Local authorities are scrutinising their approach to risk in light of the difficult economic conditions. Gordon Winstanley, Public Sector Lead at McLarens, looks at the possible implications.
In this environment of financial uncertainty and escalating costs, local authorities are scrutinising their insurance portfolios, increasing policy deductibles to offset premium costs. However, this shift towards greater self-insurance brings with it some risks and the need for an understanding of risk and claims is paramount.
Navigating financial uncertainty
In 2024, local authorities across the UK face an evolving landscape marked by financial constraints and the need for strategic restructuring. The previous year saw significant developments, with Cumbria splitting into Cumberland and Westmorland & Furness, while North Yorkshire County Council gave way to a new unitary authority. Somerset's local governance also transitioned to a single council, reflecting a broader trend towards consolidation aimed at achieving economies of scale.
Despite these structural changes, financial challenges loom large, with some councils on the brink of bankruptcy and requiring increased central government support. The lingering after-effects of Covid-19 continue to strain budgets, with surging energy costs impacting transportation and municipal facilities alike.
Compounding these pressures are inflationary spikes in construction costs, partly attributed to global events such as the Ukraine conflict and the resultant surge in energy prices, as well as rising material and labour expenses. The construction sector reports a moderate tender price increase of 3.5% annually as of late 2023, a slowdown from the dramatic 10.3% peak in early 2022, though wages persistently climb in tandem with inflation.
Resilience and sustainability
Local authorities also grapple with additional, unforeseen expenditures, such as flood damage clean-up and extensive repairs to buildings with structural issues like RAAC or defective cladding. The upcoming year mandates further investments, including the expansion of electric vehicle charging infrastructures to support burgeoning municipal fleets and a push for resilient rebuilding in flood-affected areas.
Reviewing insurance portfolios
Amid these challenges, councils face limited financial options, having largely divested their housing stocks over the past two decades, which now precludes them from borrowing against these assets.
Political pressures add another layer of complexity, with councils under pressure to cap council tax increases, sometimes below inflation rates.
In response, many have begun a detailed review of their insurance portfolios, often opting to raise policy deductibles to mitigate year on year increases in premium costs.
Several councils have already acted, raising their insurance deductibles—sometimes as high as £1m.
However, this move toward greater self-insurance is not without its perils, necessitating a deeper understanding of risk management and claims handling. This strategy requires robust in-house expertise to manage increased self-insured retentions effectively, and any failure could lead to significant financial leakage.
For example, it's essential for local authorities to check that their building stock is valued correctly for insurance purposes, and to mitigate any consequential losses arising from an insurance claim which could impact on their ability to provide critical services.
In the instance of a claim, the way it’s dealt with can have a major impact on minimising cost and disruption, yet each claim is different and can require different knowledge and/or expertise.
We have worked on countless local authority losses, which underline some of these challenges. For instance, in one case of a primary school flood, the identification of a competent professional resource to oversee business continuity, including project management and the setup of temporary facilities, was vital. Similarly, another local authority faced a budget overrun when an interdepartmental dispute arose over the replacement of underground services at a secondary school, with costs soaring above its £250,000 insurance policy deductible.
To counter these, when there is the early appointment of independent expert resource the benefits become self-evident. For instance, a fire at a council-owned crematorium was resolved within seven weeks, rather than the anticipated three to six months, by engaging specialist project management and bypassing lengthy tender processes.
Ultimately, quick and proactive handling of insurance claims can significantly curtail direct costs and further expenditures, positively influencing the local authority's insurance premiums and their internal pot of allocated self-insured funds.
Looking ahead
Looking ahead, local authorities must navigate this financial tightrope with care. Balancing cost containment with the need to maintain and improve vital services is no small feat, particularly when the stakes—community well-being and resilience—are so high.
When it comes to insurance, it's a delicate act of bolstering self-insurance capabilities while maintaining the safeguards of comprehensive insurance coverage— yet it’s one that can have a major impact on the financial health and operational efficacy of local governance in these turbulent times.
