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Procurement pretensions prevent proper partnerships

Professor Michael Mainelli, Executive Chairman, Z/Yen Group Limited investigates mutual insurance procurement

Procurement processes in many sec- tors throughout the UK have frustrat- ed Z/Yen, the City of London’s leading commercial think tank. Professional

procurement is an important and useful process that should lead to better purchasing decisions, value for money and cleaner, i.e. less corrupt, prac- tices. Yet, sadly, procurement processes are often bureaucratic nightmares of Kafkaesque terror and Catch-22 absurdities. Some recent work with UK Higher Education

Institutions (HEIs) on greater efficiency made us wonder if they were wilfully obstinate about mutual insurance procurement. Mutual insurance is a ven- erable and widely-used form of risk management, constituting for example the vast bulk of marine P&I insurance. Starting a mutual insurer can be problematic, but there are already two significant mutuals among UK HEIs, UMAL (University Mutual Association Limited – general risks) and UMSR (Uni- versity Mutual Special Risks – terrorism). At first glance, mutual insurance is alive

and well in HEIs. Of 149 HEIs (excluding private and NI institutions), 34 belong to UMAL (23 per cent) and 98 belong to UMSR (66 per cent). Oddly though, HEIs that belong to procurement clubs such as LUPC (London Universities Purchasing Consortium) or APUC (Advanced Procurement for Universities and Colleges, Scot- land) are far less likely to be members of a mutual, UMAL in particular.

APUC– 18 HEIs UMAL members 0 UMSR members 6 (33%) LUPC – 45 HEIs 5 (11%) 28 (62%)

UMSR membership shows that procurement club HEI members can and do use mutual insurers,



Is data released by brokers? Insurers buy information MUTUAL

Information held by the mutual for members’ benefit only

Where do profits go? Who owns the reserves? Who gets commission? Commercial shareholders Commercial shareholders

Purchasing consortia often take a percentage of premiums payable

How do we learn about risk management?

Little evidence of shared learning

Is there discretionary cover? Claims not covered by the policy can be declined

Members Members

Institutions join mutuals directly without commission or joining fees

Mutuals are incentivised to raise membership knowledge and standards

Claims not included in the cover wording can be adjudicated by the Board and are often paid

What is included in the price, e.g. risk surveys or claims handling?

Additional charges payable

but UMSR current membership strength is largely due to historic reasons after 9/11; UMSR stood out for providing terrorism cover HEIs couldn’t get elsewhere. Of the 86 HEIs that do not belong to a procurement club, membership of UMAL is 29 (34 per cent), while procurement club membership is either 0 per cent or 11 per cent. Is there a paradox here that mutual insurance is fine if you have no choice, but otherwise commercial insurance pro- curement is better? If commercial insurance procurement is better,

that’s a bit strange. For organisations that stay in the same business over long periods of time, mutual insurance is normally a better choice. First, mutual insurance provides much more information sharing leading to better risk management. Sec- ond, mutual insurance provides smoother charges and lower charges over the long term. To take

Such services included in price

some real numbers, let’s look at a not-so-mythical HEI in 2005–2006 with an average claims record. Its declared property value might be £250m; its wage roll might be some £45m. Its mutual contri- bution might be some £250,000 (0.1 per cent of property or 0.6 per cent of wages). By 2010–2011 its property value might be 80 per cent higher at £450m while its wage roll might be about 30 per cent higher at about £60m. Its mutual contribution would be about £400,000 (less than 0.1 per cent of property or about 0.7 per cent of wages). This looks wonderfully stable but, third, when there is a surplus, over the same period a mutual typically returns that surplus, in this case about £225,000 over the five years, i.e. enough to drop the annual headline rate by about 15 per cent. And in this par- ticular case, the reserve surplus was an additional £500,000 still undistributed, or just over a year’s 10

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