The Local Government Authority have previously estimated that Local Authorities spend around £650 million annually on insurance premiums. The exact cost of insurance could now be significantly higher. By adopting a mutual model, there is an opportunity to target annual savings of up to 20%. This could potentially save over £100 million each year – or more than £500 million over a five-year budget.

The actual savings will depend on the specifics of claims, but even a conservative estimate of a 12.5% saving on a £650 million annual bill could lead to £75 million in savings (or £375 million over five years), easing the financial burden that is part of the increased pressure on council tax and the cost to individuals of Local Government.

Current position

The Local Government Association has estimated that its members are paying the insurance industry annual premiums in the vicinity of £650m. They are also paying the number of claims within their deductible, or excess, which is likely to be of a similar magnitude.

The sector’s insurance landscape is dominated by three corporate entities, one insurer in Zurich Municipal and two Managing General Agents in Risk Management Partners (RMP) (owned by Arthur J Gallagher) and Maven (owned by AON).

There are also a number of small buying groups, such as the Insurance London Consortium (ILC), they need to capture the sector’s collective scale and buying leverage.

The primary tool that Local Authorities use to cover their insurance costs is the level of self-insured deductible they choose, which has resulted in local authorities having deductibles ranging from thousands to hundreds of thousands and even to millions of pounds.  The higher their magnitude, the greater their potential to generate significant balance sheet volatility for these Local Authorities (LA’s).

What is the alternative?

The new Labour government came to power on a manifesto which included a commitment to double the size of the mutual and cooperative sector. LA’s could use a mutual to offset some of the risk and reduce the cost of their current insurance arrangements.

What is so special about a mutual?

A mutual is owned entirely by, and run for the sole benefit of, its members (in this case, it would be the LA’s themselves) and run by a board which is drawn from the membership (again, from within the LA’s themselves).

What difference could a mutual make?

1. Unlike shareholder-owned companies, which are expected to generate a profit to satisfy the needs of their shareholders, the aim of a mutual is to provide its members with cost effective risk transfer, meaning that it does not need to include a profit margin in its pricing. A carefully managed mutual will, however, build up reserves over time.
2. Income from members’ contributions for their risk cover provided by a discretionary mutual does not attract Insurance Premium Tax (IPT), which currently adds 12% to the cost of insurance (on £650m, this adds £78m to the local authorities’ annual insurance bill).
3. Members typically deal directly with their mutual, avoiding the frictional placement costs which come with Managing General Agents and Insurance Brokers.
4. The aim of the mutual would be to retain all ‘expected’ claims whilst arranging insurance in the names of the members for the ‘unexpected’ claims. A mutual can retain a higher level of risk collectively than would be prudent for any individual LA to retain. The mutual, and its members, benefit from the stability provided by the spread of risk across multiple members and avoid the volatility of outcomes which can otherwise be experienced individually by LA’s.
5. Each LA is able to select the level of deductible beyond which they would manage the risk via their mutual.
6. The mutual is able to harness the collective group buy
7. The contracts for risk transfer between a properly constituted mutual and its members are exempt from public procurement requirements – the Teckal exemption – now embodied in the Procurement Act 2023. The mutual will be required to follow the requirements in the Act for its own and individual members’ procurements, principally supporting insurance.

How is your budget currently pay spent?

With IPT consuming 12% of insurance expenditure, if your insurance broker / MGA is earning 20% in fees, commissions and other charges, and if the insurer providing the capacity is targeting a 20% profit margin to satisfy the needs of its  shareholders, then less than half of what local authorities are currently paying would actually remain available to fund the cost of claims, the majority having been siphoned off to fund causes other than the insured’s claims.

Removing these costs gives the mutual the clear potential to deliver significant savings and provide higher quality outcomes / advantages that also provide indirect savings.

Haven’t local authorities had mutuals before?

Yes. Municipal Mutual Insurance (MMI) operated successfully from 1903 to 1990. Claims between 1990 and 1992 caused net assets to fall below the minimum regulatory solvency requirements, and it subsequently ceased writing or renewing business. In its latter years, MMI began writing about non-local authorities’ businesses locally, and internationally. Claims from these placements, rather than its core local authority business contributed to its demise. Zurich acquired this book of business which forms the basis for Zurich Municipal.

The main issues which brought about MMI’s demise would not affect a new mutual for LA’s:

1. the new mutual would have a solvency requirement, not MMI’s capitalisation requirement;
2. the rules and constitution of the new mutual would prohibit the writing of non-local authority business.

In 2007, London Authorities Mutual (LAML) was created, operating successfully until RMP brought a legal case against one of its members, Brent, alleging that Brent’s participation in LAML was in breach of the Public Contracts Regulations 2006.  Brent lost in the High Court and the Court of Appeal, but won in the Supreme Court. By then, decision had already been made to put LAML into run-off. Due to the actions of RMP, a mutual for the fire and rescue services, FRAML, followed LAML into run-off.

The Supreme Court decision removed the issue that affected LAML and FRAML, and the ability of LA’s to participate in a mutual is now permitted by the Procurement Act 2023.

Are there any mutuals operating in the sector now?

Yes, from the ashes of FRAML, rose the Fire & Rescue Indemnity Company Limited (FRIC) which has been successfully trading since 2015 and currently provides cover to 14 authority members.

What type of Mutual?

The recommended structure would be a Hybrid Discretionary Mutual (the same structure which is used by FRIC (and many others)). This brings with it a number of advantages, including:

1. a solvency requirement, not the more onerous capitalisation requirement of an insurer;
2. the Companies Act and common law set the regulatory environment of the mutual. is regulated by FCA;
3. income from members’ contributions for their risk cover does not attract insurance premium tax;
4. surpluses generated within the mutual do not attract Corporation Tax. Surpluses must be used for the benefit of members, or as agreed by them.

Under a Discretionary Mutual, the primary layer of risk (which attracts the highest allocation of member contributions) would be retained and dealt with in the mutual, with the balance being laid off into the commercial insurance marketplaces (absent central government support for a paid for facility).

What is required to enable the creation of a new Local Authority Mutual?

LA’s who are willing to join the conversation and put in the time, effort and data required to bring the mutual to life. Through this they would take back ownership and control of their insurance expenditure, and thereby deliver the enduring change the sector has been calling out for.

Do you think this sounds like a good idea and want to join the conversation?

If so, please get in touch with us at enquiries@pmm.co.uk

Interested in Learning More About Mutuals?

Get in touch to learn how mutuals offer stability, predictability, and financial efficiency in risk management.
Get in touch for a Consultation

Prospect is a multi-disciplinary practice with specialist expertise in the energy and environmental sectors with particular experience in the low carbon energy sector. The firm is made up of lawyers, engineers, insurance and risk management specialists, and finance experts.

This article remains the copyright property of Prospect Law Ltd and neither the article nor any part of it may be published or copied without the prior written permission of the directors of Prospect Law.

This article is not intended to constitute legal or other professional advice and it should not be relied on in any way.