Insurers and re-insurers are experts in long-term group risk in all kinds of areas.
In the UK, their impact on society to date has been for individuals or companies that buy their products. For employer purchased group health and rehabilitation products, they are bought not just as a "perk" for employees but also because they benefit the company through reduced sickness absence and early return to work.
So why don't insurers work with government to do the same thing? With the appearance of "Social Impact Bonds" (SIBs) on the horizon,the insurance and re-insurance industry now has the opportunity to seriously add value to a centre-piece of the coalition government's "Big Society" agenda.
In September, Lord Chancellor Ken Clarke launched the UK's first SIB. Small scale it maybe - a £5m bond is being used to fund the St Giles Trust, a third-sector organisation with a record of reducing reoffending by up to 40%. It engages with offenders in jail and then supports them once out. If St Giles fails to cut reoffending at Peterborough, investors will get nothing back. If the reoffending rate reduces by 7.5% they start to get a return.
How will SIBs operate? The starting point is set out in the 2009 Social Finance report "Social Impact Bonds - Rethinking Finance for Social Outcomes". In essence there are four aspects to SIBs. First a success metric - for St Giles this was reducing re-offending rates. Second a target population - offenders aged over 18 leaving prison after a sentence of less than 12 months and returning to a specified geographic area. Third a measure to value the success of the project - the amount returned to investors for a given improvement in social outcome. This is likely to be a proportion of the related savings to government. Finally the period the SIB lasts.
The report envisages around five years but I think it could be longer in some cases. Each one will need to be negotiated on its merits - but a number of similar schemes operating on similar metrics could have finance pooled across them.
Tripartite negotiations will be needed between the service providers, investors (for example insurers) and the government itself (or local public bodies). In larger schemes re-insurers might underwrite a proportion of the risk - as they do with long-term protection products. Or they might take on all the risk and provide the investment - as they do in some EU health insurance schemes. Once the contract is in place, the investment will finance interventions to improve the target social outcome over the SIB period. If the interventions are successful and the social outcomes improve, government pays investors a reward based on the pre-agreed payment schedule.
This is new territory but the door is wide open for insurers and re-insurers to work with the government and service providers to identify potential areas that SIBs might operate in - and then move towards real contracts. The industry has the chance to achieve worthwhile change in society, help defined cohorts of the population and make a profit on it. They can also sell other insurance products to the service providers and their target groups.
Richard Walsh is a director and fellow of SAMI Consulting www.samiconsulting.co.uk
