Compulsory Insurance in Public Procurement: Enhancing Quality and Reducing Risks

Author: Denys Kostrzhevskyi, Chairman of the Board of Directors of Kyiv International Airport

The Current State of the Insurance Market in Ukraine

Ukraine’s insurance market has long remained an underutilized tool for fostering economic stability and increasing accountability, particularly in the sphere of public procurement. While in global practice, insurance serves as a critical mechanism for mitigating risks, in Ukraine, this market is still underdeveloped. Many citizens and businesses perceive insurance solely as protection against unforeseen circumstances, overlooking its potential as an instrument for economic protection and a guarantee of the quality in executing public contracts.

In 2022, due to the war, the volume of gross insurance premiums shrank to UAH 39.6 billion (approximately €990 million), which represents an 8% decline for risk insurance and a 17% drop for life insurance. By comparison, in Poland, this figure reached €15.4 billion, while in Romania it stood at €2.36 billion. A significant portion of Ukraine’s insurance market (49%) is concentrated in auto insurance, reflecting a heavy reliance on compulsory types of insurance. However, the Ukrainian insurance market lags far behind neighboring countries not only because of the war but also due to the absence of a proper insurance culture and the lack of legislative mechanisms that mandate insurance in critical areas such as public procurement.

This creates a range of issues, including inefficient execution of public contracts, poor work quality, and frequent failure to meet obligations. The absence of compulsory insurance as a control mechanism forces the state and local communities to spend repeatedly on the same works or services, undermining economic stability and increasing corruption risks. I firmly believe that introducing compulsory insurance for public contracts is a necessary step to address these challenges.

The Role of Insurance in Public Procurement: Ensuring Transparency and Accountability

In public procurement, insurance should play a central role not only as a financial tool but also as a mechanism to monitor contract performance. Every year, state and municipal enterprises enter into thousands of contracts for services, works, or goods. However, a significant portion of these contracts are executed with violations or lack of oversight, resulting in the inefficient use of budget funds, work delays, or even failure to fulfill commitments.

Introducing compulsory insurance in public procurement can help resolve this issue. Insurance companies, acting as financial guarantors for the fulfillment of services or works, become not only protectors of the state’s financial interests but also independent arbitrators overseeing the quality of work. If the contractor fails to meet its obligations, the insurance company assumes responsibility for compensating the client, thus minimizing financial losses for the state or municipal enterprise.

The integration of compulsory insurance into the public procurement system will allow the expertise of insurance companies to be utilized for thorough quality control. This will ensure proper contract execution and reduce the risks of non-performance. Furthermore, insurance companies play a crucial role in the contractor selection process, assessing their financial stability, work experience, available resources, and technical capabilities. This helps eliminate unscrupulous companies, often created solely to participate in tenders and then disappear after completing the work. Insurance companies have a vested interest in ensuring that work is completed to a high standard and on time, as failure to do so would result in their financial losses.

How Compulsory Insurance Will Transform Public Procurement

Consider the example of a road repair project in a Ukrainian city. A municipal enterprise holds a public tender for the roadworks. Frequently, the winner is the company offering the lowest price, which, unfortunately, does not always guarantee quality. After completing the work and handing over the project, the company dissolves. However, a year later, defects begin to appear—early deterioration of the road surface, cracks, and other damages. The municipal enterprise is forced to issue another tender for the same work, and the cycle repeats. This leads to infrastructure degradation, additional expenses, and worsened living conditions for residents.

The core problem lies in the absence of effective mechanisms for controlling and ensuring accountability in contract execution. Insufficient oversight at the stages of forming tender commissions and accepting work allows unscrupulous companies to win tenders, even if their bids fail to meet quality standards.

The introduction of compulsory financial liability insurance for public contracts would fundamentally change this situation. All state and municipal procurement would be subject to mandatory insurance. In this scenario, the insurance company acting as a financial guarantor would require strict adherence to criteria for contractor selection. For instance, the contractor’s work experience, availability of technical equipment, and qualified personnel would become key factors in concluding an insurance agreement.

Additionally, the insurance company would be keen to meticulously monitor the quality of the work performed, as it would be financially liable in the event of defects. If, for example, defects appear a year after road repairs, the insurance company is obligated to evaluate the cause and cover the cost of rectifying the issue. If the defects result from the contractor’s failure to meet technical requirements, the insurance company will cover all repair expenses.

