Safety in numbers

In recent years, the number of insurers willing to offer property and property owners' liability insurance to the housing sector has dwindled. Insurers blame the increasing cost of claims, housing disrepair claims and a downturn in the reinsurance market. Whatever the causes, the impact has been clear – premiums have increased, more than 20% year-on-year in some cases.

Meanwhile, housing stock values have risen because of building cost inflation and the transfer of stock. Some housing associations' insurance budgets now top £1m (covering premiums and claims costs. Given such a base, even small percentage premium increases are a major concern, leading to a search for alternatives.

One option is to create some form of buying group, or even a mutualised captive of similar-sized associations pooling their resources. Through this vehicle, cashflow and capital burden issues can be managed more easily, with any reinsurance benefits spread between the members.

Although this would seem to be a simple solution, mutuals and association captives have had some bad press over the years.

We can all quote reasons as to why such a facility may not be acceptable. Although these fears are based on historical truths, times have changed.

There is now a growing interest in the UK, Europe and especially the USA in pooling, joint purchasing of insurance, offshore captives and other mutual forms, largely fuelled by escalating insurance premiums. This growth has been fuelled by the increased knowledge and expertise in managing those operations now present in the public sector and among charitable organisations.

Offshore businesses
The most significant difference between the old-style mutuals and these new enterprises is the virtually inherent use of offshore locations, which is important because of the lower overhead costs available overseas. As a result, smaller groups are now able to form captives, which can afford to focus on single lines of business that have an impact on parent companies.

Mutuals and association captives have had some bad press over the years. Although these fears are based on historical truths, times have changed

Inevitably, this leads to fewer areas of dispute and a greater sense of ownership over the company, with a concomitant desire to manage corporate results through improved risk management.

But there are complications with the use of offshore companies by public bodies and charities. For housing associations, the most significant are issues with the formation of an offshore company and the issue of making a profit. Many associations' capital is subject to strict control and for many, the formation of an offshore company is not allowed. Meanwhile, the captive's aim to make a profit can be at odds with the ethos of an association, as an insurance company by its nature has a desire to make an underwriting profit. Also, individual associations have a duty to look after their assets and will have a keen interest in the management of the captive. This may create a number of burdens relating to the control of the company and the need for a high level of trust between members.

We can overcome
Trowers & Hamlins' Adrian Carter recently addressed many of these issues (HT 4 July, page 15). And although there are barriers, none are intrinsic to the formation of a captive, by either a single association or indeed a group acting together. The best method for achieving a satisfactory outcome is to ensure that the parties to the mutual set out corporate goals and performance benchmarks at the outset, and provide full disclosure to interested parties in the UK.

In this way, it can be ensured that the company is transparent in its activities and operates in accordance with the aims of the trusts involved.

Many charities and government organisations use risk-financing tools as key elements of their risk management strategy. The trend towards using captives and pools in the UK has increased apace, and discussions have been held with regulators and government bodies in recent months on the subject. The results have been encouraging.