25.1.1 Traditionally, central government has chosen not to take out commercial insurance against insurable risks retained under conventional procurement techniques, as the premiums payable have not been seen to represent good value for money compared to self-insurance.
25.1.2 Public sector authorities and other public bodies sometimes elect to insure some of their assets in the commercial insurance market, though typically this is with very high deductibles and a significant level of self-insurance.
25.1.3 The position is different under PFI, because insurable risks are transferred to the Contractor which may have limited free financial resources, particularly if it is a SPV. Moreover, the need to ensure continuity of service means that self-insurance by such a Contractor for the full range of insurable risks is, generally, not appropriate. The Senior Lenders will usually take the same view and not expect nor wish the Contractor to self-insure. To achieve an acceptable credit quality for their loans, Senior Lenders will, in fact, frequently require more extensive insurance cover for the Contractor than that required by the Authority. Nonetheless, the Authority should not rely on the Senior Lenders to look after the Authority's own insurance interests and it is essential for the Authority to seek professional insurance advice on what insurance requirements should be imposed on the Contractor at an early stage in the procurement process (before issuing the tender documents) and during subsequent negotiations.
25.1.4 The main issues which the Authority will need to consider with its insurance advisers are:
• whether and the extent to which the Authority should require the Contractor to take out and maintain certain insurances as a means of managing particular risks (see Clause 25.2 and Section 25.12), and how these may change over time (see Section 25.2.5 and Section 25.6). A detailed Standard Required Insurance Schedule is set out in Annex 3;
• ensuring that the proceeds of any claim under any required insurance are used correctly by the Contractor (see Section 25.7);
• Authority control of litigation where the Contractor is the principal party insured (see Section 25.8);
• whether the Authority should share significant increases and decreases in the market-wide cost of maintaining the Contractor's operating period insurances (see Section 25.9);
• what should happen if a risk for which insurance is to be effected and maintained in accordance with the required insurance schedule in the Contract becomes uninsurable (see Section 25.10); and
• what should happen if any required insurance term becomes unavailable (see Section 25.11).
Insurance lies at the heart of the Contractor's risk management strategy and, in turn, efficient risk management lies at the heart of the value for money benefits of PFI that derive from long-term Asset ownership and stewardship by investors. The Contractor's approach to insurance is inseparable from its approach to Asset design, construction, choice of materials and maintenance regimes etc. Accordingly, Authorities and their advisers should take care not to disturb the transfer of this integral package of risks, nor to disturb incentives that ensure these risks are efficiently priced and managed. Moreover it is essential that the Authority's insurance requirements and associated contractual provisions are clearly stated in the tender documents and that bidders are required to price these matters within their responses to the tender documents.
25.1.5 The Authority's insurance requirements in Clause 25.2 and Annex 3 will represent a minimum degree of cover which the Authority expects to see maintained by the Contractor. It is, of course, for the Contractor to determine the overall insurance programme to be implemented, consistent with the Authority's and Senior Lenders' respective requirements. To ensure delivery of value for money, the Contract should incentivise (or, as appropriate, require) the Contractor at all times to:
• ensure full integration between the insurance programme and their overall risk management strategy; 420
• make cost-effective trade-offs between lower deductibles and increased insurance premiums (within the constraints specified by the Authority and Senior Lenders);
• procure insurance from good quality and cost-effective suppliers; and
• look only to the Authority for cover in relation to unavailability of insurances as a last resort.
Under exceptional circumstances it may not be value for money for the private sector to bear all the risks associated with placing an insurance programme itself (e.g. in the event of (i) non availability of insurance or (ii) excessive market wide increases in insurance costs) and it is likely to be better value for money if an Authority provides a limited level of protection under specific circumstances (see Section 25.10 (Risks that Become Uninsurable) and Section 25.9 (Insurance Premium Risk Sharing Schedule)). Factors which should incentivise the Contractor to manage risks effectively and discourage the Contractor from seeking protection from the Authority, unless in exceptional circumstances and as a last resort, include the following:-
• the Contractor remains liable for deductible related losses;
• in the event of uninsurability and an uninsured risk materialising, the Authority may have the ability to terminate the Contract; and furthermore, the amount payable by the Authority to the Contractor upon such termination will be the same as that payable upon termination in the event of Force Majeure (i.e. equity payment limited to par value less Distributions paid to date (see Section 21.3)); and
• in respect of the operating period insurance premium risk sharing arrangement, protection is limited to general market wide changes in insurance costs. Furthermore the Contractor takes the first 30% of any relevant change in insurance cost, as well as 15% of any relevant change in insurance cost in excess of 30%.
25.1.6 Further challenges faced in Northern Ireland include the following:
(a) The insurance market in Northern Ireland is more limited than that in Great Britain, with the only substantial presence provided by composite insurers (those capable of writing several classes including property, marine, etc.);
(b) Some insurers in Great Britain will not write Northern Ireland based risks, although they will accept the same risks in England, Scotland and Wales; and
(c) A number of insurers, domiciled in both Great Britain and Northern Ireland, canvassed by insurance advisers to SIB indicated that they would not be interested in becoming involved with Northern Irish projects for, inter alia, the following reasons:
• not willing to utilise finite capacity on insuring risks which historically show higher incurred claims costs;
• perceived political uncertainty;
• lack of experience among the Northern Ireland construction industry's potential bidders;
• complications and cost implications of dealing with losses arising from terrorist-type incidents;421 and
• experience has shown that dealing with devolved government has added time delay and extra cost.
All of these factors contribute to lack of competition in the Northern Ireland insurance market. SIB have noticed that this is changing over time and that the markets are becoming more aligned.
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420 For example, for a schools project, a Contractor should consider whether sprinklers should be installed, taking into account the lower cost of insurance which is likely to arise as a result.
421 See Section 25.3.