CHARITY INSURANCE: Understanding risk

Patrick McCurry

"I'm sure some of the claims are genuine, but others are frivolous, as people are being encouraged to 'have a go' at making a claim," he says.

Another factor in increasing costs is the reduction in the number of insurers offering charities liability cover.

"When we've reviewed our insurance providers in the past our brokers have identified 30-50 companies, but this year they could only find four," he says.

The outlook for the future is not rosy, with RNLI's insurance brokers warning of possible 20-30 per cent premium increases in the short term.

"We've asked them to look at how we can cap our premiums by, for example, taking on more risk, because we can't continue to absorb that level of price increase," says Ventham.

As for developing a voluntary sector insurance scheme, Ventham would like to explore the proposal. Some kind of mutualised scheme is a possibility, he says, but there may be difficulties in getting charities to share each others' risk.

"Spreading risk among different charities raises the danger that if there were a catastrophe in one organisation, the others would be left exposed."

Charity insurance has in recent years become a costly and complicated business, particularly where high-risk activities are concerned. Patrick McCurry investigates.

Three years ago, insurance was not an issue that figured prominently on the worry list of most charities. But today's soaring premiums and difficulties in getting cover are not only eating into the resources of voluntary organisations but, in some cases, are threatening their ability to carry out their mission.

It is clear that since 11 September 2001 the insurance market has changed dramatically and all sectors have been affected by higher premiums. The increased perception of risk, growth in litigation and the insurance sector's determination to improve profitability after years of losses have combined to push up premiums. The falling value in the stock market of the past three years has also had an impact, as insurers have made losses on their investments.

But it appears that the voluntary sector has been among the worst hit, especially in the crucial areas of employer and public liability, which charities are legally obliged to obtain in order to do their job. There is also some evidence that insurers are overcharging charities.

"Charities are being charged in an indiscriminate way and, according to our evidence, overcharged," says Ian Harris, director of consultancy Z/Yen, which published a report on charity insurance in the summer, commissioned by not-for-profit organisation Charity Logistics.

The research found inconsistent pricing. The 18 care-related charities reported fluctuating premiums, ranging from a decrease of 6 per cent, to an increase of 145 per cent - even though some of the charities with low price increases had a high claims record. Compared with other sectors, charities were paying higher premiums based on their claims record.

But insurers were not happy with the report. Brian King, public affairs manager at insurers Ecclesiastical, believes the sample of 73 charities was too small, and the conclusions of the research to be flawed.

Z/Yen's Harris is irritated by this criticism: "We asked the insurance industry to provide its own figures so we could be sure we were giving its side of the story, but it declined."

Harris adds that he plans, with Charity Logistics, to encourage charities to take part in a benchmarking group on insurance, allowing charities to compare premiums, which will give them more ammunition when dealing with their insurers.

Malcolm Tarling, spokesman for the Association of British Insurers, accepts that there is "some truth" in the findings of the Z/Yen research, but says there has been no deliberate attempt by insurers to rip off charities.

"Insurers feel they have not always understood the risks they were insuring in charities and so the premiums charged have reflected that uncertainty. Insurers want more information from charities about the nature of the risks and the risk management policies in place."

Talks between the ABI and charity umbrella groups like the Charity Finance Directors' Group are helping each side to better understand the other and there have been workshops bringing together charities and insurers, says Tarling. The ABI has also had some input into a Home Office-sponsored working group, which is looking at practical solutions to the charity insurance crisis, he says.

"For our part, by early next year, we will be publishing guidance on our website explaining issues surrounding liability insurance and what kind of information and risk management policies insurers are looking for when it comes to assessing charities' risks," says Tarling.

One of the challenges facing insurers is the diversity of the voluntary and community sector and some of the cutting-edge activities these groups are engaged in, says Shirley Scott, director of CFDG. "Charities may be involved in what are seen as risky activities, such as running needle exchanges at drugs projects. Some of these activities can be hard to get insurance for." She adds that smaller charities are particularly vulnerable because they often do not have the staff or resources to devote to risk management processes.

