United Kingdom

Public services face up to budget volatility

Cost management now a priority says new Aon survey

Three quarters of public service entities interviewed for Aon’s COVID-19 Risk Management and Insurance Survey said the pandemic has had an impact on their organisation. And, of the many challenges, budget volatility has been one of the biggest factors as the sector takes the lead in the fight against COVID-19, while reorganising to adapt to new ways of working.

Given that concern, it’s no surprise that getting to grips with cost management is rated highly as a ‘reshape’ priority – with the use of technology at the forefront – particularly given the public sector’s fears for a future health crisis/pandemic shock.

Double hit

Many public sector organisations have suffered a double hit on their finances. Firstly, on the debit side of the balance sheet there are the extra services that have been provided to address the pandemic. On the credit side, revenue generation through areas like taxation have been hit by rising unemployment; not to mention the loss of income from additional services – leisure services for example – that have been affected by people staying at home.

While local governments are having to fund huge additional, pandemic related expenses, they often do not know where the additional revenues are going to come from either. This situation has created long term disruption with no end in sight, making budgeting very difficult.

In addition, public sector risk managers are worried about the ability of their organisations to manage another disaster concurrently with the pandemic, particularly if the pandemic is prolonged following the arrival of a vaccine-resistant variant of the virus, for example. How to manage a natural disaster and the need to relocate and shelter people during a pandemic without making the transmission rates worse? The pandemic has been so draining on the public coffers, it makes it harder to think about how the sector can react to another disaster from a financial perspective.

Addressing the pandemic risk

It’s become clear then, that the public sector needs to do more when it comes to addressing pandemic risk and the impact on budgets. There is an urgent need to make a conscious decision about retaining and funding the risk, or look at what risk can be transferred to the insurance sector.

Aon’s COVID-19 Risk Management and Insurance Survey found that 62% of those in the public sector agreed their risk management was sufficient but more planning would have helped. Perhaps this confidence was misplaced? The emergence of a pandemic was predictable but not enough had been done to prepare and too often responses have been politicised.

Public services were not interested in pandemic insurance prior to the outbreak of COVID-19 and few in the sector had come to terms with how much risk they’re holding and the decision on whether to manage it or look to the insurance sector for support. Governments have done the best they can but the reality is many could have been better prepared. The pandemic has been a lesson in how to go about that process.

Turning to tech

Technology has a role to play here and many organisations will be looking to see how it can help both with future risk management but also to manage costs. With more working from home and use of virtual working, the need for office space has decreased, while the use of AI and increased digitalisation will be important in addressing past deficits in infrastructure spending.

One of the biggest impacts of technology has been in the growing use of electronic/real-time communications, both within internal workforces and between the public sector and its constituents. Online interaction has been supercharged by the pandemic and will be a legacy of COVID-19.

Cyber risk

Not all the benefits of technology are positive of course, and as more people use electronic methods of communication, the more entry points are offered up to malicious hackers. The public sector sees the cyber threat as the fifth ranked future shock and will need to ensure it manages the risk both through risk mitigation and risk transfer where appropriate; in the same way that it will have to manage the certainty of a future health crisis.

To find out more about the impact of the pandemic on the public sector and how future decision making will be shaped, read Aon’s COVID-19 Risk Management and Insurance Survey report.