David Gudopp
In terms of risk transfer options, there are different types of mutual structures and membership options. A discretionary mutual can be integrated into a risk transfer mix in various ways. Our Head of Risk Transfer and Mitigation, David Gudopp shares some of the advantages of a consumer discretionary mutual for communities, associations and sectors or group companies.
What are they?
The discretionary mutual model has been in use for well over 100 years and is recognised in English law. Examples include the Medical Defence Union (MDU) and U.M, Association Limited (UMAL). Discretionary mutuals share much of their DNA with fully authorised and regulated mutuals, such as the National Farmers Union Mutual Insurance Society (NFU Mutual) and Royal London.
The primary difference between these two variants of mutuality, is that whereas a fully authorised and regulated mutual insurer offers its members indemnity (‘will’ pay), a discretionary mutual offers its members discretionary cover (‘may’ pay). A member has the right to have all claims considered and the board of the discretionary mutual exercises its discretion, following the rules of natural justice, in agreeing or rejecting the payment of any claim.
Ownership and control of the mutual resides with its members, delivering a symbiotic alignment of interests and clarity of purpose. This lies at the very heart of everything the mutual does. The board is answerable to the membership. The board of the mutual typically delegates discretion to the managers to settle all losses which fall within the scope of the cover wording. The real power of discretion comes most closely into play in relation to losses which fall uncomfortably, or completely, outside the scope of the policy wording with the board being able to form a view as to what is in the best interest of the member and the membership.
Members can reasonably expect that all valid claims will be paid. However the cover afforded is not a contract of indemnity and a member’s right is simply to have their claim considered in accordance with the rules and constitution of the mutual. Members also have a right of appeal to the board in respect of claims decisions which are made by the managers.
Satisfaction of the outcomes can be seen through member retention rates observed in discretionary mutuals, when contrasted against that of corporate insurers. Examples include one mutual which has been operating for over 20 years whose membership in 2022 included all entities who had ever been a member. Retention rates in the mid to high 90s are relatively commonplace.
What are the advantages?
A discretionary mutual is not classified as insurance. Discretionary mutuals sit outside the regulatory framework which applies to insurance companies. This brings with it a multitude of potential advantages, including:
- A consumer discretionary mutual has a solvency requirement, not the capitalisation requirement of an insurance company.
- Mutual risk appetite is determined by the board.
- The mutual can be domiciled onshore in the UK
- Proportionate regulation: a mutual is regulated as a company not an insurer and is not regulated by the FCA or subject to other insurance regulation.
Mutuality (both discretionary and fully authorised and regulated) brings additional advantages:
- Surpluses cannot be guaranteed, but any surpluses created within the mutual are not subject to the application of corporation tax.
- With no shareholder profit demands to satisfy, the mutual is able to determine its own pricing strategy.
- With the mutual being owned and controlled by its members, members typically deal directly with their mutual through specialist managers, avoiding the additional costs of insurance brokers.
- Bulk buy leverage: The group-buying leverage of the mutual membership, achieves a collective outcome not typically available on an individual basis.
The mutual can also be highly selective:
- Practitioners in a sector are typically far more adept at differentiating the ‘good’ operators from the ‘poor’ operators than insurers. This alone has the potential to transform the results.
- The mutual is able to integrate minimum risk management standards within its eligibility criteria.
- By minimising the exposure of the claims of a few, reduces the cost of cover for the many.
Collectively these discretionary mutual differences have the potential to deliver significant cost advantages and enhanced flexibility.
Types of membership:
There are two primary types of membership composition:
For communities, associations and sectors:
- Otherwise unrelated entities coming together to form the membership of a mutual.
- This requires sufficient ‘glue’ to bind them together to create a shared solution to a shared problem.
For group companies with two or more subsidiaries which have separate legal entities:
- The membership base of this type of mutual is formed of the separate legal subsidiaries which reside within the overarching parent (operating as an alternative, or as a complementary partner to a captive).
- Can be constructed enabling or precluding consolidation in the group accounts, depending on the desired outcome sought.
- Can operate as an alternative to an insurance captive, or as a complementary partner to an existing captive.
How can a consumer discretionary mutual be integrated into your risk transfer mix?
Increasingly, there is no ‘one size fits all’ solution. The attainment of the optimal outcome requires the harnessing of the strengths of various risk transfer frameworks, discretion, insurers, captives and reinsurers.
Management of the mutual:
Outsourced mutual management provides access to the knowledge and expertise required to assess, design, build, launch and operate the mutual, thus ensuring that the membership drawn board of the mutual is provided with independent, impartial advice. The managers should provide their reports and guidance to the board of the mutual, without having a seat on that board (ensuring that ownership and control remains firmly within the mutual) and they should take their instructions from the board. Management is typically provided on a pure fee basis, which is negotiated directly with the board of the mutual.
Additional information on consumer mutuals and the mutual sector can be found on sector body websites such as: