Mutual insurance in the 21st century: back to the future?

The mutual insurance market’s pleasing performance since the financial crisis suggests ‘permanent recovery’ for the sector according to Swiss Re’s latest sigma report.

The Swiss Re sigma report Mutual insurance in the 21st century: back to the future (published in August 2016) states that mutuals are enjoying a renewed period of relative popularity and that they have benefited from the financial crisis of 2007/8 as policyholders retreated from stock-based insurers. The premium growth from 24% share of the overall insurance market in 2007 to 26% in 2014 suggests a permanent shift in insurance buying behaviour that could lead to a new era of mutualism the report concludes.

ICMIF contributed significant market intelligence to the Swiss Re report through the sharing of ICMIF data and research findings; intelligence from the  2015 ICMIF Conference; and member case studies.

Mutual advantage

The report states, that by combining ownership and policyholder roles, a mutual structure can align incentives between customer and insurer which in many cases leads to an ‘efficiency advantage’.  One of the ways this advantage manifests itself is in a higher loss ratio of 67% versus the industry benchmark of 63%. The report states that this reflects the mutual model well as mutuals choose to limit premium increments for members and accept more claims rather than striving solely for profit maximization.  In other words, a better deal for the customer.

This could, in turn, be the reason that mutuals are enjoying significantly greater loyalty from their members as highlighted in data included in the report from a recent Bain & Company survey. The survey shows how customer loyalty scores, as measured by Net Promoter Score (NPS), were more than double the multinational stock-based insurers.  This loyalty is reinforced by mutuals ability to compete not only on price but also on the value-added services they provide to their members, concluded the report.

New risk-based regulatory capital standards could put some mutuals at a competitive disadvantage

According to the report governments and regulators have introduced new risk-based capital requirements and tougher corporate governance arrangements, which are designed to boost the resilience of individual insurers and to curb excessive risk taking. Whilst the Swiss Re report states that mutuals are generally well-capitalised, these requirements could put some mutuals, especially smaller ones with a narrow regional or business line focus, at a competitive disadvantage. Larger and better-diversified insurers are in a stronger position to manage the additional operational and funding costs associated with compliance the report suggests.

Regulators appear to be more aware of the possible unintended consequences of their new rules, and are emphasising proportionality in implementing the new prudential (i.e. capital) and governance regimes. The report notes that, since the financial crisis, regulators and policymakers have come to recognise the benefit of diverse organisational forms in the financial sector, and this has boosted the appreciation of mutuals generally.

Corporate governance challenges

For mutuals, the key corporate governance issues are independence, risk expertise and diversity of Board members the report states. Small mutual insurers, in particular, are keen to ensure that compliance with any new measures does not create such a financial, administrative and operational burden as to impair their ability to survive.

Digital technology could present the biggest game changer for mutuals

The report concludes that advances in digital technology could yet prove to be a boon for the mutual model. Exploiting social media and smart analytics to better understand the needs and preferences of customers should be a natural fit for mutuals, given their underlying purpose to serve the long-term needs and maintain the trust of their owner-members. Furthermore, mutuals should be well-positioned to tap into the growing appetite for the sharing economy. With social media, Blockchain and other emerging digital facilities, mutuals will likely be able to better engage with existing and prospective members to select and optimize risk-sharing pools.

In fact, the report suggests, mutual insurers might ultimately be able to build private Blockchain-based platforms of their own that would establish connections between prospective members (customers) who have a common affinity or shared risk. The new technology could replicate, in a virtual setting, the sharing of risk among members that is the very essence of what it is to be a mutual insurer.

By enabling people to share risk capital to cover potential adverse developments that might affect individuals in a network, the report argues that mutuals offer an important safety net for the less fortunate or poorer in society. This is becoming increasingly important as governments in many parts of the world retreat from social insurance provision.

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