Risk financing in UK local authorities: is there a case for risk pooling?

Abstract

PurposeSince the early 1990s there has been a growth in local authorities of risk management. However, despite a range of different strategies, initiatives and practices the issue of financing the risks to which authorities are exposed has remained problematic. The traditional dependence on the commercial insurance market has proved to be a flawed strategy. This paper aims to analyse an alternative risk financing strategy which has been successful in local authorities in other countries, that of risk pooling.Design/methodology/approachThe paper analyses the rationale behind risk pools, investigates the legislative environment that appears to make these acceptable to central government and evaluates the likely benefits to local authorities of their adoption.FindingsThe paper finds that the perceived main legislative barrier to risk pools may no longer exist. Given that, there is a strategic, financial and operational case to be made for at least exploring the possibility of risk pooling. The experience from the USA would suggest that pools can have an important role to play in risk financing, and evidence now exists that a number of UK local authorities are actively pursuing pool formation.Practical implicationsThe development of risk pools is likely to result in a significant reduction in the use of conventional insurance by local authorities. The evidence would suggest that this will be beneficial, but this is subject to the proviso that actuarial, financial and managerial practice within pools is rigorous.Originality/valueThis is an under‐researched area, with almost no extant UK‐relevant academic, or indeed practitioner, literature. The paper adds to the understanding of public sector risk management and financing for both academic and practitioner audiences.