UK local authorities are rethinking their insurance approach - but risks abound

In light of the prevailing economic conditions, financial uncertainty and mounting costs, local authorities are reassessing their risk management strategies.

With the aim of mitigating budgetary strains, many local authorities across the UK are scrutinising their insurance portfolios, opting to increase policy deductibles as a countermeasure against escalating premium expenses.

However, this shift towards greater self-insurance comes with risks and necessitates a nuanced understanding of risk dynamics and claims management processes.

Challenging landscape

The current landscape for local authorities is characterised by a myriad of financial challenges and structural transformations.

Significant administrative changes, such as the recent division of Cumbria into Cumberland and Westmorland & Furness, alongside the emergence of new unitary authorities like Somerset’s single council, underscore a broader trend towards consolidation aimed at achieving economies of scale.

Despite these structural realignments, financial challenges persist, with several councils teetering on the brink of insolvency and necessitating increased support from central government.

“The current landscape for local authorities is characterised by a myriad of financial challenges and structural transformations.”

The enduring repercussions of the Covid-19 pandemic continue to exert strain on municipal budgets, with skyrocketing energy costs exerting additional pressure on transportation and municipal facilities alike.

Moreover, local authorities find themselves grappling with inflationary spikes in construction costs, attributed in part to global geopolitical events such as the Ukraine conflict and the resultant surge in energy prices, alongside escalating material and labour expenses.

A number of London councils are reportedly “teetering on a financial cliff edge” with Croydon having declared bankruptcy three times since 2020, and “all but two of the capital’s 32 boroughs are forecasting an overspend in their original budget plans this year because of increasing costs”, according to the Evening Standard.

Unforeseen challenges

The challenges confronting local authorities extend beyond financial considerations to include unforeseen expenditures, such as flood damage clean-up and extensive repairs to buildings afflicted with structural issues like RAAC or defective cladding.

When it comes to housing, councils are obligated to rehouse displaced tenants when their home becomes uninhabitable.

Available housing stock is low and rehousing in the open market comes at a considerable price, with private rental prices rising at well beyond general percentage annual increases, as well as the number of available short-term lets being at an all-time low.

More broadly, things such as highway repair costs are also significant, including rectifying potholes, and defending increasingly litigious Third Party claims.

“The challenges confronting local authorities include unforeseen expenditures, such as flood damage clean-up and extensive repairs to buildings afflicted 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 concerted push for resilient rebuilding in flood-affected areas, underscoring the imperative for robust risk management strategies.

Amidst these multifaceted challenges, local authorities find themselves constrained in their financial options, having largely divested their housing stocks over the past two decades, which precludes them from borrowing against these assets.

Political pressures further complicate the landscape, with councils facing demands to cap Council Tax increases, sometimes below inflation rates.

Changing attitudes to risk

In response, many local authorities have embarked on a comprehensive review of their insurance portfolios, opting to raise policy deductibles as a proactive measure to mitigate year-on-year increases in premium costs.

Several councils have already taken decisive action, significantly increasing their insurance deductibles, with some reaching as high as £1 million.

However, while this move towards greater self-insurance may offer short-term relief from premium hikes, it necessitates a deeper understanding of risk management and claims handling processes to effectively manage heightened self-insured retentions.

“Many local authorities have embarked on a comprehensive review of their insurance portfolios”

Failure to do so could potentially expose local authorities to significant financial leakage and vulnerability.

Take, for example, social housing providers, who are being prompted to update their property insurance coverage and give accurate rebuild costs by conducting reinstatement cost assessments (RCA).

This comes after it has emerged that many providers are using outdated or inaccurate data to insure their properties.

The sector faces unique challenges, not least due to the diverse nature of properties in their portfolios, which include dominantly residential buildings, but also offices, halls, community spaces, garages, car parks, play areas amongst others.

What are the risks?

Local authorities face a myriad of risks, from cyber to employers and public liability, but we will focus on property risks, of which there are many.

Take climate change, for example. The frequency and severity of storm events are on the rise.

Following the London flooding in July 2021, the Met Office projected that a mere one-degree rise in temperature would result in approximately a 15% increase in the occurrence of intense, short-duration downpours.

Heightened storm surges and extreme weather events ultimately translate to greater disruption for individuals and businesses alike. Lloyds of London has estimated that global economic losses stemming from extreme weather events could reach $5 trillion.

“Local authorities face a myriad of risks, from cyber to employers and public liability”

Weather patterns have become increasingly erratic, with storms occurring year-round rather than being confined to autumn and winter. Urban areas are particularly vulnerable to extensive damage due to inadequate drainage infrastructure, exacerbated by population growth. The risk of river inundation adds another layer of concern.

We’ve also seen a surge in subsidence claims in recent years, a challenge for local authority buildings where it’s not uncommon to see cases of subsidence either being mis-identified, spotted too late, or not dealt with correctly.

Issues such as RAAC and defective cladding, which we touched upon earlier in the article, have been a significant concern in recent years, whilst the cost of asbestos removal during refurbishment works remains a notable risk.

How should local authorities respond?

Ensuring accurate valuation of building stock for insurance purposes is paramount to mitigate consequential losses arising from insurance claims. Each claim presents unique challenges, underscoring the imperative for tailored expertise and proactive management strategies.

For those increasing their exposure to risk, either by self-insurance or higher policy deductibles, claims management is also crucial. The way a claim is 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.

“Quick and proactive handling of insurance claims can significantly curtail direct costs”

Take, for instance, a primary school flood, where the identification of a competent professional resource to oversee business continuity, including project management and the setup of temporary facilities, can be vital to minimising disruption and costs.

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.