There are a variety of different risk transfer mutual structures available for deployment. The commonality between them is that they are owned and controlled by and for the benefit of their members, avoiding the inherent conflict of interest in the corporate model between the interests of shareholders and the interests of policyholders.
1. Fully authorised and regulated mutual insurance companies.
Examples of this structure include Cornish Mutual, the NFU Mutual, along with a myriad of others. The members typically deal directly with their mutual, minimising frictional placement costs. Member pricing also benefits from the absence of third-party shareholders and the need to include a profit margin to satisfy their demands. However, being subject to the full weight of FCA regulation, the capitalisation and regulatory requirements on this type of structure are significant.
2. Discretionary Mutual.
Examples of this structure include the Medical Defence Union (the MDU), Benenden Health, along with a myriad of others.
Discretionary cover, as the name suggests, is provided on a discretionary basis. This has the advantage that the mutual can pay claims that the board thinks should be paid even if they aren’t strictly within the wording of the policy.
Another advantage is that with discretionary cover not being classified as insurance, it is subject to the same regulatory environment as any other non-insurance company (i.e. the Companies Act). It therefore has a solvency requirement, rather than a capitalisation requirement. Additionally, member contributions into a discretionary mutual do not attract insurance premium tax.
Ownership and control resides with the membership, ensuring that the members’ best interest is at the heart of all decision-making – its sole purpose being to meet their needs. This ensures that discretion is exercised for the benefit, not the detriment of members, as is evidenced by the longevity and high member retention rates within existing discretionary mutuals.
The next two types of mutual are a blend between a Discretionary Mutual and Insurance.
3. Hybrid Discretionary Mutual
The Hybrid Discretionary Mutual blends the benefits of discretion with the strengths of insurance. The bulk of claims costs and counts are typically in the primary layers of the insurance placement. The mutual aims to retain and deal with all of these ‘expected’ claims – on a discretionary basis, whilst arranging insurance for ‘unexpected’ losses, both on a per-claim and accumulation basis. In a similar manner to how an insurer arranges reinsurance, this enables the mutual to cap and quantify its maximum retained exposure, thus delivering the financial advantages of the discretionary mutual model, whilst leveraging the strength of the insurance marketplace.
4. Fronted and Wrapped Hybrid Discretionary Mutuals
Further variations of the Hybrid Discretionary model include the integration of ‘fronting’ arrangements from the supporting insurer, or the addition of contingent insurance. The former enables the supporting insurer to provide ground up insurance certification, the latter responding in the event that the mutual fails to pay a claim which is within the scope of cover provided.
If you would like to have a conversation and explore the potential value the integration of a discretionary mutual into your risk transfer framework could deliver, please do not hesitate to contact us.
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.
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