Exploring the Power of Discretionary Mutuals for Large UK Corporates

Discover how large UK corporates can gain a competitive edge in risk management and maximise cost and coverage advantages through the untapped potential of Discretionary Mutuals. Dive into this insightful article to learn why Discretionary Mutuals, as an alternative to insurance captives, offer onshore domicile, solvency requirements, and tax efficiency.

For more than 50 years, insurance captives have served as a valuable tool for large corporates. They offer a way for these entities to regain ownership and control in the risk transfer process, providing the flexibility and benefits that come with it. However an offshore domicile, to minimise capitalisation requirements, can lead to reputational complexities. Moreover, insurance regulation and taxes impact various aspects, from board composition to investment strategies.

What are Discretionary Mutuals and their advantages?

Enter the Discretionary Mutual, an alternative or complementary partner to an insurance captive. Discretionary Mutuals have been a fixture in the UK risk transfer landscape for over 125 years. What sets them apart are the advantages they bring. Unlike captives, they are domiciled onshore in the UK and operate under a solvency requirement instead of a capitalisation requirement.

How does membership work in Discretionary Mutuals?

They are not directly subject to insurance regulation or taxes and the surpluses generated by mutual trading are not subject to the application of corporation tax, making them highly capital and tax efficient. Additionally, they can be constructed to allow or prevent consolidation in group accounts, depending on the desired outcome.

To establish a mutual, at least two members are required to engage in mutual trading. While traditional mutuals consist of unrelated eligible entities in a specific sector, group company mutuals are formed of two or more of the legal entities within the overarching parent/group company.

How is discretion exercised in Discretionary Mutuals?

As the name suggests, a discretionary mutual offers discretionary cover, meaning that the board of the mutual, comprised of its members, has control over claim decisions – just like a captive. This ensures that the exercise of discretion remains in trusted hands.

How do Discretionary Mutuals balance risk retention and transfer?

Similar to a captive, the mutual blends risk retention with risk transfer. It retains only the level of risk which is within the appetite of the membership and the board and arranges the transfer of the remainder into the insurance and reinsurance marketplace.

What cost and coverage advantages do Discretionary Mutuals offer?

Typically, the aim is to retain and effectively ‘self-serve’ all of the expected attritional losses (handling these within the low frictional cost environment of the mutual), whilst arranging risk transfer (insurance and reinsurance) for the potential volatility of unexpected losses, which can include utilisation of an existing captive.

The use of a discretionary mutual can unlock significant cost and coverage advantages.

Designing, building, launching, and operating a mutual require the expertise of a professional mutual manager. If your organisation is interested in exploring this topic further, we would welcome the opportunity to discuss and delve into it with you.

We look forward to the possibility of working together to navigate the realm of risk management and find the best solution for your organisation’s needs.

David Gudopp

As the Head of Risk Mitigation and Transfer in our Insurance, Mutuals and Risk Management division, David will bring over 20 years of experience to the table. David’s focus is on providing clients with an independent assessment of their risk transfer arrangements and driving targeted outcomes.

Prospect Law is a multi-disciplinary practice with specialist expertise in the energy and environmental sectors with particular experience in the low carbon energy sector. The firm is made up of lawyers, engineers, surveyors and finance experts.

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This article is not intended to constitute legal or other professional advice and it should not be relied on in any way.