Risk management and insurance

Report: 8
Date: 20 July 2000
By: Treasurer

Summary

The report outlines issues in relation to risk management and insurance and recommends appointment of risk advisers to advise on the way forward. A panel of three members of the Committee is proposed to work with the Treasurer and Director of Resources.

A. Supporting information

Present arrangements

1. The Metropolitan Police Service has not generally insured against risks. The principal exception is in relation to helicopters.

2. The cost of damage to MPS, or other parties’, property and claims against the MPS are dealt with on a pay-as-you-go basis usually out of current revenue. There are various budget provisions for claims and associated legal costs, totalling £28.5 million in 2000/01. In addition a sum of £10 million has been set aside out of previous years’ under spendings specifically as a reserve for compensation claims.

Future costs

3. The annual expenditure on accident and other compensation claims is increasing rapidly and represents a major budget pressure. Such expenditure has doubled over the last four years. The preliminary draft budget submission for 2001/02 contains an uplift for this purpose of £8 million.

4. The potential for very substantial costs is illustrated by a recent accident case found against the MPS where damages are assessed at £4-5 million. This case is subject to appeal.

5. There is only limited information about the potential value of liabilities already in the pipeline as a result of events that took place some years ago. Under the arrangements for setting up the MPA the Authority assumes responsibility for all such liabilities. I have reserved the Authority’s right to discuss this issue further with the Home Office should these liabilities, when assessed, significantly exceed the resources the Authority has inherited for these purposes.

6. Success in setting in place effective measures for limiting or reducing the financial risks to which the Authority is exposed will be a very relevant factor in considering the adequacy of the Authority’s reserves in general.

Proposed approach

7. The MPS has recently had two reviews carried out by Aon Risk Services, one looking at property insurance and the other at the operation of the claims handling section in the Department of Procurement. Both reviews have produced a series of recommendations that should be taken forward as appropriate at an operational level. However they represent a piecemeal approach whereas we need to assess the total requirements in order to develop an effective strategic response.

8. The Authority is exposed to potentially substantial future costs because of the lack of any insurance arrangements. In the short term we need to seek to cap that exposure with appropriate insurance.

9. The Authority also requires a strategic review of all the risks to which it is exposed and advice as to long term funding arrangements. It is likely that such arrangements would involve a significant element of self-funding to cover a normal recurring level of liabilities together with external insurance to limit the cost of individual claims and to provide a stop-loss for the Authority’s overall liability in any one year.

10. It is essential to secure an early indication of the potential liabilities that already exist as a result of events that have taken place in the past. This will require professional judgement to assess the possible cost and timing of claims. Members will appreciate that it is not possible to insure against such past events and we will therefore need to build the necessary funding into our future financial planning.

11. Finally we need to address, as far as possible, the causes of accident and compensation claims and other damage losses. Effective risk management can significantly reduce future liabilities and insurance costs. Although there are some specific initiatives to control risks in the MPS there is not a systematic approach to risk management. Advice is required on an approach to risk management so that an ongoing programme of measures to reduce risk can be implemented.

12. We need to appoint risk advisers to help the Authority address this range of issues. Further work is needed to scope such a review and identify options for its structure. For example, should it be a single contract or a series of contracts?

13. Members should be involved in this appointment. I suggest that three members of this Committee be nominated to form a panel to work with the Treasurer and Director of Resources in taking this project forward.

B. Recommendations

That the Committee set up a panel of three members to work with the Treasurer and Director of Resources on the appointment of risk advisers to advise on the range of issues described in paragraphs 8-11 above.

C. Financial implications

The likely fees for risk advisers would be an output of the initial scoping exercise. Insurance premiums resulting from the review will represent an additional cost not reflected in the Budget. There should be opportunities to reduce, or restrict the growth of, the costs of insurable risks met directly by the MPA.

D. Review arrangements

There will be further reports to the Finance Planning and Best Value Committee.

E. Background papers

The following is a statutory list of background papers (under the Local Government Act 1972 S.100 D) which disclose facts or matters on which the report is based and which have been relied on to a material extent in preparing this report. They are available on request to either the contact officer listed below or to the Clerk to the Police Authority at the address indicated on the agenda.

None.

F. Contact details

The author of this report is Peter Martin.

For information contact:

MPA general: 020 7202 0202
Media enquiries: 020 7202 0217/18

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