BACKGROUND
6 The
Council historically placed its insurance cover with New Zealand underwriters
only. The risk with this strategy became evident following the
Christchurch earthquakes when capacity in this market became constrained.
7 As part
of the 2014/15 insurance renewal Council was able to place 35% of its core
cover into the international market, which provided significant risk mitigation
in relation to market capacity, but also delivered the opportunity to extend
cover to infrastructure assets as well as creating market tension to ensure
other renewal terms and conditions were favourable.
8 This
strategy continued for the 2015/16 renewal with placement into the
international market set at 30% (decrease due to increased placement into the
New Zealand market which had renewed capacity and favourable pricing). Of note,
London was not competitive for the CCO placement and this portion of the
programme was renewed with the existing insurers.
9 In
addition, savings achieved during this period were reinvested in Infrastructure
Assets cover by increasing the first loss limit from $100.0m to $250.0m and
expanding the property insured to include Transportation and PARS assets.
10 As catastrophic
events have quietened and capital has returned to the NZ market, prices have eased
further and in some cases almost returned to pre-quake levels. The market
experienced an unusually short cycle from being 'hard' in mid-2011 to being
considered 'soft' a mere three and a half years later.
DISCUSSION
11 In particular, the
2016/17 renewal sought to achieve the following objectives:
· To
maintain the general Policy placement of the previous 2015/16 period, and to
continue to work with existing insurers in recognition of the relationship and
business understanding acquired over previous renewals, and to ensure premium
terms remain competitive and fit for purpose.
· Comprehensively
review and update the Business Interruption Cover, including Additional Costs
of Working and Claims Preparation (currently set at $15 million, $20
million and $2.5 million respectively).
· Review
Gross Rentals Revenue – the 2015/16 policy provided cover for DCC rental
income on the investment portfolio, but does not extend to housing portfolio
rentals.
· Comprehensive
review and update of the Declared Asset Schedules – these form a key
component of the Policy and will be relied upon in the event of a claim. Any
assets excluded from the schedules will not be covered.
· Review
of the Liability Policy Limits – in light of claims history, emerging
trends and recognising the limits are Group limits.
· Consider
emerging trends including Natural Disasters/ Climate Change, Cyber Risk, and
the impact of the recent workplace Health and Safety reforms.
12 Table A provides a
comparison of insurance premiums between 2015/16 and 2016/17. The
following should be noted in relation to this data:
· All
premiums are quoted exclusive of GST. Where applicable the 2015/16 premiums
have been adjusted to include annualised premiums for mid-term changes to allow
an accurate comparison to be made.
· The
Material Damage Fire Service Levy for commercial property will be confirmed
upon completion of the insurance renewal and once all CCO property schedules
have been received.
· The
Material Damage/ Business Interruption premium is based on terms provided by
QBE Insurance (Australia) Ltd and the London market and is subject to
co-insurance support.
Business Interruption Cover
Gross Revenue/ Gross Profit
13 Business
Interruption Cover has been increased from the current $15.0 million
(36 month indemnity period) first loss limit to $90.0 million (36 month
indemnity period). The existing limit of $2.5m for Claims Preparation Costs has
been retained.
14 The rental schedule
has been extensively reviewed – internal departmental rents have been
removed and cover in respect of the residential housing portfolio included.
15 Additional Cost of
Working Cover has been increased from $20 million (36 month indemnity period)
to $30 million (36 month indemnity period). This increase recognises that 54%
of Council income is from rates and additional costs may not be covered by the
business interruption limit.
16 With the exception
of the rental cover, the above Business Interruption cover applies across the
DCC Group (some CCO’s hold individual Profit/ Revenue cover).
Health
and Safety at Work Act 2015
17 The Health and
Safety at Work Act (2015) came into effect in April 2016. The new legislation
imposes greater responsibilities on businesses and subsequent penalties for
breaches. The two key insurance mechanisms addressing these risks –
Directors and Officers Liability, and Statutory Liability – are currently
held, and remain unchanged with limits of $10m (plus defence costs of $5m) and
$2m (plus defence costs of $500,000) respectively. Limits apply to any one claim
and in the annual aggregate and are shared between the Group.
