The mutual insurance market’s pleasing performance since the financial crisis suggests ‘permanent recovery’ for the sector
The Swiss Re sigma report Mutual insurance in the 21st Century: Back to the Future, 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%1 in 2014 suggests a permanent shift in insurance buying behaviour that could lead to a new era of mutualism the report concludes.
The International Cooperative and Mutual Insurance Federation (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. ICMIF today welcomed the report’s findings stating that it was delighted that Swiss Re had focused on the mutual and cooperative insurance sector for this latest sigma report.
Rapid levels of innovation and growth
Commending the report, Shaun Tarbuck, CEO, ICMIF, said “mutuals, now more than ever, play a significant role in the rapid levels of innovation and growth taking place within the global insurance industry. It is very welcome to see the new sigma report from Swiss Re reflect this.”
Speaking about the collaboration with ICMIF, Darren Pain, Senior Economist, Swiss Re, said: “The sigma report makes considerable use of data shared by ICMIF. Given the heterogeneous nature of mutual insurers, this was invaluable in analysing the make-up of the mutual sector and how that has changed over recent years.”
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 (ie capital) and governance regimes. The report notes that, since the financial crisis, regulators and policymakers have come to recognize the benefit of diverse organizational forms in the financial sector, and this has boosted the appreciation of mutuals generally.
Shaun Tarbuck, CEO, ICMIF said: “whilst I agree with the point of view that there is a changed perception of mutuals among policymakers and regulators in the last few years this now needs to manifest itself in sensible proportionality rules in regulation and also the ability to establish new mutuals in all countries. It is not acceptable that 45% of the world’s countries still don’t have a legislative system which allows mutual insurers to exist.” Tarbuck continued: “additionally, new regulation should not be used as a tool to consolidate the mutual sector just because well-capitalized small mutuals are not and cannot be diversified in terms of products and/or countries and, indeed, many of them do not wish to be.”
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.
Tarbuck welcomed that fact that the report mentions the leading position that mutuals have taken in gender diversity at CEO level, adding “a governance report will be published later this year by ICMIF which will show just how far the mutual sector has come in terms of Board diversity over the last ten years.”
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.
urthermore, 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.
Commenting on this trend, Shaun Tarbuck said: “it is interesting to note this growing trend of a return to the sharing of risk, which, in fact, takes us back to the way most mutuals actually started, to ‘serve the underserved’ which means that the report’s title back to the future is particularly appropriate.”
Shaun Tarbuck concluded: “I believe that Swiss Re’s latest sigma report fairly demonstrates the strides that the mutual and cooperative insurance sector is making. Whilst at the same time showing the challenges it is facing. What makes this sector so strong is its propensity to innovate and collaborate, whether that be reflected in the new mutual start-ups referenced in the report; or the governance changes and diversity leadership shown by the sector; to the ability to collaborate on capital and reinsurance issues; and the opportunities presented by digitalization. We are definitely at the beginning of a new era of mutualism.”
1 Whilst Swiss Re have adopted the same definition of ‘mutual’ and ‘cooperative’ insurers as ICMIF uses, the institutional scope of the sigma report is more limited than ICMIF’s research. Therefore some small variations in market share figures will be noted between the sigma report and ICMIF’s Global Mutual Market Share figures.