Wednesday, September 1, 2010

Government Captive Insurance

More government procurement notices are issued for insurance than any other category.

Of the 235 insurance contracts awarded by the public sector so far this year, Zurich Municipal, Allianz and Royal & Sun Alliance are the main beneficiaries.

Given the UK's population of 61 million and its ability to absorb billions in losses from banks, the question which has to be asked is why the UK government does not establish a captive insurance scheme.

Use of captive insurance is common practice for large corporates where subsidiary risk is underwritten at a group level. The group carries policies to insure against risks which are material for the group but the kind of events associated with such claims are few and far between and, relatively, inexpensive to cover.

The logic of using such schemes is that, on average, premium income earned by the insurance industry outweighs claims. Therefore, by "self insuring" subsidiary risk, savings for shareholders are considerable.

Applying the same logic to government, individual public bodies would pay premiums to central government, and the surplus after claims would be reinvested in the public sector or provide a tax break.

That's not to say that the private sector has no role to play. dotgovdotuk believes that this should be limited to administering the scheme rather profiting from the nation's risk.