Further to Guidance issued by HM Treasury in December 2005 (the fourth edition of the “Standardisation of PFI Contracts” colloquially known as “SOPC4”) many PFI/PPP contracts included provisions around insurance premium risk sharing between the Contracting Authority and the Contractor involved in the relevant PFI projects. These provisions set out a mechanism for the identification and sharing of operational insurance costs (both insurance cost increases and savings).
To assess the operational phase insurance cost movements the contract requires the Contractor (through its insurance broker) to provide the Contracting Authority with Joint Insurance Cost Reports (JICRs). These are the reports which should be produced every two years by the Contractors’ insurance broker in accordance with the contract provisions.
In addition to confirming compliance with insurance obligations under the contract, the JICRs require analysis and explanation of:
- The actual insurance costs incurred by the Contractor in the relevant period.
- The insurance costs forecast in the original project financial model (the Base Cost).
- The reasons why there may be a difference in 1 and 2 above.
For many projects the insurance market went into a “soft cycle” and the cost of many of these required insurances reduced below the Base Costs. As a result of this the real costs of insuring projects may have been markedly lower than the forecast Base Cost which should have led to exceptional insurance costs savings to the Contracting Authority.
What Gallagher is finding however is that the interpretation of the cost sharing mechanism by some has resulted in expected savings not fully materialising.
If Contracting Authorities are not satisfied that the interpretation of the mechanism in the JICR is correct they have 15 working days of receipt to challenge it and, a failure to challenge within the timescale deems the JICR is accepted.
Whilst there are a number of advisors in this sector assisting Contracting Authorities with a review of their specific cost sharing mechanisms only an experienced insurance broker can provide an insurance market regulated view on the appropriateness of the correct application of the insurance premium risk sharing mechanism.
How Gallagher can help
- Gallagher can assist you in auditing and tracking when these reports are due, which is important due to the time constraints of 15 working days (referred to above).
- Gallagher can review whether the reports are accordance with the contract provisions.
- Gallagher can prepare an appropriate response to the JICR report, which can then form part of any renegotiation, or as the basis for a dispute resolution procedure.
For more information, please reach out to a Gallagher representative.