Analysis: Mutual benefits


  • Mutuals make up less than 10% of the UK general insurance market but their premiums are growing faster than the rest of the sector
  • Mutuals can’t issue shares to raise capital but they say the absence of shareholders helps them innovate and deliver strong customer service
  • The current government is favourable to the creation of public service mutuals

With four mutuals making the UK top 20 insurers rankings for 2017 and results outperforming the rest of the market, mutuality is a sector to watch, especially as it is easier to innovate without constant shareholder pressure

There are around 100 mutual insurers in the UK, worth around £19.6bn in premium income, which represents 8.7% of the market. Four of them appear in the UK top 20 insurers – namely NFU Mutual, LV, Liberty Mutual and Covéa – but mutual insurers still comprise less than 10% of the UK market.

However, the sector is growing, according to research by the Association of Financial Mutuals and the International Cooperative and Mutual Insurance Federation. Gross written premiums grew almost 10% in 2016 compared to the 2015 GWP of £17.8bn. With mutual growth exceeding average market growth in six out of nine years, the sector’s share of the total UK market rose from 4.4% in 2007 to 8.7% in 2016, its highest level since the 1990s. This is particularly notable as the overall UK insurance market saw its premium income drop by 17% between 2007 and 2016.

“The results prove how resilient the UK mutual insurance sector is,” comments Andy Chapman, CEO of The Exeter and chairman of the AFM. “In the last 10 years, while the UK insurance market has lost £1 in every £6 of premium income, among mutuals, we have grown premiums by two-thirds.”

Mutuals face financial pressure

However, mutuals are at a competitive disadvantage because they are unable to issue new shares to raise capital.

LV reportedly needed external investment because of capital pressures caused in part by its quick growth and in part by changes to the discount rate. After a merger with Royal London was ruled out, it has since agreed a deal with non-mutual Allianz.

The German giant will pay LV an initial £500m in exchange for a 49% stake in its general insurance businesses. LV will acquire Allianz’s home and motor renewal rights, while Allianz will access LV’s commercial renewals. In 2019, Allianz will pay £213m for a further 20.9% stake in the GI business through an agreed, forward purchase based on a total valuation of £1.02bn for 100% of the business.

Did you know?

There are around 100 mutual insurers in the UK

The sector is worth around £19.6bn in premium income

It has £167bn in assets

The sector employs some 27,300 people

There are 30.7 million policyholders (members) served

Mutuality has an 8.7% share of the general insurance market.

The tie-up has been widely seen as positive, and LV has said it plans to grow its GI business further and can now invest more in its core life and pensions business along with new digital opportunities.

Crucially, LV has said the deal will not change its mutual status, although some brokers have expressed disquiet that there may be a less flexible approach to commercial business as a result of Allianz’s involvement.

Katie Wadey, LV’s chief customer officer, says mutuality is a force for good. A shift in attitudes is evidenced by the rise of the sharing economy and corporate social responsibility. “A listed business is under constant pressure to bring in the numbers on a quarterly basis. At LV, we don’t have this and, while some might feel it is coincidence, we have won many awards based on our service. Customers are aware we’re a mutual and research shows people want to buy from a business with strong ethics and that gives back, with some 35% saying they would be prepared to pay more for this.”

LV has a member support fund that seeks to provide direct help to customers in the most difficult circumstances, which may surprise those who see insurers as operating solely within strict claims guidelines.

Wadey says that can mean seeking customers by scanning databases if there is a disaster. After the terrorist bombing in Manchester, a policyholder who was at the Ariana Grande concert with her daughter was unable to drive home because many cars were impounded by the police. “Insurance would not normally cover this but we do always try to provide support or even give the benefit of the doubt. We have connections with hire companies and so were able to get her a hire car that day.”

While mutuals may have more constrained budgets, Wadey says they are also better positioned to launch new projects because they do not have analysts watching their every move. Committed to developing robo-advice, for instance, LV has taken a majority stake in Wealth Wizards, which provides automated guidance.

Sour lemons?

Journalist Anthony Hilton recently waxed lyrical about US start-up Lemonade, writing it is “in many ways what a mutual insurance company would look like if it was invented today with the benefit of modern technology”.

“Insurance mutuals in this country struggle to be recognised as a force for good because from the outside they look too much like a conventional public company, and the rewards in pricing and service are not easy to make apparent. Perhaps they need to rethink their offer along Lemonade’s lines,” he added.

On the My Money blog in April, Lemonade wrote that mutuals have strayed away from their original model of pooling people into meaningful communities as these communities grew to include “millions of anonymous people”.

Covéa CEO James Reader agrees that mutuals can be more agile. “We are answerable to our French parent, which is a mutual, but it is very supportive and the philosophy is about delivering for the customer. That means there is less pressure to justify returns and, although we have strong controls, it is less about short-term profits.”

He adds: “We launched a direct arm under our Provident brand, which is aimed largely at aggregators, and were able to do this through developing our own technology, avoiding legacy systems. Being a mutual does not mean being old-fashioned, it is about customer focus and getting things right.”

Gina Fusco, director of strategy and marketing at NFU Mutual, says mutuals are doing well because of both better service and the absence of shareholders.

