Understanding the Design of a Mutual

The main question about Mutual Cover is, "Is it Insurance?" The answer is a proud "NO.”

Key Differences Between Mutuals and Conventional Insurers

Mutuals differ from, and (in our opinion) are better than, conventional insurers in several key aspects: 

Ownership

A mutual is owned by its members, not shareholders, expecting dividends and capital growth. Decisions can, therefore, be made with long-term member benefit in mind rather than short-term shareholder or executive greed. 

Capital structure

A mutual operates in a more lenient regulatory environment to that of insurers and solvency margins only maintained to ensure that the maximum liability for claims is always covered. 

Ethos

All action is driven for the benefit of the members, not third-party shareholders. The interests of the mutual directors (usually elected from and by the members), the Mutual Managers, and the members are therefore aligned. 

Shared surplus

If, after the payment of claims and operating expenses, a mutual makes a profit or surplus, this can be shared with the members. 

Tax efficiency

No insurance premium tax is due on mutual contributions, and provided it stays within its rules, no corporation tax is levied on mutual surpluses. 

Disintermediation

Mutual deals directly with members, avoiding the frictional cost of brokers’ commissions or fees. 

Cover

For smaller and predictable claims, mutuals provide cover on a "may" pay basis, with the "may" being predicated on member benefit, not the "small print" interpretation of the Wording. Insurance sits on top of this pooled layer to handle unexpected and large losses. 

The capital and tax efficiency of the mutual construct, combined with reduced frictional placement costs and a member-centric operating culture such that members can share in trading surpluses, means that mutuality remains an attractive and rewarding alternative to conventional insurance. 

What is a Hybrid Discretionary Mutual?

Mutuals have existed for 100’s of years, with some of today’s largest insurance companies having started out as mutuals. Because of the limits of indemnity and sums insured required, most mutuals now partner with external insurers to create a blend of mutual protection and insurance cover. 

Under the hybrid structure, Mutual covers member funds and the predictable losses each year (the Mutual Retention) and arranges insurance on top of this. This excess insurance is in the name of the individual members.

The Mutual also arranges insurance to protect itself once the total of losses falling within the Retention exceeds a given level. This means that the Mutual can always cover its liabilities. This means the Mutual protects itself against a particular bad claim resulting in large individual losses or a larger number of smaller claims. 

How Did the Mutual Concept Develop?

At its heart, insurance is a very mutual concept: a group of individuals or entities with a shared opportunity or problem joining together to provide an effective and cost-efficient solution. That was how the sector first became established, and little more than 20 years ago, the majority of the UK insurance sector was still mutual. 

Today, mutuals account for around ten per cent of premium income in the UK insurance industry, though this itself marks a recovery from the period immediately before the financial crisis in 2008. 

During that 20-year period, we have seen mergers that have reduced the number of active mutual insurers below a hundred, with significant barriers to entry that prevent the development of new traditional mutuals. The solution to that has been the widening development of the discretionary and hybrid discretionary mutuals.

Conclusion

Mutual Cover represents a robust and principled alternative to traditional insurance models, emphasising member ownership, community benefit, and operational efficiency. By prioritising the needs and well-being of its members over the demands of external shareholders, mutuals not only preserve the core values of mutual aid and cooperation but also deliver a financially viable and equitable service. 

Ready to experience the mutual advantage? Contact FEC Mutual to learn more about our member-focused mutual solutions and discover how you can benefit from our collective approach.