Town hall troubles

Insurers will have to wait until March to find out the result of an appeal by the London Borough of Brent over whether it acted unlawfully in awarding its insurance services direct to London Authorities Mutual Ltd (LAML).

The second judgment in the landmark test case brought by Risk Management Partners (RMP) was decided in May. The High Court found that Brent had wrongly ignored EU rules on public procurement procedures by giving its insurance services to LAML – a mutual insurer for London borough councils – outside of the tender framework.

The EU framework is intended to ensure that all European businesses have a chance to win clients.

The second judgment followed an earlier ruling in the case that found that no local authority can join such a mutual if it does so to save money on its insurance.

Brent’s decision to take part in the mutual was also deemed to have been ultra vires, or beyond its powers, because councils in the mutual have to pay out for the losses incurred by another council. This puts their own council tax payers’ money at risk. This has already happened after a school fire in Harrow for which the mutual had to pay out £4m.

Brent had relied on a ‘get-out clause’ named after an Italian court case called Teckal, which effectively allows a public body to avoid competition in awarding a contract if it retains control over the running of the contract. The judge decided in Brent’s case that Teckal could not be used.

Both cases were brought by RMP, a managing agency using AIG to provide cover to the UK public sector for the past 14 years.

Managing director Kaz Janowicz says: “I don’t have a problem with a mutual. We face competition every day. The ultra vires decision is all very interesting but that was not what we set out to achieve. All I ask for is a level playing field and the Teckal decision will allow that. It is ironic that one of LAML’s main arguments was that it wanted to increase competition to bring the price of insurance down. How do you increase competition when you simply hand over contracts without giving anyone else a chance to come in cheaper?”

Andrew Jepp, head of local government at Zurich Municipal, points to other flaws in the LAML model. “The basic principle of insurance is to spread the risk. Instead of that, what you have in London is an accumulation of risk. Floods and terrorism could affect many or even all the insured at once,” he says.

But he also questions whether the savings LAML claims councils get from joining it are as good as councils could get from the current soft market. “LAML claims that councils are saving 15% on renewal prices, but given that most of these contracts were three years old, other authorities are getting much greater savings. We are the main insurer but there is a significant market with many insurers either offering a package or writing a specific risk.”

Jepp, whose company faces the biggest challenge as it insures most London boroughs, echoes the view that councils should openly tender for insurance.

“Individual authorities should be required to tender on the market like everybody else. If the mutual comes out best then that’s fine,” he says.

LAML is managed by Martin Fone, chief executive of the non-marine mutual department within consultant Charles Taylor. He insists the Brent case does not affect the other councils as they relied on a different act of Parliament to take part. The judgment stops local authorities – which include councils, police and fire authorities – from using section 111 of the 1972 Local Government Act.

The other councils relied on ‘well-being’ powers contained within section 2 of the 2000 Local Government Act. A similar fire authorities’ mutual shut up shop as a result of the ruling because fire authorities do not have the well being powers within the 2000 act.

And despite LAML’s published literature claiming 15% savings, Fone only claims 10%.

“How do you increase competition when you simply hand over contracts without giving anyone else a chance to come in cheaper?

Kaz Janowicz, RMP

“Councils have saved 10% but we included wider cover, such as gradual pollution cover for properties where, before, councils could only get sudden and accidental cover,” he says.

And he is adamant that the mutual will not allow all London councils to join. “A key to the success of the mutual is good-quality members. All the members are at risk from the poor performance of one member, so they must be prudent about whom they let in,” he says.

Zurich will help more councils. “We will insure any local authority regardless of the risk – obviously the price will reflect that but we don’t cherry pick,” says Jepp.

It can be argued that town halls don’t like insurers. Council managers see insurers as aggressive, avaricious and anti-competitive. They depict the whole insurance industry as one of the worst excesses of the capitalist system, preying on the culture of victimhood and behaving unethically. If they had a choice, many councils would have nothing to do with commercial insurers and go back to the heady days of council mutuals – which is what many are trying to do, with all eyes on the success of LAML.

Insurers and brokers have to accept at least part of the blame for such beliefs, and misunderstandings.

When the council mutual Municipal Mutual Insurance (MMI) crashed in 1993 and ceased writing new business, Zurich stepped in to take over councils’ policies, providing improved risk management advice and selling direct – not through brokers.

But, with MMI’s problems proving its premiums had been too low, the new Zurich Municipal hiked the price. It was just about the only insurer prepared to do business with every council in the country and snapped up the bulk of them on expensive – and lucrative for Zurich – five-year deals paying no commission to middlemen.

As those deals came to the end and council reorganisation took place, many councils called in brokers to help inject competition and give them the expertise needed to attract new insurers. This was hard because, although Zurich shared claims data through the ABI on most lines of business, because it was the almost exclusive insurer of councils, it kept its claims data secret, giving rivals little evidence to use to underwrite accurately. But seeing the profits Zurich was making was enough to interest a few.

However, brokers shot themselves in the foot with a double-barrelled shotgun. The first shot was because brokers did not explain clearly how they worked. Councils thought that brokers trawled the market for each of them and came up with exclusive best deals on an individual basis. Actually brokers were putting together packages and getting discounts by promising underwriters several council customers for their line of business.

When councils talked to each other and found that those that shared the same broker had their insurance placed with the same panels of insurers, they felt they had been misled and believed the broker had not truly searched the market but had done cosy deals with favoured insurers.

They then felt aggrieved when the Association of Insurance and Risk Management, and its local government sister body, the Association of Local Authority Risk Management, started talking about “double-dealing”. This was the practice of insurers paying brokers a top-up commission for the total volume of business done in a full year on top of the individual commission for each policy sold.

Councils had agreed to pay brokers a fee, with any commission being paid back to the council. To then discover that the broker was receiving another, undeclared commission from insurers – quite possibly because the total business from the several councils sold the same policies pushed that broker’s total over the commission threshold – was a kick in the teeth. To councils it presented a conflict of interest.

Insurers and brokers appeared to be deceitful and dishonest and the whole industry corrupt. Even if councils had secured huge discounts and benefited from wider covers, they felt they had achieved them through underhanded means. The insurance industry had failed to recognise that, to councils, the probity of the procurement procedure is just as important as the price paid.

The arrival of LAML has changed the market and caused prices to tumble. But insurers argue they would have fallen in a soft market anyway. The court cases have put everything on hold for now, but other mutuals may follow. The market has usually undercut new council mutuals before they start.

The question is less about whether or not the London mutual will survive, but what the industry can do to build bridges with the local authority market. The past is littered with errors. The future does not have to be.