Insurance rules revamp could cut NFP premiums: expert

Posted on 10 Apr 2024

By Matthew Schulz, journalist, Institute of Community Directors Australia

Hazards shutterstock 1558530773
Rules governing liabilities for NFPs could be adjusted to drive down premiums.

A leading not-for-profit finance expert believes that tightening the liability rules for community groups and boosting sector knowledge about insurance could push down premiums.

The Centre for Public Value’s Professor David Gilchrist will propose to a national body drawing up the NFP Sector Development Blueprint that regulators should shift their expectations of governance by community directors towards the “real risks of operation”.

Doing so should reduce NFP liabilities and – in turn – insurance premiums.

David Gilchrist
Professor David Gilchrist

Prof Gilchrist is well placed to give that advice, as an expert adviser to the Blueprint Expert Reference Group, which is scheduled to publish the document this month.

His call comes amid a persistent “hard” insurance market which has been driving up premiums by an estimated 10% a year for the past few years.

Prof Gilchrist proposed a revised governance and legislative framework for the not-for-profit sector. This would see the rules that govern directors’ roles modified “to ensure we’re focusing on the things that really must be insured”.

Doing so would also allow government funders to underwrite “key insurables”. This should be combined with sufficient funding for organisations to manage risk, further reducing NFP costs, Prof Gilchrist said.

He gave the example of child sexual abuse insurance protection, the premiums for which have risen rapidly in the wake of a spate of claims.

The Community Advocate reported in February, for example, on the payout of $6 million for a football club found liable for the sexual abuse of a young spectator who was neither a player nor a member of the club.

Prof Gilchrist said that when it came to child sexual abuse and the role of volunteer directors, there were “some very real risks that you and I would be worried about”, but that the sector should still be consulting with insurance companies to “work out what has driven up the costs”. “Where risk can be reduced, it should be,” he said.

Prof. Gilchrist has been a chair and director of insurance companies during his long career, and “I know full well that insurers are really focused on risk”.

“Because insurers, at the end of the day, are risk managers. If they feel that their risk is going up, they have to charge more for insurance, because they'll prospectively have to pay out more, if those risks come to fruition”.

He proposed a “two-pronged approach” in which the sector and insurers were better able to “understand the risks and ensure that we're actually focusing on the real risks associated with service delivery”. There was an opportunity to work with insurers to reduce risk, “where those risks aren't appropriate to be covered”.

He also believed that lawmakers should consider the structure of “no liability” mining companies, which reduces the prospective liability of those directors.

It meant they did not have to “put their livelihoods, their houses, their personal assets on the line” if things went wrong. That structure enabled investors to support risky mining ventures, but a fit-for-purpose governance and liability structure could apply the same the concept to the NFP sector, Prof Gilchrist said.

“Because insurers, at the end of the day, are risk managers. If they feel that their risk is going up, they have to charge more for insurance, because they'll prospectively have to pay out more, if those risks come to fruition”.

“Surely we can create a set of governance responsibilities that relates to the delivery of services into our communities, that focuses on the things that need to be focused on, and is less worried about the things that are less worrisome, in order to mitigate – amongst other things – the responsibility of directors,” he said.

The Insurance Council of Australia, in its Insurance Catastrophe Resilience Report last year, said that “long-term planning and investment to better protect Australians and their assets” were needed to bring premiums down.

Alongside more infrastructure investment, and changes to planning and building codes, it called on the removal of “unfair [state] taxes that inflate premiums and penalise customers”.

“Insurance affordability is only going to get worse if governments don’t act now before the impact of climate change on premiums is fully felt,” the report said.

The report said the tax component of insurance could be as much as 40 per cent in some states, even though several government inquiries have previously suggested reforms.

Insurance industry experts have raised doubts that the changes proposed by Prof Gilchrist would drop premiums, at least in the short term.

Gavin Deadman
Aon's Gavin Deadman

Experienced insurance broker and client director Gavin Deadman, from Aon insurance brokers, said rising insurance premiums ­– including those for NFPs – were largely a result of increased claims.

These came from a range of sectors including building company collapses, natural disasters, historical sexual abuse claims, bullying, harassment and wrongful dismissals. And he said that not-for-profits were not immune from the kinds of problems affecting for-profit companies.

In addition, Australia had become significantly more litigious, he said, with insurance costs rising to meet the rapidly rising size of legal claims.

Mr Deadman agreed that if governments changed directors’ roles to reduce their responsibilities, liabilities, and likelihood of being sued, “that could potentially change premiums”, but he said predicting the effect of such changes was “crystal ball stuff”.

Prof Gilchrist remained steadfast that the changes were worth considering.

He said his proposals were more likely to succeed if the insurance industry, government and the not-for-profit sector were better placed to understand the drivers pushing up costs and to respond accordingly.

He said NFP leaders could led their support for the idea by improving their financial literacy and establishing a strong negotiating position with insurers and lawmakers via membership of peak bodies.

He said the NFP Sector Blueprint – which will have a 10-year horizon for change – would also be a pathway for reform.

More information

Insurance trends and more ways to cut premiums

ICDA tools and resources: Insurance and risk guidance

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