A.55 Many respondents highlighted the maturity and competitiveness of the insurance market and noted that there have been significant reductions in the cost of insurance over time. It was considered that this has partly been driven by experienced private sector bidders using existing large PFI portfolios to drive down insurance costs. As such these respondents considered that current PFI insurance arrangements represented good value for money for the public sector. A number of respondents also highlighted that insurance costs in PFI projects represented a small proportion of total PFI service charges.
A.56 Some respondents considered, however, that the low PFI claims history indicates that public sector self insurance of PFI projects would provide better value for money. A number of concerns were raised about this approach, with particular concerns about whether the public sector has the skills to manage the potential exposure to major risks. The costs of this approach were also highlighted, in both administration costs and the potential for large or multiple claims. It was also considered that self insurance may not satisfy lenders' requirements.
A.57 Some respondents felt that a framework of insurers should be introduced and variable views were expressed on whether this should be mandatory or optional. However, other respondents felt that procuring insurance from frameworks may not offer value for money and could potentially erode competition.
A.58 Other approaches put forward included the private sector taking out the insurance for the project and passing the costs through to the public sector at each renewal point, rather than requiring the private sector to take a view on the cost of insurance over the duration of the contract. Others suggested that the Government should introduce a risk sharing mechanism for insurance premium fluctuations or a mechanism to ensure that changes in insurance costs are borne by the party whose action caused the increase in insurance costs.
A.59 Some respondents also considered that responsibility for the insurance could be split between the construction and operational phases of the project, where the private sector is responsible for insuring the construction phase of the project and this passes across to the public sector for the operational phase.