In the top 20

The four mutual insurers that appear in AM Best’s UK top 20 based on gross written premiums:

14 NFU Mutual
15 LV
18 Liberty Mutual Insurance
20 Covéa

“We share our financial success with our members in the form of our mutual bonus discount on renewal premiums, which is an important way of showing appreciation of our customers’ loyalty. The combination of our personal service and our bonus drives persistency and customer satisfaction.”

Strong reserves needed

But adequate solvency levels are critical. A mutual can certainly prove a sustainable business model, but it needs strong reserves.

“The past 30 years have also seen major surge events, such as the Great Storm of 1987,” Fusco says. “Thanks to our long-term financial security, reserves and network of local agents, we have been able to pay claims quickly and assist our customers with immediate, local support when it is needed most, which remains our approach today.”

She adds: “Mutuals need to be financially strong to weather bad times and enable them to develop new products and continually improve customer service. They also need to take steps to prevent their exposure in one sector putting them at risk. While insuring over 70% of the UK’s farmers, NFU Mutual has diversified and today half of its business comes from non-agricultural sectors.”

There is also plenty of insurtech activity in the mutual sector. Much of this has been as a result of Regis Mutual Management, which was founded in 2007, and specialises in the creation and management of mutuals. It runs nine of these, including The Military Mutual, Activities Industry Mutual, The Retail Mutual and The Masonic Mutual, and has plans to launch more.

“Mutuals are not a new idea; they have been around for hundreds of years,” notes Regis CEO Paul Koronka. “After the rash of demutualisations in the 1990s that principally affected the building society sector, and following a decade of broken trust with financial services generally, mutuals have seen a resurgence as they offer a strong, stable and trusted alternative to traditional insurance companies with shareholders.”

He continues: “Mutuals operate as businesses just as other companies do. What makes them stand out is being 100% member-owned. They are, therefore, inherently trusted by those who use them.”

He adds government generally favours the mutual model. And last year the government expressed its support for public service mutuals.

Indeed, the Local Government Association is exploring options to set up a new mutual with the aim of saving on insurance costs. The LGA chair, Gary Porter, points out: “Councils spend hundreds of millions of pounds on insurance nationally. They also routinely work together to share best practice and support each other to improve, but currently are limited in doing this by understandable confidentiality around insurance contracts.”

Marine mutuals steady ships and more

Marine protection and indemnity cover has been a mutual specialism for over a century. Jeremy Grose, CEO of The Standard Club, comments: “Over that time it has developed effective structures to provide the high liability limits needed by ship owners. This protects them against routine and large claims for incidents, such as wreck removal or cleaning up pollution.

“The pooling model of the International Group of Protection & Indemnity Clubs, which shares large losses between the world’s 13 largest P&I clubs, combined with reinsurance programmes, means the market can effectively absorb very large losses.”

The cost of settling major liability claims, such as pollution and wreck removal has been rising rapidly. “This means that the P&I clubs have seen downward pressure on premiums at the same time as rising claims costs. This is where mutuality really demonstrates its strength in protecting members’ interests.

“For example, The Standard Club returned 5% of premium to members in 2017 and will do the same in 2018 while maintaining its financial strength to absorb shocks. It is hard to imagine the commercial market responding to these challenges in the same way.”

Watching closely

Zurich Municipal is watching the development closely and hints at the debacle of the Municipal Mutual Insurance, which went into run-off in 1992.

“Insurance is a long-term investment and claims far in the past can take a long time to settle, or indeed may not be reported for many years after the incident,” notes a Zurich spokesperson. “As with all forms of contract management, it’s imperative to look at the potential future pitfalls and ensure you fully understand what you are entering into.

“It would also be remiss not to highlight that a discretionary mutual is not insurance. Under an insurance contract, there is a right to indemnity providing the policy conditions are met. With a mutual, claims payments are at the discretion of the board of trustees. The two solutions are not the same, and we would encourage local authorities to review all options in line with their individual risk appetite.”

That said, Zurich affirms it would “welcome any new competition in the market.”

The LGA has said it plans to operate a stable model that would involve a mutual fund from which claims could be paid, up to an excess level yet to be decided, and this fund would not be liable for insurance premium tax. Claims above this level would be covered by insurance bought from the market.

This is known as a hybrid mutual. Koronka says these “blend discretionary layers with traditional insurance. If the blend is carefully structured, the mutual is very robust, even in the most extreme claims situations.

“The boards of the mutuals also have the power to agree claims that fall outside the terms of the cover. This is where a discretionary mutual can and often does go beyond the restrictions of a traditional insurance policy.”

He adds: “As mutuals are completely member-focused, one of the fundamental tenets of the regulatory regime – namely treating customers fairly – comes absolutely naturally in a mutual context.”

Koronka says it is difficult for new mutuals to launch in the onerous Solvency II environment. Discretionary mutuals, however, are not regulated by the Prudential Regulation Authority since they are not classed as insurance companies, nor, for the same reasons, are they regulated by the Financial Conduct Authority. This may not suit all buyers, who may want higher levels of protection.

Mutuals can run into problems if they get too big or if they are insufficiently capitalised. They can be subject to poor management and be inefficient, like any business. But performance is up and the market might soon welcome a new entrant.

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