Large insurance broking houses could leave their corporate and non-profit clients better off if they consider the advantages of discretionary mutual arrangements, though they could end up reducing overall insurance sales by the channel.
The Fold Legal solicitor director Charmian Holmes says discretionary mutuals can cut risk spend for corporate clients significantly, and that brokers who source these arrangements can still retain the account and provide additional broking services.
"There is always a role for the broker in placing the excess of loss cover, and this is particularly the case where the broker has specialist expertise and access to insurance markets that other brokers cannot," Holmes said.
"In essence, if the broker doesn’t recognise the potential for the mutual they may lose the client to another broker who does a better job of identifying alternative risk transfer vehicles like discretionary mutuals."
Holmes says there are currently corporate and non-profit buying groups with low loss ratios that are still paying reasonably high premiums.
"One of our recent clients had been purchasing accident and sickness insurance for their members for many years with hardly any claims at all in each year, but they were handing over close to $1m in premium annually," she said.
"By moving to a discretionary mutual they now manage the claims up to a certain retention level and any surplus in each year can be used to subsidise the contributions for later years or to provide additional benefits to their members."
Holmes said instead of paying all of the premium to the insurer most of it remains with the mutual, and they buy an excess of loss policy so there is no exposure for them if their claims experience is extraordinary in one particular year.
"Now instead of paying a premium of $1m they are paying $400,000 and managing the claims up to $700,000 through the mutual," she said.
Holmes said there are brokers involved in the market but they are those with larger corporate clients who have streamlined the process or have expertise in managing these sorts of mutuals.
"Not all brokers can get into this space but those brokers who want to value add to their clients would be well advised to find out more about this option in case they have non-profit clients or large corporate clients who could benefit from this model," she said.
"They could lose the account in some cases if they can’t innovate and collaborate with someone that can help their client better manage risks."
Holmes said that as premium rates harden, mutuals are protected to a degree from market fluctuations as they can be more selective about how much insurance is purchased for their group. They can also choose to retain more of the risk themselves where it is difficult to access insurance cost effectively. Holmes said discretionary mutuals are a particularly good alternative for large buying groups with a reasonable premium pool.
"Large corporate groups with a significant amount of assets / liabilities can benefit as can non-profit organisations and unions who purchase insurance for a group of people," she said. "In most cases, the clients need to be wholesale clients or clients with a reasonable degree of sophistication in relation to insurance. There needs to be leadership in terms of who drives the establishment of the mutual and there needs to be keen stakeholders who are willing to use the mutual in the longer term."
Holmes warned against discretionary mutuals as a short-term option in a hard insurance market. "It is commitment to managing risk and the group needs to work in a more hands-on way."