If the problems stem from violations of operational standards (e.g., exceeding weight limits by vehicles), the responsibility falls on the road maintenance organization or traffic police. Nevertheless, the community will receive compensation to restore the infrastructure. The insurance company acts as an intermediary in the fair allocation of responsibility between the parties, ensuring the protection of the client’s interests.

The implementation of such a system would encourage contractors to take a responsible approach to their work. Companies seeking insurance coverage would be required to meet high-quality standards. This would, in turn, lead to improved infrastructure quality and reduced costs for repeat repairs, as every participant in the process would be invested in achieving a quality outcome. Insurance would become an effective control tool, ensuring transparency and accountability in public contract execution.

This approach will inevitably bring logical and civilized changes to public procurement. First, the development of the insurance services market will create insurance funds, strengthening the financial system. Second, insurance companies will become a new regulator of contract fulfillment, guaranteeing high-quality work. Finally, communities will benefit from quality services and the efficient use of funds spent on infrastructure projects.

Legislative Initiatives: The Necessity of Compulsory Insurance

The first and most important step towards reforming the insurance market is the development and approval of a strategy for insurance development in Ukraine. This strategy should outline key directions for expanding the insurance services market, improving their accessibility and reliability. A particularly important aspect of this strategy is the role of insurance in public procurement, specifically the introduction of mandatory requirements for insuring public contracts.

Once the strategy for developing the insurance market is approved, the next step should be the development and implementation of legislative and regulatory changes. These legislative initiatives, aimed at introducing compulsory insurance for public contracts, must be comprehensive and take into account the interests of all participants in the process: the state, contractors, insurance companies, and local communities.

The main goal of such changes is to create mechanisms that protect public finances from unscrupulous contractors and ensure high-quality work financed by the state budget. The legislative requirement for compulsory insurance of all public contracts will compel contractors to responsibly fulfill their obligations. The insurance policy will guarantee the financial accountability of contractors at all stages of contract execution.

Legislative changes must establish clear criteria for evaluating contractors, mandatory requirements for warranty periods on completed work, and insurance obligations to the state. During tender procedures, insurance companies will assist in selecting reliable contractors by verifying their financial stability and compliance with public procurement requirements. Insurance will become an effective control tool, reducing the risk of non-performance and significantly improving the quality of completed works.

Advantages: Reducing Corruption, Improving Service Quality

The introduction of compulsory insurance in public procurement should be a key step in fighting corruption and improving the quality of works carried out. One of the primary advantages of this system is that the insurance company acts as an independent controller, invested in the high-quality execution of contracts. This significantly reduces the risks of abuse by both contractors and clients.

First and foremost, insurance companies are motivated to ensure that work is completed to a high standard because they will be responsible for covering any defects. This creates an additional incentive for contractors to adhere to high standards at every stage of the work. Additionally, the process of concluding an insurance contract forces contractors to take their obligations more seriously, as insurance companies carefully assess the reliability and competence of contractors before issuing a policy.

Reducing corruption risks is another crucial advantage of compulsory insurance. By involving an insurance company in the public procurement process, the entire process becomes more transparent. The insurance company independently assesses risks and monitors the quality of work, helping to avoid dishonest actions by tender participants, including unfair agreements or concealing violations between the parties.

Furthermore, the system of compulsory insurance in public procurement will help reduce government expenses. By effectively controlling the quality of work, the number of defects and unfulfilled obligations will decrease significantly, allowing the state to avoid the costs of repeat work.

Conclusion: A Step Forward

The introduction of compulsory insurance in public procurement in Ukraine is a necessary step in creating a stable and transparent public finance system. The development of the insurance services market must begin with the creation of a strategy that includes a comprehensive set of measures to improve service quality and ensure the financial responsibility of contractors.

Insurance in public procurement is not only financial protection but also a powerful mechanism for monitoring work execution. It will help reduce corruption, improve the quality of completed works, and save public funds. Legislative initiatives on compulsory insurance should increase contractor accountability, reduce risks to the state budget, and lead to long-term positive changes.

Thus, insurance should not just be an additional condition but a key factor that fosters economic growth, ensures the quality of public services, and strengthens trust in government institutions.