18 Of note, the new Act
has not changed the proviso that insurance against fines imposed for a breach
of the Act is invalid and of no effect. As with previous renewals, the above
Policies therefore do not extend to cover fines imposed for a breach of the
Act, only for the defence costs associated with defending actions and
prosecutions brought against Insured parties.
Policy Limits
* Natural Disaster Perils
include earthquake, volcanic eruption, tsunami, geothermal activity,
hydrothermal activity with outfall cover extended to include storm (Force
10). This definition excludes the impact of floods.
Policy Excesses
Uninsured Risks/Emerging Insurance Trends.
19 It is acknowledged
that with any insurance cover the Council will accept a degree of uninsured
risk, whether it be reflected as higher excesses, policy limits and/or
uninsured assets. In terms of particular risks associated with the
current programme the following should be noted:
· Policies
do not provide cover for automatic reinstatement of the sum insured in the
event of fire or Natural Disaster losses. If a significant loss occurs
additional insurance cover may need to be purchased.
· While
Asset Schedules have been extensively reviewed and updated, any assets excluded
from the schedules will not be covered, and those incorrectly valued may not be
adequately covered. It is recommended that further work be undertaken to review
undeclared assets and update asset schedules (including Fine Art and Cultural
Asset values).
· Liability
Policy limits will need to be continually reviewed in light of claims history,
emerging trends and because these policy limits are held as group limits.
· Emerging
trends that remain under consideration include an extension of current policy
coverage for more robust Cyber Risk protection, as well as risks posed by
terrorism, climate change, contagious disease, pollution and weather tight home
claims.
· An
increasing recognition of the extent of asbestos risks and the potential costs
of identification/ maintenance/ removal activities may necessitate further
Policy reviews.
· The
Material Damage - Fire First Loss limit of $250m needs to be sufficient to
provide cover for fire following any cause including Natural Disaster losses
(it incorporates all assets insured by the Group). In order to test this limit,
a review exercise was completed in October 2014. It is recommend that a similar
review exercise is completed to ensure the existing first loss limit remains
adequate based on adjusted values since 2014.
· Infrastructure
asset coverage can be extended to include a sub limit of $25.0m for damage
caused by flood (defined as 'the covering of normally dry land by water that
has escaped or been released from the normal confines of a lake, river, creek
and other natural watercourses, a reservoir, canal or dam) and storm (defined
as winds, rain or snow) perils for an additional premium of $205k.
· Government
Levies – fire service and earthquake commission levies are subject to
change outside the control of Council. Notably, at the end of April the
Minister of Internal Affairs announced the amalgamation of the urban and rural
fire services into one organisation (Fire and Emergency New Zealand). New
legislation is yet to be drafted which address both the funding and structure
of the service, however it is believed that levies will be charged on
commercial property based on the sum insured (presumably aimed at Material
Damage policies). The rate of levy (currently .076% plus GST) will also need to
be determined.
As such, it is likely the DCC will be able to have a
single Material Damage policy First Loss Limit (less than the total replacement
value for insured property) for all perils and pay levies on such a limit. Serious
consideration will need to be given to such a limit to ensure it is adequate
for the entire Group.
· Contract
Review: There remain some concerns with regards the number of current DCC
contracts that include open ended indemnity agreements, hold harmless
agreements, and/or limitation of liability clauses. Such agreements may be
placing Insurance arrangements in jeopardy, including the potential negation of
the exercise of subrogation. This applies in particular to those waivers
whereby other parties are relieved of liability for their own negligence, and includes
contracted service agreements as well as tenancy/ lease and community group
activities.
Options
20 Not applicable.
Next Steps
21 The DCC Group
Insurance Policy is subject to an annual review and renewal.
22 Additional and
ongoing Policy review, monitoring and negotiation activities will be undertaken
by the GCFO/ Financial Controller and representatives of the Crombie Lockwood
Insurance Programme Service Team to ensure adequate coverage remains in place
for the DCC Group. A number of these proposed reviews are included in the Risks
section above.
