With many public sector organisations facing structural change, it could be time to review your organisation's approach to risk financing. Hamish Champion, principal consultant, strategic risk finance, at Aon, and Matt McKinley, public sector development manager, at Aon, explain the options further.
Significant restructuring is underway across the public sector as the government seeks to improve service delivery, drive savings and deliver greater accountability. Reviewing an organisation's approach to risk financing following a restructure is essential but the emergence of new threats and differing approaches to risk transfer and retention means organisations of all sizes and risk profiles could benefit from this exercise.
Change can be seen across the public sector, whether it's local government reorganisation, the emergence of 'super-universities' or the government's proposed reforms to the police service.
Against this backdrop, public sector organisations are facing challenging conditions. Budgets are squeezed and new risks are emerging, with everything from AI to ESG disclosures and the rise of nationalism potentially presenting a threat.
With the understanding and sophistication of insurance purchasing strategies varying between different councils, and the challenging backdrop, understanding the fundamental concepts of risk financing as well as some of the alternative approaches available, can provide governance as to how and where the total cost of risk can be reduced, while ensuring the organisation has appropriate protection in place.
Appetite and tolerance
The starting point for any review should be determining the organisation's risk tolerance – the amount of loss it can tolerate – and risk appetite – the amount of loss it's willing to take on.
Risk tolerance is a quantifiable metric, which can be determined in several ways including testing, benchmarking and financial stress testing. Conversely, risk appetite is influenced by factors such as the organisation's ability to control risk, familiarity with risk factors, and reputational risk. This is unique to the organisation and needs to be derived through structured and holistic interviews.
Alongside the 'enterprise risk' of the organisation, holistic engagement and exploration of insurer responses and critical delivery targets are part of a framework to convert these concepts into an insurance programme response.
These metrics are likely to change following any reorganisation. The new entity might take on new risks or, as a larger organisation, there may be stronger requirements to demonstrate value and governance around risk transfer decisions.
Programme design
Once risk tolerance and appetite are defined, assessing the frequency and severity of losses can inform decisions around retention and risk transfer. While losses that are high severity but low frequency are best suited to conventional insurance, organisations will look to retain the high frequency, low severity losses, such as slips and trips, within deductibles and/or use risk management to minimise exposure.
The middle ground is more challenging. These moderate frequency, moderate severity losses create volatility and uncertainty, particularly with an ever-growing list of risk issues to monitor and evaluate. Where these are insurable, and in principle can be transferred, this can be expensive so organisations may look to retain and cap this layer to control costs.
For uninsurable risks and exposures, alternative ways in which risk can be incubated with additional resource support and specialist oversight is becoming ever more important.
Alternative risk transfer solutions
Any review into programme design should also consider alternative risk transfer solutions once the context of available options and constraints has been documented. As well as offering different approaches to risk transfer, these can be used to structure coverage for risks that aren't readily covered by the commercial market, potentially providing solutions for these types of risks.
Among these solutions are the following:
These are insurance companies set up to insure the risks of the parent company and its subsidiaries. Although they're a fully regulated insurance company subject to capital, solvency and compliance requirements, most captives are managed by third-party specialists, rather than in-house.
They can be used for traditional corporate risk and to access additional reinsurance capacity where required and not available through traditional means. They can also be used to cover risks that might not be insured by the traditional market, for instance ESG and other emerging risks.
Captives are still unusual in the public sector. Most are US-based, although there are a handful of UK-based examples including large, nationalised infrastructure bodies and large councils. But this is likely to change. Concerns about domicile, tax and reputational risk have fallen away over the years and, with the UK introducing a new captive insurance framework in 2027, they are set to become a more attractive option for consideration.
Rather than paying out for losses actually sustained, parametric insurance pays a fixed amount when an index value, or parameter, is reached. Cover is often tied to weather events, where the index value is a set wind speed, hurricane rating or rainfall level for instance, but could be linked to any measurable and independent index or parameter, such as website traffic or alert warnings in defined areas.
Speed of payment is a key benefit, with money released as soon as the parameter is reached rather than after the loss has been assessed. Payment can be used for any financial loss, including losses that may be excluded from traditional coverage. For example, if student accommodation is flooded, the payment could go towards costs such as repair work and alternative accommodation but also staff overtime to cover additional workloads.
This flexibility means parametric insurance can be used to fill gaps in an existing insurance programme, for instance non-damage business interruption. Other public sector uses could include event cancellation, social care demand surges, and emergency works.
Parametric insurance can also support governance, with organisations able to use the potential payout to underpin continuity and response plans.
As public sector organisations and the risks they face evolve, so do their risk financing requirements. A regular review of your organisation's approach will ensure its approach remains fit for purpose.
More information
To find out more about risk financing and how a review could benefit your organisation, speak to your Aon account manager or contact Hamish Champion or Matt McKinley.
You can also catch Hamish at this year's ALARM National Conference (21-23 June 2026) where he will be discussing this topic in-depth. His presentation, Reshape, reimagine, reinvent – risk financing through structural change, is on 22 June at 1pm. Attendance is free for full, named members of ALARM and the session will require pre-booking upon registration at the conference.
About Aon
Aon plc (NYSE: AON) exists to shape decisions for the better — to protect and enrich the lives of people around the world. Through actionable analytic insight, globally integrated Risk Capital and Human Capital expertise, and locally relevant solutions, our colleagues in over 120 countries provide our clients with the clarity and confidence to make better risk and people decisions that protect and grow their businesses.
The information contained herein and the statements expressed are of a general nature and are not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information and use sources that we consider to be reliable, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.
Follow Aon on LinkedIn, X, Facebook and Instagram. Stay up-to-date by visiting the Aon's newsroom and sign up for News alerts here. ©2026 plc. All rights reserved.
This article has been compiled using information available to us up to 01/06/2026.
Aon UK Limited is authorised and regulated by the Financial Conduct Authority. Aon UK Limited is registered in England and Wales. Registered number: 00210725. Registered Office: The Aon Centre, The Leadenhall Building, 122 Leadenhall Street, London EC3V 4AN. Tel: 020 7623 5500.