Mutuals are on the comeback trail in Australia. According to Melina Morrison (pictured above), CEO of the Business Council of Co-operatives and Mutuals (BCCM), there are two main reasons for this comeback: hardening insurance markets and a change in legislation.
“The hardening of insurance markets means that people actually have to innovate and look for other solutions,” she said. “Mutuals - and we have a particular type of mutual in Australia called a discretionary mutual fund (DMF) – are a potential solution.”
The BCCM represents both mutual insurers and discretionary mutuals. Morrison was talking to Insurance Business on the sidelines of a recent International Cooperative and Mutual Insurance Federation (ICMIF) seminar in Sydney. The seminar was attended by mutual insurers and major reinsurers from around the world. One focus was exploring the future role of mutuals in the Australian insurance and risk protection sector.
The second reason for the renaissance of mutuals locally, said Morrison, is a change in legislation that has “taken the handbrake off for mutuals again.”
“In 2019, the Mutuals Reform Bill was passed and what that did is put into the Corporations Act special capital instruments for mutual companies,” she said.
So now mutuals can raise capital by issuing shares to external investors or members. Back in the 1980s and ‘90s many mutual companies in Australia demutualised because the old legislation left them unable to access capital and, instead, incentivised them to corporatise.
“I’ll give you one example in life insurance,” said Morrison. “In 1985, 60% of assets in life insurance were held by mutuals, by 1998 it was 1%.”
This “big shift” out of mutual structures - and not just in life insurance - is now swinging back.
Morrison said that this combination of market conditions and legislation has allowed mutuals to become a more viable risk solution again.
“What it means is that groups can come together and self-insure or provide a pool for their risk that may give them an alternative,” she said.
Morrison said that mutuals have an ability that traditional insurers don’t have: influence over members as distinct from customers. This ability could be particularly important as the risks facing businesses increase.
“It’s very hard for a commercial insurer to say to its customers, you should do X, Y and Z in order to try and mitigate or adapt to future events,” she said. “In a mutual, because the members are the policyholders, it makes sense for them to work collegially to try and work out what’s best to build back better, for example.”
Morrison said because there are no profits to shareholders, any advantage gained from adapting or modifying business practices can be returned back to members as reduced premiums or other benefits.
However, she said the entire insurance industry and risk protection industry has a common objective and needs mitigation and adaptation to be a focus.
“I think where we [traditional insurers and mutuals] definitely are all on the same page is we have got to stop kicking the can down the road by just talking about the price of the premium,” she said. “It’s in everybody’s interests because insurers of businesses have to be profitable whether they’re mutual or not.”
Brokers play an important role with mutuals, she said, much like their role with traditional insurance companies.
“Brokers often play a pivotal role and sometimes they even bring cohorts of businesses or communities together in order to find a specialist in setting up a discretionary mutual fund on behalf of that group of people,” said Morrison.
Morrison said mutuals are often a good option in large sectors with similar risk protection needs.
“An example is Capricorn Mutual which is a risk protection business within a retail and buying group that brings together 30,000 mum and dad automotive repair shops and smash repair businesses across Australia and New Zealand,” she said. “They are insuring themselves because what they’re seeing is it’s more cost effective – because there are enough members in the pool – to grow the pool and buy this risk product at a competitive price from the market.”
Another example: Australia’s customer-owned banks.
“There are more than 60 of these and they have director and officer (D&O) insurance needs,” she said. “That’s quite a large pool of entities so they’ve been looking at a discretionary mutual fund to make sure that they can get the best possible price from the market.”
Mutuals can also work for niche industries that have a very specific but major risk issue. There’s a “very successful” mutual for banana growers in Carnarvon, she said, that’s operated for about 30 years.
“They periodically experience cyclones which are always going to happen so banana growers there have a self-managing fund which they are required to contribute to and, as a result, they’ve been able to withstand and build back better whenever they’ve had one of these catastrophic events,” said Morrison.
The government initially contributed 50% of every dollar pooled by the farmers.
“That built the reserves up to a certain point but now it’s completely independent and autonomous,” she said.
Mutuals, said Morrison, can help deal with wider impacts of nat cats but in collaboration with markets, governments and local communities. One of those mutuals, she said, operates in the flood prone Northern Rivers area of NSW.
In the years ahead, Morrison said climate change will likely drive communities and government towards more partnerships with the private sector, including mutuals, just in order to keep operating.
This risk protection, she said, could include small business insurance, cyber coverage and “some sort of flood cover, which may not be a full-blown insurance product.”
Morrison stressed an important difference between traditional insurers (including mutual insurers) and discretionary mutuals.
“They [discretionary mutuals] issue a risk protection product, rather than an insurance policy,” she said.
Mutuals, said Morrison, just like insurers, are also dependent on the price of risk.
“I will caveat all this by saying, markets are still markets, risk is still priced, discretionary mutual funds or mutual insurers still have to go and seek underwriting from a reinsurer,” she said.
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