Housing associations look at setting up insurance firms

The National Housing Federation is exploring whether housing associations could pay lower insurance premiums by setting up their own insurance firms.

Some housing associations' premiums doubled as a result of price hikes after the 11 September terrorist attack in New York. Also, underwriters are gaining a better understanding of the risks for housing associations and are now factoring late claims into future premiums. Premiums for housing associations have risen by 25-35%.

The National Housing Federation is therefore looking at the possibility that one or more housing associations could start their own insurance firm, known as a "captive". Any profits could be retained by the organisation and premium inflation could be reduced.

Associations would also, however, share any downsides experienced by the firm. But there is one type of captive – a protected cell company – that would prevent associations from sharing the misfortunes of others in different cells.

The firm could also be based offshore to take advantage of lower tax and more relaxed insurance laws.

Jane Greenoak, director of corporate services for the National Housing Federation, said it was "just the beginning of an idea".

But she said the NHF would gauge interest in the plan at its finance conference in March. The federation will contract researchers to look at benefits, risks and savings if there is enough interest in the scheme, Greenoak said.

Meanwhile, risk specialist Farr, which sponsored a recent seminar on captives and housing associations, is modelling a number of captive feasibility options for housing associations. A group of 16 associations, including Richmond Housing Partnership, have expressed interest in the idea.

Paul Williams, finance director of Richmond Housing Partnership, said that although a captive firm could save them money, it would be very complex to set up.

"If a group of housing associations formed their own captive, it could knock out the profit margin that direct insurance normally adds. It could, in theory, knock off 30% [about £200,000] off our insurance costs," he said.

Williams added, however: "The complexity of offshore costs and tax implications is slightly off-putting. Captives are, by definition, the option of last resort, and I am not sure we're at that stage yet."