17 premium revenue, LMI spent 14% on the service provider’s fee and 66% on reinsurance.”
This would be music to the ears of other large brokers that have been trying to gain traction in local councils’ insurance business for some time.
The report recommends councils “undertake a cost/benefit analysis to evaluate whether tendering for insurance, in line with procurement better practice, would provide better outcomes”.
It says MAV should “undertake an open and transparent tender for Liability Mutual Insurance’s service provider”.
While MAV says it will “undertake reasonable steps” to carry out the recommendations, it has joined JLT in defending the current set-up.
They say a lack of consultation and the use of an adviser with clear interests in the outcome damage the credibility of the report.
MAV CEO Rob Spence says in his response to the report that he has “unresolved concerns” about the use of insurance advisory service The Lion Partnership as an adviser to the Auditor-General.
He alleges The Lion Partnership “may have a direct pecuniary interest in the findings and recommendations of this review as a provider of insurance tender consultant services into the local government sector”.
Mr Spence told insuranceNEWS.com.au the MAV scheme provides $600 million of public liability and professional indemnity cover for each council.
“Nobody else comes near that,” he said. “We’ve been criticised for not going out to tender but we aim to build long-term relationships.
“This notion that you should always go out to tender has whiskers on it.”
JLT Public Sector Global Head Leo Demer told insuranceNEWS.com.au the report contains inaccuracies and JLT had not been asked for comment.
“This really impacts on the report’s credibility. The report didn’t mentioned us by name so they didn’t feel the need to contact us, but everyone knows JLT is involved and they could have picked up the telephone and spoken to us, and we could have corrected some of those errors.”
Mr Demer disputes claims that going out to tender in the private market would result in significant savings, and says mutuals remain the best and most stable option for local government insurance.
“Excluding the ACT, 96.5% of councils in Australia are members of a mutual for some of their insurance requirements.
“There are significant cash surpluses sitting in the funds right now. At the June renewal period councils in mutuals received minimal premium increases whereas councils not members of mutuals were forced to bear increases of up to 65% as insurers withdrew from the market.
“The private market comes and goes, but the mutuals are always there.”
Despite requests from insuranceNEWS.com.au, the Auditor-General declined to comment on the use of The Lion Partnership as an adviser.
“The Auditor-General has a standing policy of not providing any additional commentary regarding our reports, therefore I am unable to respond to the matters you have raised,” a spokesman said.
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