Virtual Summit Shorts: Mutual Renaissance

An insurance policy issued by an insurance company is not the only form of risk transfer product available to individuals and businesses. Alternative solutions include insurance mutuals, discretionary mutuals, aggregate deductible schemes, reciprocal exchanges, and captives (formal insurers owned by a single parent or collective).

Charlie notes that the Australian GI market has seen an increased interest in alternative insurance solutions over recent years, influenced by:

• Traditional insurance insufficiently focussed on customer outcomes;
• Traditional insurance showcased an asymmetric response to poor claims experience analysis, resulting in upward price pressures and reduced coverage for policyholders (especially when we head into a hardening market);
• Good experience profit was not shared with customers who had to shoulder the price increases/reduced cover; and
• Traditional products were difficult to understand;                                                                                                                                                                                                                    

So, what are some considerations when designing a new discretionary mutual to address those issues?

• By its very nature, any mutual is owned by members and should be designed in consultation with potential members to be customer-centric;
• The constitution should be drafted with prospective members in mind and specify capitalisation (including the consideration of mutual capital instruments (‘MCI’), and how decisions are made amongst the membership;
• A discretionary mutual’s retained profits can be used in a variety of ways, including building the capital base, as a rebate for future premium or to fund risk management activities;
• The payment of a claim is ultimately at the discretion of the Board of the mutual and therefore the product issued is not a contract of insurance and the entity is not regulated by APRA.                                                                                                                                                                                                                                                               

How exactly, would the financial outcome from a discretionary mutual differ for members?

• Members typically share in ‘experience profit’ (contribution minus claims, external insurance costs and expenses). This element of profit within the mutual is not typically taxed;
• Members may share in investment returns. However, this element of profit is taxed, and franking credits may be trapped in the mutual;
• The level of potential experience profit depends on the net retention. A higher capitalisation through instruments such as MCI can allow a higher net retention and less profit ceded to reinsurance (but also potentially more retained volatility);
• A ‘Greenfields’ solution allows for a model that may be simpler and have lower overheads;
• Product features that are more member friendly may include: more payment flexibility for members such as fortnightly payments, or use of a hurdle, rather than an excess;
• Changing the product design can remove the risk to an individual of underinsurance.                                                                                                                                                      

I would like to thank Charlie for sharing his insights on alternative insurance solutions. The sentiments expressed resonate with me, as I have had the pleasure of working with corporates who have “taken control of their insurance destinies”. The effort and dedication showcased by these corporates to increase their insurance knowledge can only be a good thing for the industry and it is clear that actuaries are playing a major role in facilitating new solutions and the Mutual Renaissance.

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