Victorian Auditor-General John Doyle has criticised the Municipal Association of Victoria’s (MAV) insurance operation for not running a competitive tender for its insurance services.

His audit of the MAV raises issues about tendering and the potential for conflicts of interest in the association’s insurance arm.

The MAV board has rejected the findings of his inquiry and says it has a legal opinion that supports it.

MAV Insurance provides public liability and professional indemnity insurance to councils in Victoria and Tasmania as well as Tasmanian water authorities through its Liability Mutual Insurance scheme.

It also has a commercial crime fund that provides cover against fraudulent or dishonest acts by an employee or third party.

JLT provides claims and risk management although it is not named in the Auditor-General’s report into the effectiveness of the MAV and Local Government Victoria, another association.

MAV CEO Rob Spence told insuranceNEWS.com.au the Auditor-General ignored a key factor in the insurer’s relationship with JLT.

He says local governments around the country operate their own insurance arrangements, but they pool their reinsurance requirement and JLT takes it to market, he said.

It is the largest public sector reinsurance purchase in Australia.

The MAV’s decision to stay with JLT is made “on absolutely sensible commercial grounds – the national reinsurance purchase is critical to the success of the scheme,” he said.

“We have benchmarked and tested it against the market.”

The Auditor-General’s report says JLT has administered the scheme since 1993 and the value of the contract is around $2.03 million a year.

There hasn’t been a competitive tender process despite an independent review in 2010 raising concerns about the provider’s performance and recommending a competitive tender.

Despite this, Mr Doyle says in 2012 the MAV signed a new 10-year agreement with JLT with a possible five-year extension.

Local councils and state government departments are required to hold a public tender or expression of interest process for a contract of this value, he says.

“With no market testing for the past 10 years, the MAV cannot reliably demonstrate value for money from its insurance business activities or that the arrangements with its service provider are appropriate for the needs of member councils.”

The MAV is governed by the Municipal Association Act and MAV Insurance is not subject to the Insurance Act or the Australian Prudential Regulation Authority (APRA).

“Consequently it is not subject to the oversight which ordinarily applies to insurance companies,” the Auditor-General says.

The MAV has also applied to Victorian WorkCover for a licence to operate a workers’ compensation self-insurance scheme for councils and local authorities.

“The provision of self-insurance services represents a major procurement. Deficiencies in the procurement process highlight the need for a comprehensive review and updating of the MAV’s procurement policies and procedures,” says the report.

It says the MAV has provisionally procured claims management, health and safety and other services through a competitive tender process won by its existing provider.

The Request for Tender document required tenderers to make a full disclosure of any conflicts of interest.

The successful tenderer did not disclose any but the Auditor-General says that because of its existing relationship with the MAV over two decades there could be “perceived, potential or actual conflict of interest which the MAV should have recognised, acknowledged, documented and managed accordingly”.

Insurance was just one part of the audit and in its response to the report, the MAV board says all Victoria’s 79 councils have chosen to be members, it is accountable to them and its insurance activities and accounts are reported to parliament annually.

“The MAV does not accept it has not managed actual, perceived or potential conflicts of interest by the successful self-insurance workcover tenderer. This view is supported by legal advice.”

The criticisms of the insurance purchase “lack consideration of all relevant issues, context and history”.

The audit had relied on a single recommendation in the view of risk management services but more detailed and considered reports had been provided.

The MAV says the workers’ compensation tender was competitive, with an independent tender evaluation panel choosing the preferred supplier from companies that were existing service providers to local government.

The MAV Insurance earned premium revenue of $28.97 million in the year to June 30 2014 and made an operating loss of $1.59 million, which the board says is due to increasing claims, particularly for public liability. It forecasts a small profit this year.

The nine-member board includes a former director as well as a former CEO of the Victorian Managed Insurance Authority.

JLT declined to comment on the grounds that it was not named in the Auditor-General’s report.