Ronan Ball, underwriting manager at Zurich Municipal, agrees that the sheer diversity of activities can present more of a challenge to insurers more used to the conventional risks associated with the commercial or public sectors.

"You can't just say you understand the charity sector - you have to also understand the particular activity the charity you're talking to is involved in, whether that includes children and young people, education and training, and so on."

The way forward, argues Ball, is for both sides to understand each other better - that means charities taking on board the need for good risk management and being able to communicate their assessment of risks to their insurer or broker. But it is unclear whether, even with better risk management policies in place, charities will be able to bring down premiums significantly, because an important factor in the current market is that there are far fewer insurers willing to offer liability cover.

Ian Ventham, corporate services director at RNLI, does not believe charities are being ripped off, but that the reduction in the number of providers offering liability insurance means that charities often have little or no choice but to pay what the insurers are demanding.

CND treasurer Linda Hugl agrees, pointing out that the organisation has seen its liability premiums rise four or five-fold. She believes the insurance industry is "running away" from offering public liability insurance to charities.

"CND is seen as risky, despite the fact that our staff are office-based and none of the demonstrations we've been involved in over the past 18 months have resulted in any problems or claims," she says.

The insurers, on the other hand, point to the emergence of a "compensation culture" in the UK, in which employees or the public are much more willing to sue organisations and in which legal damages for successful claims are much higher.

Ecclesiastical's King argues strongly that the voluntary sector is not being singled out by insurers. What has happened, he says, is that insurers are now taking the same approach to charities as they have done historically with commercial clients.

"Charities are now having to put up with the kind of scrutiny other clients have had, and insurers are making sure they know exactly what kind of risks they're taking on," he says.

Charities that want to get insurance at competitive prices will have to be upfront with insurers and have transparent and accountable practices, argues King.

"We're more than happy to insure charities, but they must tell us what they're doing," he says.

Greenpeace finance manager Iain McSeveny says: "I think it would be very hard to get everyone in the sector working together. My immediate advice to charities facing problems is to get a good, specialist broker who can negotiate on your behalf with insurers."

CASE STUDY: GREENPEACE

While Greenpeace has never had insurance for its direct action, the organisation has been affected this year by the withdrawal of liability cover for training activities such as climbing and abseiling.

"Our previous insurer pulled out of liability cover and our new provider will only give us cover with lots of exceptions," says financial manager Iain McSeveny.

The premium has doubled and additionally there is now an excess of £5,000, despite the fact that Greenpeace has not made any claim on its liability insurance for at least 10 years.

"People see the name Greenpeace and think we're involved in lots of dangerous activities, but our climbing and abseiling training is very well run by qualified trainers and we've never had any accidents," he says.

Greenpeace has also had difficulty getting liability cover for local groups, even though their activities focus on fundraising, rather than risky activities.

"I think the insurance sector treats charities with a broad brush - there needs to be more understanding of what charities actually do," he says, adding that charities have better health and safety policies than other sectors.

CASE STUDY: RNLI

RNLI's premiums for employer and public liability have soared from £152,000 to £529,000 since last year - that's the equivalent of five Atlantic-class lifeboats.

Corporate services director Ian Ventham says: "We're a big organisation and can cope with the increase, but for smaller charities the big increase in premiums must be disastrous."

The increase in liability cover has occurred even though RNLI does not insure its boats, explains Ventham. "We carry a lot of risk ourselves."

He believes that a major reason for soaring insurance costs is the increase in litigation in the UK. The RNLI currently has 18 personal injury claims against it, from both lifeboat crew and office staff.

"The number of claims has increased dramatically in recent years because we're living in a more litigious society," says Ventham.

He blames lawyers offering 'no win-no fee' services, along with the fact that insurance companies will often only defend larger claims.

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