INSURANCE: A Premium Price

Dan Williamson

Headquartered in Cheshire, the society employs 570 full- and part-time staff and runs 20 residential houses and five schools. Around 2,000 children use its services each year.

In December 2001, the society's brokers MEM Insurance in Stoke-on-Trent broke the news that because of employers insurance and material damage, the charity was going to face a doubling of costs.

"Obviously that was something of a shock, particularly to the trustees," says Mahon. "It's not that we've had a poor claims record. The trustees looked at its options, including the possibility of not taking any insurance at all. But given that the Charity Commission requires insurance, there was no way we could do that."

But when the organisation asked its brokers to go out to the market, they came back with bad news. "They basically told us that there was no-one who would touch us and that we should stay where we are," says Mahon. "They couldn't get insurance for child care."

Insurance firms normally welcome charities which set out risk assessments and procedures, but Mahon claims the society's efforts had little effect on the cost of its insurance.

"This year, our brokers told us not to move whatever we do as the situation is getting worse," says Mahon. "This is despite what we do in terms of investing in equipment, installing CCTV and our low claims history. It's still growing."

After a "deafening" silence from the society's existing insurer New India on whether it was going to continue its cover for the coming year, the charity completed renewals terms on a policy placed through another insurer.

Describing quarterly reviews as "a blessing", Mahon says that charities should get closer to their broker as they can anticipate the market.

"It's all about relationships with your broker," says Mahon. "If you go to the market yourself, you'll get ripped off or they'll say no. This is a major problem."

The cost of insurance cover has risen sharply in the past two years. But now steps are being taken to drive down the amount charities have to pay. Dan Williamson reports.

Norman Connor, finance director at the Stroke Association, is a happy man, despite the fact that the charity's overall insurance premium bill for the year has just risen from £58,000 to £66,000.

Employing some 400 staff and benefiting from a £13 million annual income, the association has been hit by large increases in two specific areas.

First, public liability has gone up by 52 per cent while insurance for protection against terrorism has also risen by a whopping 115 per cent.

"All of our premiums shot up a year ago," says Connor. "To be hit with only a 12 per cent increase overall was light relief."

Research by the Charity Finance Directors' Group (CFDG), an organisation which helps charities manage their operational finances, found that charitable and voluntary organisations are facing substantial increases in their premiums for both employers' insurance and public liability insurance.

"Estimates of increases over the past couple of years range from 30 per cent to 300 per cent," says David Sinclair, policy officer at the CFDG.

"Rising insurance premiums are putting many charitable and voluntary activities at risk."

As well as rising costs, some charities are finding that insurers are not renewing their cover, often with just a few days' notice. "It seems that every customer who calls is asking for help quickly as their insurance is due to run out," says Ronan Ball, underwriting manager at Zurich Municipal's community insurance centre. "We're finding groups are coming to us after they've not been able to find insurance at an affordable rate."

Jean Bond, chief executive of children's behavioural charity Atlow Mill Centre in Derbyshire, said that its insurer pulled its public liability cover just one week before the insurance was due for renewal. Although it later transpired that the charity was covered under its existing professional liability insurance, its broker could not find public liability cover under £11,000 at the time. "There's just no way we could pay that," says Bond.

As well as the 11 September terrorist attacks in the US, which were estimated to have cost the insurance industry between £42 billion and £50 billion, and stock market falls eating into insurers' payout reserves, the growing compensation culture in the UK and the introduction of "no win, no fee" litigation is proving to be a particular problem for both insurers and charities.

"We receive a hundred enquiries a month from charities who can't place their cover," says David Allison, schemes director at insurance broker Stuart Alexander. "Most insurers will not cover a charity if all they want is public liability. With property it's quantifiable as there are set amounts for the building and contents. With people, you can't quantify the costs of compensation and legal fees."

Public liability claims have been on the increase since civil justice reforms to the personal injury claims process were implemented in April 1999. As well as fast tracking the process of claims to three months, an insurer must now respond to notification of a claim within 21 days, or automatically lose the case.

Such changes have increased administration and court costs. "Most people do get a payment when they claim, but even if they don't, the insurer has to defend their position," says Allison.

Therefore, he argues, insurance companies have no choice but to pass these costs - increasing by 15 per cent per year - on to their customers.

"We're not against people being compensated if they feel they have a right to claim and that's for the courts to decide," says a spokesman for The Association of British Insurers (ABI). "But that money doesn't come from nowhere. That money has to be clawed back."

