Memorandum from Zurich
INTRODUCTION
Zurich is grateful for the opportunity to respond
the to the Public Administration Select Committee's inquiry into
third sector delivery of public services. Zurich is one of the
leading insurance and risk management specialists in the UK with
a dedicated charities segment that currently works with more than
15,000 charities. These customers range from some of the largest
charities in the country to thousands of small, community-based
groups run solely by volunteers. Zurich is also the country's
largest insurer of local authorities, often the source of a significant
amount of funding for local voluntary organisations. Being positioned
at this nexus enables Zurich to have a good overview of the relationship
between charities and statutory bodies during the commissioning
and letting of services.
In keeping with your guidance this short response
will focus on Zurich's area of expertise and concentrates and
topics found in questions 3, 4 and 5 in your issues paper. We
work very closely with our customers in the community and voluntary
sector and have identified a particular issue regarding the transfer
of risk in the delivery of public services by community and voluntary
sector groups. We are currently engaged in pressing this issue
with a range of stakeholders and have fed back directly to the
Department of Communities and Local Government on the recent Local
Government White Paper and its implications for the community
and voluntary sector.
Zurich would be happy to speak to the Committee
should it wish to probe further into the issue of risk transfer
in the delivery of public services.
RISK TRANSFER
The Committee has rightly recognised that the
third sector is becoming increasingly involved in the provision
of public services. This outsourcing often goes hand in hand with
a wider drive towards "contestability" in the provision
of public services, the aim being to improve service delivery
while also securing value for money for the taxpayer. But third
sector organisations don't just claim to be better value, they
claim to be better across the piece: better at delivering to "hard
to reach" groups; better at being innovative; better at thinking
outside the box. Perhaps most importantly, community and voluntary
groups also claim to increase social capital by encouraging community
cohesion and civic engagement.
However, while these added value services should
clearly be part of any contract letting process, finance is also
important. Local authorities are themselves working to tight budgets
and need to secure value for money in the most literal sense.
Therefore, there is clearly a tendency to drive down costs in
a public service tendering process and a temptation to cut corners.
Zurich believes that this is becoming the case in the area of
risk management and insurance.
When community and voluntary sector organisations
take on the running of public services they also take on significant
amounts of extra risk. This ranges from the day to day operational
risks to the macro strategic risks inherent in running such services.
An operational risk in a contracted out meals on wheels service
could be an increased likelihood of injury to volunteers due to
lifting; a strategic risk could include volunteers not arriving
at the allotted time and the service being unable to function
on a particular day.
Whatever services third sector groups take on
they will find that they incur increased risk management cost,
whether through increased insurance premiums or in administration
time to manage uninsurable strategic risks. Zurich is concerned
that this fact is not being understood during the letting of contracts,
which is exposing the community and voluntary sector to greatly
increased risks with no financial recompense. In effect, local
and central government could be tempted to outsource the risk,
as well as the service, with no commensurate reimbursement.
FULL COST
RECOVERY
The third sector is understandably exercised
by the concept of full-cost recovery as it relates to management
and administrative time and costs. Given the importance of risk
management to the smooth running of public services, especially
those delivered by volunteers and community groups, Zurich believes
that risk management and insurance should form a part of any discussion
about full cost recovery. We have seen examples with our clients
where this has not been the case and the charity/voluntary group
has been saddled with significantly increased risk and insurance
costs which has not been reimbursed by the commissioning body.
Zurich believes that the current Compact Code
of Practice, which briefly deals with the transfer of risk issue,
is insufficiently clear to manage the ever-increasing number of
issues associated with the funding of charities and voluntary
groups by central and local government. For example, while the
guidance does state that "the Government undertakes to
discuss risks up-front and place responsibility with the public
sector body or voluntary and community organisation best able
to manage them", this does not seem to be working in
practice. On top of that, there is no explicit recognition in
the guidance that insurance and risk management carries a cost
and that that should be built in to the concept of full cost recovery.
Without this explicit recognition it will be hard to leverage
funding for insurance and risk management in contract negotiations.
Some of the guidance on this issue also seems
to be relatively inappropriate for many of the contracts undertaken
by small voluntary groups. For instance, one of the documents
referred to in the Compact Code of Practice, Managing Risks
with Delivery Partners, is a very high level document published
by the Office of Government Commerce seemingly pitched at companies
bidding for large scale PFI contracts. What the third sector needs
is high quality but simple advice which demystifies the issue
rather than making it seem more complex than it really is.
Given the size of statutory bodies relative
to many of the voluntary organisations with which they are contracting
it is more likely that they will have expertise in risk management.
Statutory bodies should therefore discuss the issues surrounding
risk transfer at the beginning of a partnership, which will ultimately
benefit both partners as it is likely that if there is a problem
risk, if managed poorly, will ultimately find its way back to
the local authority or government department. This is not just
an issue with community and voluntary groups but is an inherent
issue when public services are outsourced to any group, be that
a charity or a private company.
CONCLUSION
Zurich is pleased to have the opportunity to
comment on this important issue. Our hope is that this inquiry
can push the issue of risk in public sector contracts up the political
agenda. Community and voluntary sector groups are carrying out
great work across the country and Zurich wants to support them
in this. Our fear is that the more contracts are let to third
sector bodies, the problems that occur when risk is not properly
managed will increase in frequency and severity. However, small
changes to the process could have a significant benefit. Zurich's
proposals are:
— Risk management and insurance should
form part of any discussion about full cost recovery.
— Full-cost recovery should include
the cost of insurance and risk management.
— There should be an obligation on
statutory bodies to engage in discussion about risk management
with potential service providers before a contract is let.
— The Compact guidance should be clarified
to highlight the issue of risk transfer and the guidance should
be appropriate for all sizes and types of organisation.
Zurich would be pleased to offer more detail
to the Committee if required, either in written or verbal form.
February 2007
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