Even the smallest or most remote local government in Western Australia is connected to the global commercial market through their protection. Over the next few editions we’ll look at the factors of concern and influence for each portfolio for LGIS, this edition we’re looking at LGIS Liability and Property protection. To start off with we’ll take a step back and look at the difference between LGIS and commercial insurance.
A mutual indemnity scheme is a specialist financial vehicle for the management and financing of risk. It’s important to note that the Scheme is not insurance –it’s an alternative risk financing strategy.
Mutuals are established by organisations with a common purpose (in the case of LGIS, WA local governments).
Scheme members pay contributions to create a fund, or a ‘pot of money’, which is used to manage the primary layer of risk (Pooled Cover). The Scheme buys a variety of ‘insurance’ (indemnity covers) more than these Pooled Covers to provide members with the protection they require.
As funds are administered for the benefit of members there is a clear relationship between the successful execution of risk improvement strategies, which lowers risks and losses, and the increased financial strength of the mutual. This leads to greater member benefits – stability in pricing and coverage; risk services to support members, which in turn provides, in the case of LGIS, a $60M return of dividend to members since 2007.
Congratulations to the Shire of Yilgarn who were award their Tier 3 Silver diligence in Safety Award. James Sheridan, CEO LGIS and Christ Gilmour, Risk Specialist – Regional visited the
Shire on Tuesday 26 February to meet the Yilgarn team and present the award.
In February this year the Australian Tax Office (ATO) made a private ruling on the following question: ‘Is the income compensation component of the redemption settlement payable under Workers Compensation and Injury Management Act 2023 (WA) included in your assessable income under section 6-5 of the Income Tax Assessment Act 1997 (Cth)?’ The ATO’s very short answer was ‘Yes’.
It’s a question very few people want to ask but given the current cyber risk landscape shows no signs of slowing, it’s likely an inevitable question for organisations, including local governments.
Recent events that impact the sector’s risk profile and inform indemnity partner’s risk appetite
Bushfire (Australia)
Planning Failure (Australia)
Flood and storm (Australia)
Wildfire (US)
Planning Failure (UK)
Source: Insurance Council of Australia and KPMG, various reports.
LGIS works with over 20 indemnity partners to ensure that members are well supported and protected across a diverse range of exposures. This reflects the increasing complexity of the sector and the variety of operational areas and responsibilities it covers. Many of the day-to-day business activities of members carry potential for major claims and both reinsurers and the Scheme have their eye on emerging factors.
LGIS works with over 20 indemnity partners to ensure that members are well supported and protected across a diverse range of exposures. This reflects the increasing complexity of the sector and the variety of operational areas and responsibilities it covers. Many of the day-to-day business activities of members carry potential for major claims and both reinsurers and the Scheme have their eye on emerging factors.
Bushfires – approvals and management
Australia is known for its bushfires and our global partners have a keen interest in this area. In recent years there have been a couple of WA local government claims which have put preventative bushfire functions and tree management in the spotlight. To date the number of claims has been small but the potential cost has been significant.
Global bushfire activity is also forefront in the minds of indemnity partners. The recent LA fires and their outcomes will undoubtedly be a focal point, especially concerning land use planning, preparation and emergency response.
Abuse claims and protection for vulnerable people
The landscape for historical abuse claims, particularly those involving children, is on the radar and members may see changes to limit constraints and/or exclusions.
Cover for abuse is not available at the limits required and any offerings available are restrictive and limited to defence costs only. The exposure for these types of claims is long tail and was a key reason for the winding-up of Catholic Church Insurance back 2023.
LGIS’s Indemnity partners have shown a desire to restrict coverage over the past decade, and while the Scheme has resisted changes thus far, they are likely to be implemented soon. It’s essential that members address any issues related to mitigation, policy, and procedure, as well as the implementation of Royal Commission recommendations.
Work, health and safety – particularly contractor management It’s been five years since the Work Health and Safety Act 2020 (WA) (WHS) was adopted and it’s now being tested in the West Australian court system. There are several incident investigations which are ongoing and will be turning points to provide clarity on local government responsibilities. Interpretation of WHS duties and obligations regarding volunteer bushfire fighters is high on the watchlist. Another area of interest is the sector’s labour hire contract practices to meet WHS duties and obligations to deliver a safe work environment. Again, there are several incidents under WorkSafe WA investigation which will provide clarity. Indemnity partners and the Scheme are looking to members to adopt policies and procedures alongside thorough documentation to demonstrate that they are making reasonable efforts to meet their duty of care in this area.
PFAS – Forever chemicals
PFAS or Per- and poly-fluoroalkyl substances is an emerging issue for indemnity partners. They are considering the broad exposure to governments at all levels and working to understand the specific situation for local government in Australia.
PFAS are a diverse group of synthetically produced chemicals resistant to heat, water and oils. They were used in common household and industrial products in the 1950s and in firefighting foams from the 1970s. PFAS are persistent and highly resistant to physical, chemical and biological degradation. Consequently, PFAS are found in humans, animals, and the environment around Australia.
