The mutual insurance sector has undergone a modest recovery in recent years, yielding gains in direct premiums written. So reports Swiss Re in its latest sigma study, “Mutual insurance in the 21st century: back to the future?”
Mutual insurers’ share of the insurance market increased to 26 percent of direct premiums written in 2014 from 24 percent in 2007, reversing declines of previous decades. But Swiss Re warns the segment faces challenges, including adapting to new risk-based capital requirements and more stringent corporate governance arrangements, which could put some mutuals at a competitive disadvantage.
Mutual insurers must embrace technological disruption, the report notes. Exploiting digital technology such as smart analytics and social media, will enable mutuals to better serve the interests of their member-owners, while their ownership structure should enable mutuals to keep insurance affordable for some individuals and risks.
The primary purpose of mutual insurers is to provide risk protection coverage for its owner-members, rather than to make profits or provide returns to external shareholders as in the case for stock-based insurers. In recent years, cumulative premiums written by mutual insurers have outpaced those of the wider insurance market, with much of the outperformance concentrated during the height of the financial crisis in 2008-09.
“That mutuals’ relative premium performance did not reverse once economic growth resumed after the financial crisis, suggests a degree of permanence to the segment’s recovery,” says Kurt Karl, chief economist at Swiss Re. “Some mutual groups have expanded internationally in recent years. And new mutuals have been established in a number of markets, another indication of the segment’s renewed popularity.”
However, while mutuals’ share of the global insurance market has increased modestly since 2007, it remains well below previous highs. For example, in the life sector, the share of global premiums of life mutuals was 23 percent in 2014, well below levels of around 66 percent in the late 1980s and early 1990s, before a wave of demutualizations in a number of countries.
Among the top challenges faced by mutual insurers, the report notes, are new risk-based capital requirements and tougher corporate governance arrangements. These aim boost the resilience of individual insurers and curb excessive risk taking.
Swiss Re notes the 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.
Regulators appear alert to the possible unintended consequences of their new rules, and emphasize proportionality in implementing the new prudential (i.e. capital) and governance regimes. There has also been a renewed focus on capital solutions available to mutuals, including legislation in some countries to allow equity-like capital instruments to be issued, such as “certificats mutualistes” in France.
Together with customized reinsurance solutions and alternative risk transfer mechanisms such as insurance-linked securities, the capital solutions will give mutuals increased financial flexibility to grow their business and compete with other types of insurers, Swiss Re reports.
The study also reveals these findings:
Mutual insurers’ share of global premiums has risen in recent years, reversing the decline of earlier decades.
New risk-based capital requirements and tighter corporate governance standards pose challenges for some mutual insurers.
Novel capital-raising instruments, greater access to customized reinsurance and alternative risk-transfer solutions will give mutuals increased financial flexibility.
Mutuals must upgrade their underwriting and distribution practices if they are to thrive in the digital age.
Digital technology can help mutual insurers better serve their members’ long-term interests, and keep some risks insurable.