There are different types of mutuals but the Mutuals managed by Regis Mutual Management (Regis) are all owned by and run solely for the benefit of their Members. The Independent Schools’ Mutual will be a Hybrid Discretionary Mutual, the key features being:
- The provision of financial protection for its Members against risk
- A company controlled and governed entirely by its Members – its customers
- The membership elects the Directors
- Always acts for the benefit of the Members
- Members pay contributions into the mutual fund based upon the risks they bring
- The Mutual will pay all ‘expected’ (predictable) claims from the mutual fund with an insurance protection programme providing protection against the ‘unexpected’, which may arise from a particularly large individual loss or an aggregation of losses
- Members own any surpluses’, not shareholders. Surplus can only be used for the benefit of members or as the Members may agree
- The Rules of the Mutual dictate that all claims are paid on a discretionary basis and based on the Member’s Protection Wording. The Board also has the discretion to pay for any losses, costs or expenses excluded by the Rules or the terms of the Member’s Protection.
Mutuals are created when there is a common interest between organisations with similar risk profiles. The most effective mutuals operate in sectors where the members have an interest in controlling their risk transfer and risk management arrangements. Examples include Livery Companies, retailers, Fire Authorities, universities and medical and legal professionals.
A Mutual is fully funded from member contributions. This means that the income collected by the Mutual through Member contributions is enough to meet the worst case scenario funding requirements of the Mutual (including the retained exposure and all operating costs) up to the attachment point of the accumulation insurance cover. This is achieved by managing the level of risk retained in the Mutual and transferring the balance of risk to insurers. In the event of a worst case claims scenario, Members have no financial exposure, although the Mutual will likely not make a surplus in that year.
The graph below illustrates the structure of the hybrid discretionary mutual and demonstrates the robust nature of the model. You will see that valid claims will either be settled from within the Mutual’s retention or from the insurance protections arranged by the Mutual.
Contributions are used to pay the expected claims, to pay the insurance premiums required for the insurance protection programme that supports the Mutual and to meet the management/administration costs of running the Mutual, with any surplus being retained by the Mutual. The apportionment of these costs varies from mutual to mutual and from year to year depending upon a number of factors, including the attachment point of the insurance and, in the case of the surplus, the financial performance of the Mutual. The chart below is provided for illustration only.
The Board of Directors, drawn from the Members, set the strategic direction of the Mutual. The Directors delegate day-to-day functions to Mutual Managers.
The Members’ contributions will reflect the risk they bring to the mutual fund. In addition, good and continuously improving risk management is a key principle of mutuals and an important benefit of mutual membership. The admissions process involves the disclosure of applicants’ claims history and their risk management systems and practices. Potentially, some schools will require support in updating these systems and practices and improving their claims records before they are accepted into the Mutual. It would be the intention that the Mutual will work with any such school to help them bring about the changes that enable them to join as soon as possible.
The managers are in discussion with a number of insurers with appropriate security rating. Other insurers will provide specialist covers as required. All insurer selected to work with the Mutual is required to demonstrate a strong security rating.
Each Member placing risk with the Mutual will have voting rights which it can exercise on Members’ resolutions, including electing the Board of Directors, this ensures the Mutual runs smoothly and efficiently.
This is a question for your insurer or broker as the wording of agreements vary. In general terms, however, the wording of a traditional LTA will require the insured to renew an insurance policy annually, for the term of the agreement, unless the insurer amends the terms of the insurance (premium rate/terms and conditions of cover). If insurance terms are amended, then the insured is freed from the obligation to renew. Insurers may give a discount for the insured’s agreement to enter into an LTA which the insurer may be entitled to recover if the insured breaks the agreement.
Since the Mutual will operate on a discretionary basis how can we be assured that valid claims will be paid?
Claims that fall within the Mutual retention are paid on a discretionary basis. The Mutual will be controlled by its Members (its customers) – the schools taking out cover with the Mutual. The Board of Directors will be appointed wholly or predominantly from the membership. The Board will have sole and unfettered discretion to agree or reject claims, however, Members can expect that all valid claims will be paid in line with the terms of their Protection and the Rules of the Mutual.
The Mutual exists only to serve its Members and will not turn down valid claims as this would quickly reduce Member confidence and the reputation of the Mutual.
Discretion has the important benefit of the Board being able to agree claims that fall outside the terms of a Member’s Protection, or which might even be expressly excluded if the circumstances warrant it.
Discretionary mutuals have been in existence for over 150 years. The legal basis for them is confirmed in the case of Medical Defence Union v Department of Trade, (1979) 2 All ER 421. The FCA recognises discretionary cover (PERG 6.7.1).
Remember that the Mutual will be funded to meet expected claims and will have the safeguard of an insurance protection programme to meet the unexpected and provide Members with insurance for statutory classes of cover.
The cover provided in respect of the large claims which exceed the Mutual’s retention is not discretionary. These claims which fall to be considered within under the insurance policies arranged to protect the Mutual are not discretionary and will be dealt with in accordance with the terms and conditions of the insurance policy. The Mutual will, of course, continue to support Members through this process.
