Insuring public assets: our intentions
On 22 March 2017, we wrote to the Finance and Expenditure Committee informing it of our intention to carry out work in 2018/19 that will follow up on our June 2013 discussion paper, Insuring public assets.
Chris Bishop MP
Chairperson, Finance and Expenditure Committee
Dear Mr Bishop
OFFICE OF THE AUDITOR-GENERAL: FOLLOW-UP OF 2013 REPORT, INSURING PUBLIC ASSETS
This letter is to inform the Finance and Expenditure Committee (the Committee) that we intend to carry out work in 2018/19 to follow up our June 2013 discussion paper, Insuring public assets (our 2013 report). This work will focus on how well public entities assess their risk, for the purposes of deciding whether and how to insure against risk to their significant assets or to otherwise finance that risk.
In 2013, the Committee requested that the Office undertake further work to examine the robustness of risk assessment underpinning public entities’ insurance decisions. There is other work in this area currently under way. We outline below work that the Treasury, the Ministry of Business, Innovation and Employment (MBIE), and Local Government New Zealand (LGNZ) are engaged in, to enable entities to achieve better risk assessment and profiling to determine insurance needs.
Given the activity by those other agencies, we have decided to wait until their work has progressed further so we can consider it in our follow-up work.
Our 2013 report provided a high-level view of insurance for public assets and the main changes after 2010, the year of the first major Canterbury earthquake, which had significant costs to New Zealand as a whole. Our findings were based on data collected through audit returns from over 400 entities in late 2012.
From our data, we identified that public entities held assets of about $128 billion that had no insurance cover (although about a third of these assets is land, for which insurance is generally not offered). We noted that, in itself, this is not necessarily a cause for concern, because public entities may choose ways other than insurance to manage or mitigate the risk of damage to, or loss of, assets. However, we noted that it was important to distinguish between entities that properly analysed their risks and those that chose to do nothing because they considered insurance was too expensive. We did not assess the risk analyses of the entities that did not insure assets.
The Committee, in its report to the House of Representatives following our briefing, commended our 2013 report and requested our Office to undertake further work, as noted above.
We have completed some internal work based on the data used for our 2013 report, and have compiled a list of asset-intensive agencies and large local authorities to compare levels of uninsured assets. We will use this analysis to inform the scoping of our proposed follow up work in 2018/19. We also published a review of insurance recoveries for local government entities and the effect of the Canterbury earthquakes on local government insurers in Local government: Results of the 2012/13 audits (our 2014 report)1.
Current work by MBIE, LGNZ, and the Treasury
MBIE: Alternative risk financing approach
The Risk Financing and Insurance Centre of Expertise team sits within the New Zealand Government Procurement team in MBIE. Since 2015, this team has been engaged on a project, “Alternative Risk Financing”, an all-of-government approach to reform how entities insure public assets and liabilities, including against natural disaster. This approach aims to introduce a more collaborative and cost-effective model than previously used, and MBIE anticipates that it will provide significant reductions in costs to entities. The approach is also intended to make agencies better risk managers.
In 2016, MBIE completed an analysis of the risk profiles of many public entities and has piloted the approach with a small group of entities. After consultation with a number of agencies with significant and complex insurance requirements, MBIE plans to deliver a business case for review by senior government stakeholders in September 2017. In conjunction with this, MBIE also plans to prepare guidance and a manual for entities.
Local Government New Zealand
The Canterbury earthquakes and subsequent major natural disasters placed pressure on insurers of local authorities. Our 2014 report noted reinsurance difficulties for local authorities and their insurers affected by the Canterbury earthquakes. Increased insurance risk has led to higher insurance costs in general, and insurers have also introduced limits on what is insurable.
After the Canterbury earthquakes, LGNZ commissioned a review of the insurance market for local authorities. The New Zealand Local Government Insurance Market Review report2 recommended setting up a local authority-owned agency to replace the current local authority-owned insurers, to provide expertise on risk profiling, risk management, and risk mitigation.
An establishment board was set up to prepare the business case for a “Local Government Risk Agency”. This business case was submitted to the Government in June 2016, but no decision has been announced at the time of writing. The proposed entity is intended to assist local authorities to profile their asset risk and determine their risk financing/insurance needs, share data and practices, and thus reduce cost from natural disasters and other major damage.
The Treasury’s work
The Treasury is working on the wider exposure of the Crown to risks that have a financial impact on the Crown, including managing contingent risk. It has broad oversight of both of the initiatives described above and is on the steering committee for the MBIE work. The Treasury has also worked with LGNZ on the Local Government Risk Agency proposal.
The Treasury’s involvement with both of these initiatives enables it to identify opportunities to consider and compare how the models work in each sector, and where the approaches might work together with both local and central government entities.
Our future intentions
The recent earthquakes, floods, and fires in different parts of the country have reinforced the importance of how well entities prepare and account for expenses incurred as a result of unexpected major events. In particular, earthquake damage to many buildings in Wellington that housed government departments and agencies tested the business continuity of government.
We intend to carry out a follow-up performance audit or other study in 2018/19 to consider how well public entities assess their asset risk, particularly risk from natural disasters, for the purposes of deciding how or whether to insure or otherwise finance against that risk. Our work is likely to include whether MBIE’s and the Treasury’s work has been effective in achieving better assessment of risk to assets from major events (and in general). Depending on whether the Local Government Risk Agency has been established by that time, we may also consider its effectiveness in improving local authorities’ assessment of asset risk.
In preparation for this work, we will keep a watching brief on the current work in both the central and local government sectors and, in particular, the work already under way by the Treasury, MBIE, and LGNZ.
Suggestions for the Committee
We suggest that the Committee share this letter with the Commerce Committee and the Local Government and Environment Committee to inform their work with relevant entities, such as MBIE and local authorities. Committees may wish to ask asset-intensive entities directly about the risk financing and insurance of their assets. We would be happy to brief the Committee on our recent and proposed work in this area.
We intend to publish this letter on our website, and will be keeping in regular contact with the Treasury, MBIE, and LGNZ about their work on risk financing and insurance. We would seek to engage with the Committee when we come to the detailed scoping of the proposed follow-up performance audit or study.
We will also publish later this year our report presenting the Auditor-General’s reflections on work we have carried out under our Investment and asset management theme.
Assistant Auditor-General, Parliamentary Group
1: Part 5. Available at www.oag.govt.nz.
2: Available at www.lgnz.co.nz.