Addressing the wide range of issues associated with PFAS contamination, including the management of PFAS contaminated materials, represents a challenge for all levels of government as environmental regulators.
There is plenty that is unknown about PFAS, their long-term effect and potential for liability. At this time, the WA local government sector’s exposure is minimal, but it is an area that will remain in the spotlight in coming years as it develops. Members involved in waste management or bushfire response should give PFAS consideration.
Nuclear verdicts and class actions An issue primarily coming out of the United States, class actions and nuclear verdicts have global indemnity partners on watch. In 2023, 89 USA lawsuits against corporate defendants resulted in a ‘nuclear verdict’ award, a 15-year high. Nuclear jury verdicts are those that surpass $10 million and have been increasing in the States by both size and number since 2009. In 2023 the number of these cases increased by 27% with the median award rising to $44 million. In Australia we have not seen nuclear verdicts emerge, but class actions are on the rise. According to Herbert Smith Freehills, outside of the USA Australia is the preferred jurisdiction to file a class action for those that promote them. In 2023 approximately one class action was filed every week in Australia. The sectors identified to be most at risk include finance and insurance, plus healthcare, government, manufacturing, infrastructure, and technology. While there is no indication of nuclear verdicts in Australia, indemnity partners are keeping an eye on the national trend which has demonstrated a tendency to follow American patterns with regard to class actions.
The cost of extreme weather in Australia is growing in real terms. Averaged over the past three decades and adjusted for inflation, insurers paid $2.1 billion a year to all policyholders (not only local government) impacted by extreme weather events.
Shortening this time scale by decades further illustrates how the cost of extreme weather has grown, to the point where over the past five years it has reached an average $4.5 billion a year, with floods the main driver of this increase.
The main factors driving up disaster losses are expanding development and urbanisation. Indemnity partners are particularly interested in the role that local governments play in the planning, development and approvals process, weighing up the potential of liability exposure.
Extreme weather events are in the spotlight for property protection. In WA local governments have suffered significant losses related to structural fires, maintenance failures, the suitability of structures, and weather events. Flood damage is high on the list for global indemnity partners considering the national impacts, however in Western Australia cyclone, storm and bushfire vie for top position for weather related damage. The Bureau of Meteorology has declared Australia’s most cyclone- prone area is the north-west coast between Broome and Exmouth.
Increasing frequency and intensity of extreme events such as droughts and floods alongside ocean warming and acidification, increasing fluctuation in air temperatures and rising sea levels are posing significant threats to communities and the built environment. The earth is warming, and Australia has warmed on average by up 1.47+/-0.24 degrees Celsius since 1910. We know that we will continue to experience more frequent and intense events, which cumulatively reduce recovery time and impact the ability to respond.
A study by KPMG found that two-thirds of all Australian’s have been impacted by natural disasters, emphasising the scale of the risk and need to invest in infrastructure and loss prevention. Lately the population of local government areas impacted by natural disasters has reached record highs:
As our members know first-hand, in some cases local governments have been impacted by multiple events in recent years. Unfortunately, we know that current infrastructure was originally constructed to withstand weather conditions based on historical patterns.
We know that this trend is the ‘new normal’, but it remains a concern for indemnity partners and the Scheme, and we look to global exposures and more locally the sector’s efforts to take preventative action.
Although the inflationary environment has eased, ‘average’ clauses remain front of mind for insurers. There is an expectation of markets that we can demonstrate a clear valuations process with respect to material damage and business interruption declared values. It’s concerning that some members follow the financial accounting rules on timing of valuation (i.e. every 5 years) and don’t connect building, infrastructure, and contents, to provide a single and accurate declared value. This will be an area of focus in the 2025/26 renewal cycle.
There is plenty more to explore when looking at global,
national, and local risk influences. For more information on your
membership and protection for your local government have a
chat with your account manager.
The recent WA Local Government Convention was an excellent opportunity to chat with members and talk about the issues that matter to you. LGIS also appreciated the invitation from WALGA to provide members with an update at their AGM on our 2023/24 results and achievements. For more information, our end of financial year reports, A Year in Review and Annual Financial Report, are now available on the LGIS website or you can read the article on page 18.
Even the smallest or most remote local government in Western Australia is connected to the global commercial market through their protection. Over the next few editions we’ll look at the
factors of concern and influence for each portfolio for LGIS, this edition we’re looking at LGIS Liability and Property protection.
Working from home and hybrid working is now common practice for many local governments. It offers plenty of benefits to individuals and employer alike. It can provide meaningful flexibility for employees to juggle multiple demands and is now expected by many recruits.
LGIS is the unifying name for the dedicated suite of risk financing and management services for WA local governments, established by the WA Local Government Association in conjunction with JLT Public Sector (part of the Marsh group of companies). LGIS is managed by JLT Public Sector (ABN 69 009 098 864 AFS Licence 226827).
Risk Matters, via this website, is designed to keep members, their staff and elected members informed on topical risk management and insurance issues and LGIS programs and services.
