At Financial Close, insurance has historically been priced on the basis of a stand-alone project to ensure that insurance can be re-provided in the event of Lender or Authority step-in.
Over time, insurance premia for PFI risks have reduced considerably for two main reasons:
- Underwriters increasingly view PFI as a well maintained sector with relatively low risks and the last few years has seen a number of new entrants into the PFI sector, eager to do business.
- Post operational commencement, many projects have grouped their insurances under a portfolio arrangement facilitated by the major PFI shareholders. Whilst still being individual project policies, the private sector has aligned renewal dates on projects with the resultant benefit of lower premiums from underwriters. This is commonly referred to as the “portfolio effect”.
Most PFI contracts since around 2003 have benefitted from Gain or Risk Sharing Mechanisms with respect to insurance premiums. These typically allow for the public sector to benefit from reductions (or contribute to increases) in actual insurance premiums when compared to the original contract price at Financial Close.
However, we are seeing many instances where the private sector has argued, when presenting risk share savings to the public sector, that the “portfolio effect” is an issue that should be carved out from the mechanism due to the fact that it is entirely down to their actions. Often, the public sector have accepted this argument. In addition, although most portfolio insurance placements include a low claims rebate, the private sector tend to omit this from their calculation of any gainshare. Together, this approach means that the private sector is top slicing the benefit that risk sharing was there to give.
It should be remembered that the private sector is partnering with the public sector for long periods. The terms of the agreement generally require the private sector to cooperate, pursue good industry practice, and mitigate costs. We would argue that actual means actual and shouldn’t be subject to manipulation. More importantly, the public sector can obtain insurances in line with those obtained by the private sector.
P2G, through its frameworks with a well known PFI insurance broker, is able to facilitate equivalent cover at market rates for the benefit of the public sector that at least match the premiums that the private sector can procure at, inclusive of their “portfolio effect”.
What does this mean for public sector bodies?
No longer should a public sector body allow the private sector to run any sort of argument about portfolio rates being excluded from a sharing mechanism. The result should be real returns to public sector budgets. There are over 900 PFIs and the benefit accrued from this one small measure is gained annually. The benefit to the exchequer is huge.