In a market that picks and chooses, the co-operative approach to risk protection seems to be having a moment

There’s nothing new about mutual risk protection. It dates back centuries, and is built on a principle as old as time: community co-operation.

And according to recent global premium figures, the mutual model has never been stronger, with Australia among the markets leading the surge. In 2021, more than 4400 mutual funds collectively wrote a record $US1.42 trillion in premium, an International Co-operative and Mutual Insurance Federation report from earlier this year states.

By market share, Australia was the 13th-fastest-growing market, with mutuals’ share growing 7.7 percentage points over the 10 years from 2011.

In a hardening market, with insurance affordability and availability a growing problem in some sectors, it is perhaps unsurprising that some insureds are looking for alternatives.

Charles Pollack says his mutual fund start-up lab Picnic has, in its first few years of operation, noted interest in the model from a variety of organisations and businesses.

“We’re seeing organisations that have a community and they want to do something for that community because they’ve heard from many members…that they’re having trouble getting insurance or insurance at an affordable price,” he tells Insurance News.

“We’re seeing interest from organisations where it’s useful to support their foundational business…[so] having a suitable protection solution will make their business more efficient and allow them to really grow their business. And then on the other side, there are segments where the [insurance] industry has cut them off, and they’re looking for alternatives.”

Geoff Henderson, Chief Executive of university sector mutual Unimutual, also notes an uptick in interest.

“Given we only look after the higher education and research sector, we are a limited market,” he says. “We’re not open for anyone to opt in, but we certainly over the past 12 months have seen a lot more enquiries around what the mutual is about and the opportunity to join.

“The feeling is that they’re not getting a specialist cover where they are, and it’s just a transaction and a price at the end of the day.”

A discretionary mutual is essentially a policyholder-owned risk protection group. Claims are settled at the discretion of the group, and profits are redistributed among members.

Mr Henderson notes the model is no “panacea to the industry’s problems … Looking at [insurance] affordability, it has a number of different dimensions. The structure of a mutual, I don’t think necessarily solves the problem.

“I think it’s the actions that mutuals take that can solve the problems. Things like members buying into a common risk management proposition, peer-to-peer collaboration to solve problems. That’s where the gold lies.

“For-profit companies would love to have their customers providing feedback and input to develop products. Our members are our owners, they have a vested interest in seeing our success. It’s having that connection that allows us to be able to leverage that knowledge.”

Fun’s over: caravan parks, including this site in Mildura that was forced to remove its jumping pillow, face issues sourcing affordable public liability insurance. Efforts to get an outdoor industry mutual off the ground have not been successful.

Unimutual covers 55 members across lines including property, liability and cyber. Mr Henderson says co-operative risk management shapes as one of the key advantages over traditional insurance.

“I think there’s a number of dimensions to that. Looking purely at our risk management proposition, we have an in-house team that do that work and they’re specialists in the higher education sector … that specialisation is really valuable, it’s something we hear a lot from our members.

“I think the second part is, the losses of the few, the majority can learn from. So when we see losses coming through, we actually share it more broadly with the membership. ‘Here are the types of losses we’re seeing. How are you going to look to improve your risk profile to reduce these losses?’

“Because end protection is one thing, and we’ll pay for the claims, but it’s the operational impact that really affects them more than the claims element. If we can stop that from happening, because they’re learning from their peers, then it’s really important.”

Picnic Chief Executive Mr Pollack says pricing uncertainty is another area where a mutual “has particular value”.

“Everyone talks about climate change. That is such a slow-burn thing in terms of the effects on the insurance industry, the effects on so many things.

“There’s not a sudden tipping point where everyone goes, ‘Oh, the climate is changed’. When you have any long-term thing like that and, importantly, the real effects aren’t fully understood, people want to just put prices up to manage that risk, because they think that’s the right way.

“A mutual is by far the best solution there because, firstly, you can use it to build up reserves in a cost-effective way. But secondly, if you do get it wrong in the long term, the benefit for members is that their money’s there in the pot for them to take lower contributions in future.

“So the members are sharing that risk rather than putting the…benefit onto shareholders at the expense of the customer.”

Picnic has established mutual funds including Our Ark (for community groups such as churches, childcare providers, community housing groups and Aboriginal land councils); Turo Travels (for users of the world’s largest car-sharing marketplace); and most recently Our Guard (for customer-owned banks, credit unions and building societies).

Establishing some mutuals is challenging, he says. “We call it herding cats. The ones where there’s no single proponent, there’s no [trade] association, are really hard to get to the starting line. And they need that initial capital.

“If you are getting members over the course of not just 12 months but multiple years, you’re not going to have all the capital you need on day one, so that ‘build it and they will come’ model – which is what we’ve done with Our Ark – is very challenging, especially where you’d have significant exposures, and therefore you do need a significant amount of capital just to take on even one problem.”

Initial capital proved a stumbling block for the Australian Amusement, Leisure and Recreation Association, which has been determined to establish a mutual to counter an insurance affordability crisis but was last year denied government funds to get one off the ground.

It was also an issue for the Australian Outdoor Industry recently when it investigated the mutual model for its members in the outdoor tourism and activities industry.

The peak body’s Chief Executive, Lori Modde, tells Insurance News insurers withdrew from the sector after the covid pandemic shutdowns. But the group eventually decided against setting up a mutual fund.

“The hardest part…that we saw is, the whole industry needs to be part of a mutual for it to succeed, because it’s the pool of funding that makes it sustainable.

“Without that, some of the models that we’ve seen being put up, as soon as the first claim happens, you’re going to be struggling, The pool of funds would not be big enough even if we got the whole industry on board – and we’re a big industry – to ensure that it was a sustainable approach.”

There were other obstacles, she says. “If you look at the requirements of our…outdoor activity providers, they’ve got licences and permits that say they must have an APRA-approved insurer.

“So there’s a lot of challenges associated with getting something of that nature through.”

Instead, the group has been working with brokers and insurers to bring them back to the sector – which has included establishing an industry framework on risk management.

“That was literally sitting there with the insurers going, ‘Right, what is it that you need from our industry…what do you need us to do to better safeguard your risks as you see them?’

“The first part of our framework is the [operators’] Active Safe education program, which is now open to members. That is the first stage that we promised the new insurers we would do. That’s why they came into the market and came into Australia.”

Mr Pollack says 2019 changes to the Corporations Act, championed by the Business Council of Co-operatives and Mutuals, have shifted the dial on capital by legislating for the use of mutual capital instruments (MCIs), a new type of share that can only be issued by mutual entities.

“The 2019 changes have been a real opportunity for the mutual sector to grow start-up mutuals, so that ‘build it and they will come model’, where do you get the launch capital from? Mutual capital instruments are key to creating that pot of funds.”

He says educating investors on MCIs is a challenge, but Picnic has “had some useful conversations recently with for-purpose superannuation funds and things like that, which are really interested in this segment”.

“They’re really dialling into the idea of, they do have a genuine return, but more importantly, they’re creating genuine benefit for the community as well. So it aligns with what they’re trying to do.”

Melina Morrison, Chief Executive of the Business Council of Co-operatives and Mutuals, tells Insurance News: “The legislation we were successful in getting enacted in the Corporations Act enables mutuals to raise equity without demutualising, which is a big leap forward in standing the model up more frequently. We continue to be challenged by the low awareness and appreciation of the different purpose of mutuals. Our voluntary industry code of best practice has been developed to set out what a well governed [discretionary mutual] looks like. With the MCIs and the industry code, we see an increasingly bright future for discretionary mutual funds.”