NEWS October 07, 2019

Bringing Back the Mutual Life Insurance Model

Historical summary
Since its inception, the financial services industry in Australia prospered immensely from the life insurance mutual companies that existed for nearly 150 years by protecting and raising the standard of living of the nation’s people.

Intermediaries were introduced to facilitate the realisation of consumers financial aspirations and/or concerns into direct obligations via life insurance policies or wealth creation strategies. By doing so, the financial sector improved both the quantity and quality of peoples’ lives whilst simultaneously contributing immensely to the country’s economy.

Unfortunately, in the 1990s the industry in Australia abandoned its long-held conservative principles and the new breed of managers went on a frenzy devouring itself. One household brand after another was lost in a steady stream of amalgamation and buy-outs that saw one group after another disappear.

Not only did Australia lose long-established mutual groups like Colonial Mutual, National Mutual, Mercantile Mutual and City Mutual, other brands like Norwich, Scottish Amicable, Legal & General, T & G, Prudential, AC&L, Friends Provident and Tyndall were lost too.

To compound the dilemma, in 2001 the intervention of government in seeking to improve the performance of the financial sector has proven not to have been beneficial or constructive.

In fact, many will argue the detrimental effects of regulation on both the structure of the financial services sector and the real economy have worsened the situation.

Industry reform fatigue and constant legislative/regulatory changes have contributed to many advice practitioners’ decision to terminate their careers and exit the advisory sector. It’s been estimated that over 6,000 planners (predominantly life insurance specialists) will exit the industry by 2026.

If matters couldn’t get any worse, after having been the ultimate beneficiary of industry amalgamation, the major banks are now seeking to jettison their insurance/wealth sector arms.

The mutual model – why it was successful
A mutual, mutual organisation, or mutual society is an organisation (which is often, but not always, a company or business) based on the principle of mutuality, not too dissimilar to the co-operative model.

However, unlike a true cooperative, members or policyholders of a mutual life insurance company usually don’t contribute to the capital of the business by direct investment. Instead, they derive their right to profits and votes through their customer/policyholder relationship.

Hence, a mutual organisation or society is often simply referred to as a ‘mutual’.

The mutual existed for the purpose of raising funds from its membership or policyholders which were then used to provide common services to all members of the organisation or society.

A mutual was therefore owned by, and run for the benefit of, its member policyholders. Without external shareholders, there was no need to divert member benefits in the form of dividends – thus maximising the profits and gains for the members.

To ensure the ongoing sustainability, security and growth of the organisation, necessary financing was used for operational purposes. The profits generated were then re-invested for the benefit of the members.

This was a very simple and effective business model that had been successful for nearly 150 years until the 1990s, when the industry lost direction resulting in a downward spiral.

The inevitable return of mutual model
Although it’s impossible to undo the failures of history – there is hope for the future if legislators and industry could revisit the mutual life insurance model with a modern-day adaption that would restore much-needed certainty, trust and confidence to the life insurance sector.

The efforts of the federal government to bring about change and restore confidence has only resulted in the industry experiencing a state of constant and reactive chaos. The Hayne Royal Commission legacy has shown that the post mutual era has been a disaster and against this backdrop of the major banks and AMP reconsidering their positions, the re-emergence of the mutual insurance model in Australia could be the answer to the industry’s future viability.

For mutual companies to succeed they need to be aligned with the best interests of their policyholder members. What’s more, mutual companies are owned by their policyholders, not shareholders – and that’s a very important and crucial distinction.

Mutual companies share their profits with policyholder members, look after their interests and needs first and develop products and services accordingly. This differs from the current bank-owned model that sells and markets products to generate profits / dividends for their shareholders without necessarily benefiting policyholders.

Furthermore, the profits of mutual insurance companies are distributed to policyholders in the form of lower premiums or bonuses on policies.

Two further differentiators to shareholder ownership are:

Mutuals are driven by decisions that deliver long-term benefits to their members as opposed to short-term gains to equity holders
Policyholders can be elected to the board as opposed to shareholder owned institutions.
The Hayne Royal Commission and adverse media coverage have highlighted the depth of reputational damage and how much work is needed to restore the public’s trust and confidence in the life insurance sector and industry more broadly.

At the core of the industry’s failings has been principle that shareholders’ interests are prioritised ahead of those of consumers.

Then there were the revelations surrounding conflicted advice and denial or avoidance of claims that highlighted the misalignment of internal interests that in turn drove the behaviours that adversely impacted policyholders.

A horse with two jockeys can’t win the Melbourne Cup. This also applies to financial services with the competing interests between shareholders and policyholders.

The interests of the institutional shareholder will always be the priority, whilst on the other hand, the mutual will only have one jockey and priority – the policyholder!

The re-emergence of the mutual in a modern-day format and entity in Australia will be inevitable.

According to the International Cooperative and Mutual Insurance Federation (ICMIF) in its Global Mutual Market Share 10 report released in February, the mutual and cooperative insurance market has been the fastest growing part of the global insurance industry in the ten-year period since the GFC:

Premium income of the global mutual/cooperative insurance sector grew by a total of 30% over ten years
The global market share of mutual/cooperative insurers rose to 26.7% in 2017
922 million members/policyholders were served by mutual/cooperative insurers in 2017
1.16 million people employed by the sector in 2017 – a 24% growth since 2007
In the foreword of the report, Hilde Vernaillen, Chair of ICMIF said, “At this financially volatile time, as consumer trust, consumer spending and interest rates plummeted, the cooperative/mutual insurance sector began to emerge, even flourish, outperforming the insurance industry average and capturing more market share.

“Additional qualitative research carried out by ICMIF during this period suggests that this positive performance is linked to consumers’ preference for providers that can demonstrate characteristics most commonly associated with cooperatives and mutuals: trustworthiness, security and service excellence.”