Blurred lines: who owns the risk?

  • The current climate of austerity is driving public and voluntary sector bodies to consider new ways of delivering services, including sharing services, setting up commercial entities and entering into working relationships with private sector businesses
  • Structural or organisational changes such as this have the potential to blur lines and create misunderstanding about who is responsible for insuring and managing risk
  • We examine the factors that organisations should consider when undergoing change

As austerity measures bite, most public and voluntary sector bodies are undergoing significant structural shifts, often adopting a new spirit of entrepreneurialism as they look to explore commercial opportunities.

While this approach can create opportunities to generate revenue, it can also complicate the risk management and insurance process. As many organisations look to partner with private sector businesses, or even establish their own commercial entities, lines can be blurred over who owns the risks involved.

For organisations to negotiate structural changes effectively, without leaving gaps in insurance and risk management responsibility, there are a number of important considerations.

Operating a shared service or partnership

Shared services are now commonplace in many parts of the public sector, with almost all local authorities now sharing services. While this can produce significant cost savings, it is important to clearly demarcate responsibilities and liabilities.

To align risk management strategy, while also giving all partner organisations confidence in the process, oversight and governance needs to be defined at an early stage.

As shared services can involve sharing back office IT and HR functions, or sharing the same building, decisions often need to be taken on a case-by-case basis. In the case of a shared building, for example, where would liability lie if a member of the public suffered a fall? Who is responsible for contents insurance? What happens in the event of a flood?

With some councils now sharing front-line services, risks can become increasingly difficult to quantify. In most cases, customers are unlikely to notice if back office functions are shared, however this will probably not be the case with front-line services. When shared services are thrust into the public consciousness, the likelihood of reputational damage increases – requiring a different sort of planning and understanding.

Without allocating responsibilities at the outset, or at least developing structural frameworks for shared services, lines can blur and misunderstandings can arise.

Setting up a new commercial entity

The growing commercialisation within many public sector bodies has extended as far as establishing stand-alone commercial entities. The 2017 Senior Managers’ Risk Report illustrates how views on commercialisation are changing. Many public and voluntary sector organisations are expanding their risk appetites as the scale of revenue-generating potential becomes clear.

While a potentially valuable step in establishing self-sufficiency, this kind of diversification also raises questions about insurance and liability.

One specific concern is professional negligence. If, for example, a local authority established a stand-alone construction firm, where would the liability lie if there was a financial loss resulting from a breach in professional duty – with the new construction company, or the authority?

And if the construction firm had insufficient limits of indemnity, would the authority have to pick up the excess layer in the event of a claim? While these areas are yet to be tested in law – because insurers are yet to face a claim under such circumstances – it is important for organisations to carefully consider, at the outset of any such commercial arrangement, where liability might lie and how a claim might play out.

Outsourcing

A recent study found that the value of outsourcing contracts signed by local authorities rose by 84% in the first half of 2016 – running counter to the wider falls in public spending over the same period. Outsourcing can deliver real transformation, however, it can also complicate risk management and insurance arrangements if handled incorrectly.

Perhaps the most significant risk, and one of the most difficult to quantify, is the reputational damage that can occur if outsourcing goes wrong. It is often the case that the public body that placed the contract will suffer greater reputational damage than the third-party supplier, regardless of where fault lies.

Legal liabilities also need to be considered. It is not safe to assume that passing on responsibility for service delivery also fully transfers the associated risk. Before conducting any procurement process, organisations need to make sure there is full understanding on all sides about the nature of the business being outsourced, including full costs and perceived risks.

Understanding the Total Cost of Risk

Establishing where liabilities and risk management responsibilities lie when undergoing organisational or structural change is an important part of understanding your organisation’s Total Cost of Risk.

Total Cost of Risk is an equation that factors in all of the costs involved in managing risk, so as well as insurance premiums, it also includes direct costs, indirect costs and risk management expenses. Thinking in terms of Total Cost of Risk helps organisations to establish which risks cannot be mitigated through risk transfer alone, and enables effective decisions to be made on the trade-off between insurance, self-insurance and risk management investment.

Read our previous News and Views article on the Total Cost of Risk to find out more about what it means and how it is calculated.