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Risk

To help the Department understand and consider all the risks, it would be useful to construct a table of all the likely liabilities you may face in carrying out consenting and certification activities and the likely maximum amount and duration of each liability.

Other factors that need to be taken into account are the extent of:

  • joint and several liability that is in place, as this increases your risk if a jointly liable party is not in a position to pay their contribution to the loss. You would need to show evidence of their ability to cover their share, or how you would cover it in the event of default
  • uninsured liability in any event for which a claim is made (assuming your insurance is on a claims-made basis) in the period that falls outside the policy definitions or is subject to an exclusion, or any amount over the maximum insured, plus the excess.

Transferred risk

There are a number of ways that risk can be transferred to other parties. Examples of these and the evidence that would be required by the Department are:

Contract or other arrangements to transfer risk
Full details would be required of all contracts or arrangements that are in place to transfer risk, including:

  • contract parties
  • scope of contract
  • period of contract
  • amount of contract.

An example of a transferred risk would be a contract with a builder in which the builder guarantees to rectify any building defects. This may be backed up by building warranty insurance to cover any remaining risks, including the bankruptcy risk of the builder.

Professional indemnity insurance
The assessment of insurance cover would consider the current insurance contract and the applicant's likely ability to continue to obtain this cover for the full 10-year run-off period.

The assessment of insurance cover would consider all relevant information including:

  • the capital available to support the likely liability
  • whether adequate means is assured for the full responsibility period
  • the rating of the insurance company providing the cover
  • the definition of liability (generally a professional negligence definition)
  • any other civil liabilities covered
  • the term and nature of the insurance
  • the maximum amount covered and the reinstatement of cover provisions
  • policy conditions
  • exclusions
  • amount of excess
  • premiums.

The assessment would take into account the significance of insurance to your risk management strategy and your ability to purchase ongoing insurance based on your previous claims experience and any emerging liability claims.

Other risk transfer
You would need to provide full details of any other risk-sharing arrangement with a third party.

This would include evidence of:

  • the terms, duration and scope of the arrangement
  • the intended action at the end of the term
  • any additional arrangements in place to back the risk-sharing arrangement.

Organisations would need to consider any circumstances where the risk-sharing arrangement may break down, whether this causes the liability to fall on the organisation and how this would be managed. Examples of potential circumstances would be if the other party to the risk-sharing were to go out of business, or if the term of the arrangement is less than the full responsibility period.

Retained risk

You may find it useful to develop a table, such as the one below, to clearly document all likely risks. This would make it easier for the Department to identify and understand the full risk picture.

Table 2 shows an example of one risk divided into total risk, transferred risk and the net retained risk.

Table 2

Risk Component Secondary risks Maximum Duration
Negligence Total   Building value 10 years
  Insured   500,000 1 year
  Net retained   50,000 plus (claim - 500,000)  
    Non-renewal of insurance Building value 9 years

Funded liabilities

It is not necessarily a requirement that you fund your retained liabilities . However, if some of the liabilities are to be funded, it demonstrates a serious commitment to the risk management strategy, and is likely to make the assessment of adequate means somewhat easier.

When assessing the funding arrangements you have in place, the Department would need to consider:

  • the risk being funded
  • the type of arrangement for funding
  • whether there are any charges, covenants or restrictions over the assets backing the funded liability
  • any arrangements to separate the fund from day-to-day business activities
  • the extent and pace of funding – for example, whether it is fully funded or includes any additional margins
  • monitoring procedures in place
  • data and assumptions underlying the funding calculations
  • collateral data such as industry experience or insurance premiums
  • the nature of the assets or other instruments backing the fund.

Unfunded liabilities

There are two parts to this final stage.

  1. Assessing the remaining assets, capital and access to additional capital
  2. Assessing the remaining unfunded liabilities

You would need to provide detailed financial information, along with details of all financial assets and instruments. If you are proposing to raise additional capital, or invoke a guarantee or another arrangement to cover unfunded liabilities as they arise, the details of these arrangements must be provided to the Department.

You would need to provide evidence that the extra capital would be available, particularly if you intend to access the capital in times of adverse financial results.

The next stage is assessing the remaining unfunded liabilities. You would need to provide detailed information on the extent and nature of the remaining unfunded liabilities. The Department may combine the unfunded and the funded liabilities and consider all the retained liability together.

Sustainability

The assessment would need to carefully consider the sustainability of any arrangements. The 10-year responsibility demands this. The main problems in the past with private building certifiers resulted from lack of sustainability of arrangements. Principally, there were the difficulties in renewing professional indemnity insurance without substantial exclusions and the loss of all insurance on ceasing business.

The assessment would consider, for example, the effect on the run-off liability of insurance being cancelled.

Applicants would need to provide evidence of:

  • mechanisms in place to continue to provide for likely liabilities on ceasing business or winding up the company
  • provision for controls that may be needed around the paying of dividends or return of capital that resulted in the adequate means capital position being breached.