A group company mutual is a type of mutual which has been specifically designed to operate within a group company environment. It enables all of the benefits offered by a traditional multi-member discretionary mutual to be deployed within a group company setting.
Why consider integrating into a Group Company Mutual?
The same reasons that make a multi-member mutual a compelling proposition apply to a group company mutual:
- Taking back ownership and control
- The mutual is owned 100% by its members (i.e. the Group Company Mutual).
- The mutual is controlled by a board which is drawn from within its membership.
- This brings the decision making process inhouse, rather than being reliant upon the decisions of others (such as brokers and insurers).
- It provides a framework within which the Group can accumulate a pool of funds in a low friction environment, which it is then able to direct and utilise as required (for insurable and uninsurable losses);
- Over half of a Group’s current insurance expenditure may have nothing to do with funding the cost of its claims. It will be taken up by frictional costs such as insurance taxes, broker fees and commissions, the profit margin required by the shareholders of the insurer etc.
- Within the retained layer of a discretionary mutual, the only deduction is the operating costs of the mutual itself.
- Surpluses generated and accumulated in the mutual do not attract corporation tax.
The above all serve to make the mutual a highly efficient environment in which to manage and fund risk.
How many of the items on a company’s risk register are fully met by insurance? How could a mutual help address those gaps?
What are the advantage of a Group Company Mutual?
The group company mutual brings with it a number of advantages, including:
- Domicile – the mutual is domiciled onshore in the UK, avoiding the potential reputational challenges offshore domiciles can entail.
- Capital – the mutual comes with a solvency requirement, not the more onerous capital requirement of a captive or an insurer. This enables the mutual to:
- Operate on a deposit and call basis. The mutual calls up the level of income it expects to spend in a normal year, calling up additional funds only if they are required.
- Unlike a capitalisation requirement, where the funds have to be on balance sheet, the mutual simply needs access to them.
- This makes the mutual highly capital efficient.
- Tax efficiency – a discretionary mutual brings with it a number of attractive tax advantages:
- Contributions into the mutual do not attract insurance tax.
- Surpluses generated within the mutual do not attract corporation tax.
- Proportionate regulation – the regulatory environment of the mutual itself is that of the Companies Act, avoiding the more onerous regulation which applies to insurance companies such as those imposed by the FCA and PRA etc.
- Ownership and Control
- Ownership rests entirely with the membership.
- Control rests with the board which is majority, if not entirely drawn from within the membership.
- Surpluses
- Any surplus generated must be used for the benefit of members, or as agreed by them.
- The mutual can operate as a complementary partner to an existing insurance captive:
- The mutual would take on the primary layer.
- This allows the captive to move up the placement, or to reduce its exposure, facilitating reduced capitalisation requirements.
- The captive, or the captive’s supporting insurers, are able to provide fronting to the mutual in circumstances where this is advantageous.
- Or alternatively, the captive can enter run-off if it is no longer required.
- The lower layers of an insurance placement attract the highest rates, as this is where the bulk of claims activity is expected’
- This is the area which both mutuals and captives typically occupy.
- Placing this area in a mutual brings about a dramatic change to the cost of the enduring insurance support that is still required (the enduring insurance expenditure typically reducing to a minority proportion of the overall risk transfer spend).
- The members are still able to evidence insurance, where this is required, with a large excess which is managed within their mutual.
- Having complete ownership and control of the mutual ensures that it is operated in accordance with the needs of its members:
- The discretion must be exercised for the benefit, not the detriment, of its member owners.
- It brings the decision making process on the majority of claims by count entirely in-house, not least because the mutual is able to agree ex-gratia losses.
- The simple act of risk retention brings with it an enhanced focus on risk management and risk mitigation because of the direct vested interest in driving up risk quality.
What is the legal structure?
The mutual is created as a separate legal entity.
Can the mutual be a member of a “group” for corporation tax purposes?
The choice of being limited by guarantee or having share capital will determine whether or not the mutual is able to be consolidated into group accounts. Which option is selected will be determined by the board on the basis of which outcome is deemed most advantageous from tax and other perspectives.
What is the typical risk retention / risk transfer balance?
The typical aim of the mutual is to retain all of the ‘expected’ losses, whilst arranging insurance for the ‘unexpected’ losses, both on a per claim and accumulation basis. Structured on this basis, the mutual is at all times able to quantify its worst case scenario and ensure that this remains within the risk appetite and funding capabilities of the mutual and its membership.
Is the cover offered by the mutual insurance?
Discretionary cover is provided on a may pay, not a will pay basis. However, with ownership and control of the decision making process residing in-house, this ensures that it is exercised for the benefit, not the detriment, of its members. The members’ best interests are at the heart of all decision making.
Where insurance is required, for example by law or regulation (Employers Liability, Motor Insurance etc.), this can be dealt with in a Hybrid Mutual, or through ‘fronting’.
It is this differentiation which means discretionary mutuals are not classified as insurance, which along with the power of mutuality, delivers the range of benefits outlined above.
The above paper is a summary providing a high-level outline. A detailed assessment, including external tax and legal advice is recommended prior to any decision to proceed.
To learn more about how a Group Company Mutual can benefit your organisation and the steps required to implement one, we invite you to get in touch with our team. Whether you’re considering taking back ownership and control of your risk management, exploring tax-efficient solutions, or seeking a complementary partner to your existing insurance captive, we’re here to provide expert guidance tailored to your needs.