The design phase of the Mutual has involved in depth analysis of current policy covers to create a ‘best of breed’ Protection Wording ensuring everything that everything that was covered remains covered plus any additional cover requirements identified during the analysis which can feasibly be included.
Legal liability claims will be considered in accordance with the Rules of the Mutual and the Protection wording.
The Mutual will defend vigorously non-meritorious claims and will not risk gaining the reputation of being a ‘soft touch’. Members will be engaged in the process of liability claims settlement to a greater degree than might be the case with a commercial insurer. The Board will agree the claims management strategy.
How will the Mutual protect against the adverse effects on the fund of several large claims in the early years?
Attritional or expected losses are met from mutual funds with exceptionally large losses and accumulations of losses being met by insurers. The structuring of the protection programme (Excess and Aggregate) will mean the effect on the mutual fund will not be catastrophic. Should the Mutual experience consistently ‘exceptional’ losses, there could be a requirement to increase contributions and/or insurance premiums may increase at renewal. The experience of the Mutual is likely to be reflected by the insurance market as a whole and the market response, in terms of premiums rating increases will be similar. Assuming losses in line with expectation and the accumulation of reserves, the attachment point for the insurance programme will be reassessed with the potential for reductions in contributions.
The Rules of the Mutual will be made available to any school considering membership and will include provisions for leaving the Mutual and the position with regard to outstanding contributions, future claims and surpluses.
The Rules of the Mutual will allow for termination of membership in certain circumstances, the most obvious being non-payment of contribution. If the risk presented by a Member deteriorates, resulting in increased claims, the Mutual will look to work with the Member to improve the risk and the claims experience although ultimately the Directors may decide to decline to continue a membership. However, this would be an extremely rare occurrence as admittance into membership will be controlled and improvement in risk management practice is one of the aims of the Mutual.
What about historic claims e.g. for Abuse or asbestosis, which may not come to light for many years?
The handling of historic liability claims will be determined by the nature of the insurance cover provided at the time of the incident.
Employers’ Liability claims, such as those arising from historic exposure to asbestos, for example, will be considered by the insurer on risk at the time of the exposure. This is termed, ‘claims occurring’ cover.
The cover provided by insurers in respect of Abuse has also traditionally been arranged in this way with claims falling to be considered by the insurer on cover at the time of the alleged abuse. Some insurers have, however, changed the basis of cover for Abuse to require that claims need to be notified during the life of the policy. This is termed, ‘claims made’ cover. To protect against any possible exposure to claims not notified during the life of the policy, retroactive cover is required from the time cover was first arranged on a claims made basis to the expiry date of the insurance policy. This is no different to the way in which cover should be arranged when changing from one insurer to another.
One of the key responsibilities of the Managers will be to monitor new and emerging risks along with market and sector developments. Members will contact the Managers for all risk and insurance related queries. The Managers will maintain a watching brief on all activities within Members and within the insurance marketplace, ensuring that Members are always provided with the most accurate and pertinent advice available.
We currently use the services of an insurance broker. Is there any role for a broker if we join the Mutual?
The Mutual will deal with an insurance broker duly authorised to act on behalf of a Member. The Mutual will not, however, pay commissions to brokers. Should a Member wish to retain a broker, any fees payable for services would be for the member to negotiate with the broker.
Will the Mutual be proactive in providing updates and briefings on new/emerging risks and legislative/regulatory changes relevant to risk/risk management?
We see this as a key function of the Mutual. In addition to providing a risk transfer mechanism, the Mutual will ensure all forms of risk are identified, assessed and mitigated as efficiently as possible. The accelerated feedback loop which exists within the mutual structure offers the advantage of flexibility in that protection against new risks can be readily incorporated in the coverage offered.
Where the Mutual can add value, either financially or through the claims handling process, it will seek to retain risk and deliver the sought added value. Where the Mutual identifies that it is unable to add value at the present time, it will act as a facilitator, pooling the Members’ insurance needs and bulk buying these on a traditional basis in the insurance marketplace (but with the increased scale benefit value).
A hybrid discretionary mutual’s business will consist of both regulated activities (such as the placement of its insurance protection programme) and unregulated activities (the provision of discretionary indemnity). Mutuals, therefore, need to be authorised in their own right or the Appointed Representative of an FCA regulated company.
In practice, a well-managed discretionary mutual will apply the standards of conduct required for its regulated activities to its entire business. This is the essence of mutuality – putting the customer first, – but the FCA also has the power to intervene in a firm’s unregulated activities if they are closely linked to, or may affect, a regulated activity, or call into question the overall suitability of the firm.
As a company limited by guarantee, the maximum liability of each Member would be £10 if the Mutual is wound up while it is a Member or within one year of cessation of membership.
No, the Mutual will not have a regulatory capital requirement. The Mutual will only ever retain a level of risk which it is able to fund from operational revenue and surpluses. Mutual pricing to its Members may change from year to year, reflecting the performance of the Mutual and movement in the insurance placements, but Members will not be asked to pay any more than their original annual contribution.
Any mutual trading surplus belongs to the Members of the Mutual and must be used for the benefit of the Members or as the Members may agree. Surplus can be:
- used to build up reserves
- returned to Members,
- used to offset future contributions
- invested elsewhere e.g.ment in risk management measures.