Performing full risk assessments and establishing management procedures is vital. Statement of Recommended Practice (SORP) guidelines state that charities with an annual income of £250,000 should include in their annual report that all risks have been reviewed by trustees and that "systems have been established to mitigate those risks".

But smaller organisations, which are just "encouraged" to issue a risk management statement, could face increased exposure to such liability claims.

Charities involved in the care of children or the elderly could face particular difficulty. "With charities for children, insurers are asking a lot of questions as parents and even the children know their rights," says Allison. "They're much more aware of what they can get out of the system."

Therefore, showing an insurer set procedures for processes such as recruitment and training of staff could help allay any concerns.

The Charity Commission's web site has further information on risk management, but the NCVO is planning to launch a new reference guide this summer called Keeping It Safe. It will suggest that building or activity-related risk assessments could also be used to assess certain situations and people.

Bond explains that as well as luggage checks for new arrivals, the centre has plenty of signs detailing the potential dangers of areas in the centre.

"As long as you make attempts to stop people hurting themselves, you can't get sued," she says.

To help maintain full compliance, Paul Smillie, governance and legal director at YMCA England, suggests that charities set up a regular dialogue with their insurance broker.

"It's important to have a good relationship with a broker, as it's their job to ensure risk management," says Smillie. "They often have pro forma and set forms on their web site. They contain the questions to ask and help you find out what's being done. We get regular newsletters with updates on the law."

Although insurance premiums rose by 36 per cent for all YMCAs opting into their centrally managed insurance scheme last year, Smillie has heard that its insurer, Ecclesiastical Insurance, will be introducing three levels of increases ranging from 15 per cent to 48 per cent, depending on claim history.

"An insurer will walk away unless you follow processes and procedures," says Smillie. "We've learned we need to be more proactive in our risk management. Think about insurance at the same time of planning any activities, rather than once you've got the funding in place."

The Scout Association has benefited from a good relationship with its broker, Willis, which spotted liability claims growth back in 1990 and advised the organisation to set up its own insurance firm, otherwise known as a "captive".

Called Scout Insurance Services and based in Guernsey, the fund is paid into by scout groups across the UK and helps cut its insurance premiums by paying excesses of £200,000 on any liability claims, up to a total of £1.3 million.

"This way, we only pay in what is needed because it doesn't need to make a profit," says John Grantham, manager at Scout Insurance Services. "Our insurance premium costs are £1.4 million a year, instead of £2 million-plus."

Larger organisations can use their size to negotiate lower insurance premiums, but smaller organisations can also tap into this group buying power by signing up to schemes backed by organisational member bodies.

The CFDG has negotiated a 5 per cent discount for all members which use Stuart Alexander Insurance, an insurance broker, and Risk Management, which offers cover for public liability, property, personal accident and professional indemnity via two schemes underwritten by Norwich Union.

The first, called Charity Care, is aimed at larger organisations and provides cover for personal accident and up to £5 million in liability cover. The second, called Charity Sure, is aimed at smaller office or shop-based organisations. Premiums for these schemes depend on the level of cover required.

NCVO has also partnered with insurance broker Keegan and Pennykid for a service called the Encompass Insurance Scheme, which is used by 400 of its 2,500-plus members in England.

Taking the group buying concept one further, Charity Logistics is conducting a feasibility study into the formation of a charity-focused mutual insurance fund. Often used by the shipping industry, mutual "clubs" of organisations can save 20 per cent on premiums as they do not foot the bill for claims that a general insurer takes in other areas of its business.

Set for completion in mid-April, the study will gain input from both charities and the insurance industry on the costs of insurance and current premium reduction methods to identify if a mutual would be viable for the charity sector.

The plight of charities also caught the attention of the Government last year when charities contacted MPs over fears about having their insurance cover withdrawn. The Home Office's Active Community Unit has since set up an Insurance Cover Working Group to create a dialogue between the insurance industry and groups such as the NCVO and CFDG.

Stephen Bourne, a member of the Home Office's Active Community Unit, says that once the consultants deliver a "snapshot" of the situation, they will provide recommendations for MPs to consider. "One plan to come out of that is a mutual, which is possible, but that will be one option of many," says Bourne.

CASE STUDY BOYS & GIRLS WELFARE SOCIETY SEES PREMIUMS SPIRAL

According to Steve Mahon, director of central services at the Boys & Girls Welfare Society, the charity's insurance bill has jumped from approximately £100,000 a year to around £200,000.

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