Under the vast majority of PFI contracts in England, the risk of damage or failure of the assets during the project life is transferred to the private sector contractor. Most contractors are special purpose project companies who lay off this risk by taking out required insurances in the market. Their estimates of future insurance premiums over the long contract term are included in their bid pricing of future unitary charges to the public sector. The insurance market is cyclical and contractors build in contingencies against adverse future movements in the insurance premiums.
The standardised PFI contract terms have been developed over time. Insurance cost sharing mechanisms were introduced in 2002 and standardised in 2006, whereby the public and private sector share the risk of fluctuations in market pricing of insurance premia. These provisions aim to minimise the inclusion of risk contingencies within private sector contract pricing, while still incentivising contractors to seek the keenest insurance pricing.
In addition to insurance market pricing cyclicality, there is a broader question whether the insurance market is pricing PFI risks efficiently and whether the apparent low claims record of PFI projects is fairly reflected in insurance premia. Alternative approaches to risk management, such as self insurance or pooled insurance models, have been applied in other areas of public sector activity and in some parts of the private sector, particularly where large portfolio interests offer scope for effective risk diversification and for specialist risk management techniques to be applied.
Question 34: Are the insurable risks of PFI projects most appropriately dealt with (a) by the private sector with a fixed cost passed through to the unitary charge, (b) by a premium risk sharing mechanism or (c) by the public sector? Please specify reasons for your choice. Question 35: Are changes in insurance costs that are attributable to project-specific factors (eg claims-history, poor security, quality of build material, installation of sprinklers, security arrangements , etc) most appropriately borne by (a) the private sector, (b) the public sector, or (c) borne on a shared basis? Please specify how. Question 36: Are there (a) certain types of project (eg housing, office accommodation, specialist accommodation, highways, street lighting, equipment etc) and (b) certain types of risk (eg negligence of the contactor/supply chain, business interruption cover for banks, officer's liability, statutory cover, third party liability, vandalism, construction phase cover, property damage all risks), which are more/less suited to coverage by the public sector. If so, which are they and why? What are the concerns, constraints or procedures that would be relevant or required for any such public sector self-insurance? Question 37: If the public sector provided cover for insurable risks for any future PFI projects, what incentives or penalties would be needed to promote a private sector interest in managing risks effectively to reduce/avoid claims? Question 38: Would you favour the establishment of a framework of insurers for PFI contractors to use (with the use of mini-competitions)? If so (a) should the use of the framework be mandatory and (b) would it lead to better value for money for the public sector compared with contractor-led portfolios? Question 39: Do you consider that the ratio of premium income to claims paid for PFI projects indicates that (a) commercial insurance does or does not represent good value for money and (b) the commercial insurance market is or is not operating efficiently in this area? Please specify reasons for your view. |