The purpose of this document is to promote continuous improvement in alliances. Agencies have varying expertise in alliance insurance. This has led to a variety of experiences, indicating that guidance would be helpful.
Importantly, this guidance is prepared from the point of view of assisting government and its agencies 'sell risk' as opposed to 'buying insurance'. This is an important distinction as it is a fundamentally different approach.
'Selling risk' is considered to be a best practice approach as it is based on the government perspective of how its risk should be managed in delivering alliance projects. 'Buying insurance' is a responsive approach to market forces, often created by the insurance market. In some cases, the approach to date has been aligned to that approach, which may not result in the best outcome for the government.
The guidance is also based on taking a cost-effective approach, seeking to achieve Value-for-Money for taxpayers and avoid the possibility of over-insuring risks. This may occur if the alliance members' view is that more insurance is better for the project and obviously incurs additional cost for the government.
There may also be cases where the public interest is best served by not insuring particular types of risks. Many of these risks may be outside the alliance's control, but will be borne by the government. Similarly much of the insurance cost will be borne by the government, either directly or indirectly. Arguably the Target Outturn Cost (TOC) needs to capture the cost of insurable risks so that required behaviours are manifest. In particular this is relevant for developing an insurance program where the level of self-insurance (deductible) appropriately influences the behaviour of the Non-Owner Participants. These factors would indicate that the public sector Owner should have a significant role in the alliance insurance process-both in design of the process and its execution.
As a result, this guidance note is intended to provide:
• a recommended process for procuring insurances in project alliances;
• assistance in identifying and articulating common insurable risks in project alliances;
• assistance in identifying and recommending a range of suitable insurance options; and
• guidance in reviewing the adequacy and prudence of the selected insurance options.
The note is also intended to assist the public sector Owners and users consider whether the products currently offered by the market meet their needs.
While there has been a level of innovation in the insurance product offering, product development to date has mainly been from the insurance industry perspective. The aim of guidance such as this document is to:
• encourage product development that carefully balances what is best for the state against the need for the private sector to create and market appropriate, attractive insurance products; and
• encourage public officials not to accept without challenge the way the market has shaped insurance cover, while being realistic about the ability to shape a better product offering in the short-to-medium term.