Understanding Mutuality

The interests of the individual equal the power of the group

Mutuals, which provide members with an alternative to insurance, are becoming increasingly popular. Organisations that have not been involved in mutuals before may still find the concept needs clarification.

Mutuality has been a feature of the insurance industry since it began. More recently, mutuals have been established for professions such as lawyers, architects, accountants, the automotive industry and insurance brokers, as well as for major property owning interests such as universities.

What is a mutual?

The type of mutual described here is an organisation established as an insurance alternative for its members. It is collectively owned by individual members and is operated for the benefit and in the best interests of its members.

Typically a mutual is formed for a group whose members share a high degree of similarity in their risk profiles. As a group, these members are able to achieve benefits that they could not obtain individually. To achieve this there is an element of risk sharing or pooling. However each member is individually rated according to risk profile and claims history. Membership of a mutual is generally selective.

It’s all about the members

No matter what type of mutual, the objective is to provide the best possible returns and services to its members. And it is effectively run by its members too.

Through their right to vote, members are involved in the corporate and strategic decision making of the mutual. Generally the directors are chosen from the membership, ensuring that people who understand the members and their industry are in control.

What are the benefits of a mutual?

There are many benefits that result from mutual membership. They can be grouped into the six areas explained below.

• Control - A mutual offers its members greater control over their protections and can tailor its cover to meet the specific needs of its members.
• Cover - A mutual has control over the protection it offers and can produce the widest protections it deems practical for its members.
• Cost - Mutuals are not-for-profit organisations which strive to offer members highest quality services at the lowest possible price.
• Compatibility - Generally mutuals are selective in offering membership, and will only accept those who represent good risk management control and practices.
• Continuity - Mutuals provide members with a long-term, viable protection solution that complements their needs. It will provide protection for the membership for as long as the membership feels it is performing a useful role.
  Given that mutuals do not have to pay dividends to shareholders (as with insurance companies) their financial investments and long-term management combine to achieve the goal of securing long-term member returns while maintaining the loyalty of members.
• Returns - Once claims reserving targets and administration costs have been met, excess earnings belong to the membership because there are no shareholders to be paid. The board will decide how to distribute this benefit to the members.

Mutual management

Professional management is essential for the success of every mutual. Professional managers provide skills and expertise to ensure that the mutual runs as smoothly as possible.

Most mutuals employ professional managers to run their day-to-day business. The managers work under the direction of the board of directors who are usually drawn from the membership of the mutual. It is important that the managers have no conflicts of interest and are paid a fee for the work they do rather than receive commissions.

Regulators

Mutuals must comply with the requirements of industry regulators which provide a framework for the good governance of the organisation and a protection for the members.

Mutuals are required at all times to have access to sufficient funds to cover existing and future claims.

Well run mutuals employ a raft of insurance and reinsurance strategies to protect the interests of their members. Through effective risk reduction processes, they can maximise savings to meet future risks. This means less reliance on reinsurance arrangements and therefore more cost savings to the members.