Auditor-General's overview
This paper provides a high-level view of insurance for public assets and the main changes after 2010. It does not provide a comprehensive view of all types of insurance in the public sector. I hope that it will inform debate, and that public entities and others will find it helpful when considering insurance as part of risk management.
The Canterbury earthquakes have resulted in significant costs to New Zealand as a whole. Some of these costs relate to uninsured losses for assets in Canterbury and some relate to unanticipated costs that arise as a result of a major catastrophe. Further, many public entities throughout New Zealand have told me that one of their most significant cost pressures since the Canterbury earthquakes has been insurance.
The cost of the Canterbury earthquakes highlights the importance of good risk management, and the part insurance plays, for public assets. In many instances, public entities can provide services in the future only through the continuing use of their assets. Public entities have had to think carefully about how they are managing their risks and how they are using insurance.
In this context, I decided to find out more about the nature and extent of insurance cover for public assets and the extent of changes in insurance associated with those assets after 2010.
In late 2012, my staff got information about how more than 400 of the largest public entities insure their assets. This information shows that:
- These public entities spend about $280 million on insurance premiums each year for assets of about $97 billion.
- These public entities have assets of about $128 billion without insurance cover. However, my staff estimate that land - for which insurance is generally not offered - makes up about one-third of these assets.
- The nature of insurance cover is changing.
- Nearly 40% of the insurance policies of these public entities included an increase in insurance premiums of more than 20% between 2011 and 2012.
- Many of these public entities are thinking about the risks to their assets, whether or not to insure them, the right insurance cover, and the most appropriate way to get that insurance.
We supplemented our analysis of this information with three examples of different approaches to insurance in the public sector. These examples included a public entity that self-insures, a sector that insures collectively, and a specialist insurer of local government assets. The purpose of these examples is to show what is happening and why, not to judge validity or appropriateness.
In response to recent events, reinsurance costs have increased substantially. Insurers have to manage these extra costs by increasing premiums. Recently, insurers have been using an increase in excess to ensure that insurance remains accessible. However, in some situations, the excess may be so high that the cover makes the cost of insurance difficult to justify. Some of these increases in excess have happened recently, so the information we collected in 2012 does not necessarily fully reflect this.
The nature of cover, especially cover for natural disasters, has also changed. There have been moves from replacement cost to indemnity value and increased restrictions on cover for buildings that are not earthquake-strengthened.
In looking at the analysis of the information that my staff collected, there are six questions that we are not in a position to answer, but that the public sector needs to consider. These are:
- What is the assessed risk of assets not being available to provide public services in the future, and what is the most appropriate way to manage it?
- How well are risk assessments being done to inform decisions about insurance, including assessments of the likely costs to replace assets?
- Is the right amount and nature of insurance cover being obtained to ensure that public services can continue to be delivered?
- Is insurance being acquired in the most cost-effective way?
- How much can be prudently borrowed to replace uninsured assets?
- Has the risk of all uninsured assets been assessed centrally, and is the risk being appropriately managed?
The questions arising from our analysis are worth asking when considering whether the public sector can provide the services required to meet our future needs. I encourage public entities, groups of public entities, and the Government to consider these questions.
I would like to thank my auditors, who provided the underlying information analysed in this paper, the public entities that provided examples of different approaches to insurance, and the Insurance Council of New Zealand for valuable advice and comment.
Lyn Provost
Controller and Auditor-General
19 June 2013