Ensuring mutual benefit

The first mutual insurer created by local authorities for the benefit of local authorities in over 100 years is already delivering significant savings to its members.

In its first year of operation, the London Authorities’ Mutual (LAML) is proving that, by working together for the common good, councils are accessing more competitive insurance markets, and making six-figure savings for their communities.

LAML is regulated by the FSA and works by using the collective spread of risk represented by the participating authorities and by retaining a higher degree of risk collectively than would be possible individually.

By retaining the immediate layer above each members’ self-insured retention and combining a number of local authorities into one risk transfer vehicle, LAML is able to attract the support of reinsurers that would not have an appetite to write individual London borough risks in isolation.

LAML is a company limited by guarantee with subscribing members rather than shareholders. Since launching in April 2007, LAML’s gross premium income currently stands at around £2.3m. It is anticipated to write more than £8m of premium income in 2008/09.

The mutual’s strategic direction is set by its board, comprising six representatives from its membership and two independent directors. Its day-to-day activities are managed on behalf of the board by Charles Taylor Consulting, a professional manager of mutuals.

LAML is supported by over 20 reinsurers and its reinsurance programme is administered by reinsurance broker GCFac.

The reception from the wider insurance sector has been largely welcoming. Furthermore, interest from across the public sector is understandably strong and, following LAML’s successful start, several of the UK’s fire and rescue authorities banded together and formed their own mutual in September 2007. Another mutual, consisting of over 20 unitary authorities and county councils is in the process of being established.

So what can members expect to receive in return for ‘going mutual’? The list is compelling and growing.

First, they are seeing 15% reductions on expiring rates – this has been achieved primarily because the cost of allocating capital, profit demands, and operating expenses of the mutual are lower than those of commercial insurers. They are also in line to share directly in any underwriting surplus made by the mutual.

“One of the most important perks for members is the greater input and control they have in determining the mutual’s risk appetite and underwriting philosophy

Nathan Elvery

Councils can also be sure of greater pricing stability. By adopting a risk retention and risk transfer strategy which is responsive to current reinsurance underwriting cycles, LAML is able to protect its members against the vagaries of a sometimes turbulent market.

LAML has been able to offer a number of cover extensions which address the specific needs of local authorities, including gradual premises pollution cover, higher limits of indemnity at no additional cost, terrorism cover on liability insurance, and cover in respect of defence costs arising out of corporate manslaughter charges.

One of the most important perks for LAML members is the greater input and control they have in determining the mutual’s risk appetite and underwriting philosophy. This, in turn, is incentivising effective risk management.

By retaining control over their own capital – and with the prospect of sharing in any underwriting surplus a huge motivation – practising sound risk management becomes a top priority.

But this pragmatic approach does not preclude innovation. Indeed, we are already seeing the development of pan-member risk management initiatives, including a self assessment module for assessing property management, prototyping a tree roots claims handling protocol, and a mutual-wide adoption of a fraud line initiative to combat fraudulent claims.

Also, LAML offers its members a method of procuring their covers which eliminates many of the frictional costs associated with commercial insurers.

In addition, LAML is helping local authorities to meet targets which currently dominate the sector’s thinking – namely improving efficiency, value for money, and delivering the ‘shared service agenda’.

On this latter point, LAML is a good example of an innovative and collaborative approach which chimes strongly with central government’s vision of pooling resources and expertise to deliver improved services to the public. IT

Nathan Elvery is chairman of London Authorities Mutual