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Mergers - the insurance angle

Mergers - the insurance angle
Analysis

Mergers - the insurance angle

Finance | Gareth Jones | 30 May 2012

Charity Finance recently organised a panel discussion on insurance issues relating to a merger. Gareth Jones picks out a few choice morsels.

Representing the charity sector at the discussion were two executives with personal experience of mergers. One was Tina Winders, director of finance and corporate services at Locality, who played a key role in guiding the merger of bassac and the Development Trusts Association, to form Locality, after the two organisations had previously shared a building under a joint-venture arrangement called Community Hub.

Of the merger, Winders stated: “It was a very expensive thing to do, so there was a lot of discussion about ‘is this really worth it, shall we just carry on as we are’, because all the legal costs were essentially dead money. However, it did provide us with the opportunity to save some back-office costs; it saved us some insurance costs, like employers’ liability and public liability, because obviously we weren’t having to pay two lots of that; we also saved on audit fees. So we will save in the long run but it’s been quite an expensive process.”

Meanwhile, Emma Snow joined the Terrence Higgins Trust as interim finance director earlier this year, having previously spent three years at the Refugee Council. Both organisations have undertaken either mergers or acquisitions in recent times, and she confirmed that this had usually been a case of her larger charity merging with a smaller one. She added that, as had also been the case for Winders at Locality, the approach in legal terms was generally to transfer activities from one organisation to the other. “Although we might be talking about a merger, for the purposes of the general idea behind it, in fact – legally – transferring assets out of one entity and into another tends to be better for limiting risk if you’re not sure what liabilities are in the organisation you are merging with. You don’t want to take on unknown quantities.”

The FDs were joined by two representatives of Ecclesiastical Insurance: city underwriting manager Michael Saroglou and Phil Duffy, a charity underwriting consultant with particular expertise in liability insurance.

According to Saroglou, the sort of ‘one-way’ merger experienced by Winders and Snow is also simpler from the insurer’s perspective. “When you create a completely new charitable company we tend to have to cancel all the policies, reissue everything, and look at everything from scratch. But when you’ve got a situation when one charity has legally taken over the other one, it makes everything a lot simpler.”

Timescales

Snow revealed that while, normally, a merger takes a couple of years between first discussions and completion, recently a more common scenario has been that organisations have been in difficulty and have therefore needed to merge much more quickly. “When the timescales are really short, there is a lot less time to think about it properly and make sure that you have covered all the bases. Of course, everyone is trying to save money on their administrative costs and make sure they don’t have too many administrative staff, but the problem then is having enough people to cover when you need to do extra work created by the merger.”

Shorter timescales have a negative impact on the insurance side as well, according to Duffy: “Insurance brokers and insurers are able to offer a lot of advice, but the problem they have is lack of time. Sometimes we feel like the poor relations to the accountants and the solicitors; they get told months in advance because they have to get all the paperwork going, but I think for an insurer to be told at the same time is not a bad thing.

“For example, with the projections of wages or income, and how that may impact on your insurance premiums, if we get told six months before that there are plans to expand, then the transition may be phased rather than ‘bang – doubled your income, so double your premium’.”

Home workers

Locality’s merger was made simpler by the fact that the two organisations were already living under one roof but, nevertheless, over half of its staff were dotted around the country in single offices. Furthermore, quite a few staff worked from home which, according to Winders, led to “quite a long debate” about the insurance costs for such individuals. “They might just have a computer, desk, chair and very little equipment, but the insurance costs were quite high for one individual working from home. Obviously that will be included in your employers’ liability, but in terms of property and contents insurance we did eventually come up with a deal where the insurers would cover a certain number of offices at a reasonable rate. We did initially, however, feel that we were being excessively penalised for having people working remotely like that.”

Saroglou said he understands these concerns: “For us it’s around understanding how the staff are managed. Usually once we get that information, providing they’re being risk-managed at their office at home, we don’t tend to have a problem with that sort of arrangement. If it’s purely an officebased role at home you don’t tend to have an issue. The key thing is if someone is working from home who might have other members of the public coming to visit them for meetings. In an office you can make sure nothing is lying around, there’s nothing to trip over, whereas in a home environment you don’t have that control.”

He added: “On the flipside, it does have its benefits. In terms of business continuity, if an office goes down you might lose an entire day and the work you would do for that day, but if you’ve got people working in different areas, then if one person’s electricity goes down it’s less likely to have an impact on the overall business.”

Redundancy issues

Winders admitted that Locality paid out a lot in redundancies due to its merger: “It was very challenging. We actually found the trade union, Unite, incredibly helpful. We went through a job evaluation and reward package, and the union sent along representatives and agreed the system we were using was fair. It was very important to have consulted with the union.”

According to Duffy, redundancies are inevitable in a merger and, even for staff that may stay on, there are likely to be disputes due to the mismatch between the two organisations’ employment practices. “You’ve got two organisations maybe having two distinctive wage structures or benefits structures, so do you bring one up or one down? How do you balance that? You almost need to put those two to the side, look at a blank piece of paper and say ‘well, we can’t discriminate against anybody’. But that’s the difficult juggle, because once you’ve selected the people to make redundant, they’re going to question it – ‘is it because I’m too old now, or because I’m of a certain background?’”

In recent years there has been much debate about the need for more mergers within the charity sector, either due to the financial climate or simply for greater efficiency of effort and to reduce duplication. It seems clear from this discussion that the insurance considerations that go along with such activity merit full consideration.

Gareth Jones is a senior reporter at Charity Finance  

 

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