Following the Local Government Association's recent announcement that it is exploring options to set up a local government mutual, we have received many requests from clients seeking our views.
The announcement is certainly interesting, and we always welcome new competition in the insurance market, but there is, as yet, little detail on the shape it will take. However, we believe it is useful to examine some of the issues it has raised and to outline the information that is required to enable local authorities to make an informed decision.
At Aon, we first became aware that the LGA was considering this last November when it started to conduct a fact-finding exercise among local authorities. Working with Togethersure, it was looking to collect information on local authorities' insurance programmes to enable it to model and price various insurance risks.
Its stated aims were to develop an approach for local authorities that should reduce the cost of insurance; give greater control over the insurance arrangements and; enable authorities to benefit financially.
How successful this data gathering exercise was is unclear as feedback from our clients suggested many were not comfortable sharing commercially sensitive information, and equally sector insurers vocalised their concern at the approach and request for their IP. However, it has subsequently announced that it has started work with a number of local authorities to consider developing a mutual and is inviting others to become founding members.
So what exactly is a mutual? Charles Winter, Head of Risk Finance & COO at Aon Risk Solutions, explains: "A mutual is owned and controlled by its members who have a stake in the organisation's success. Any profits earned by a mutual insurance company are either retained within the company or rebated to policyholders in the form of dividend distributions or reduced future premiums."
Under the mutual umbrella, there are two distinct models - a discretionary mutual and a mutual insurance company. These operate in slightly different ways and it will be necessary to know which model the LGA is selecting to understand the implications for members.
A discretionary mutual is effectively a protection organisation whereby, according to its rules and at the discretion of the governing body or managers, compensation is provided to members in return for contributions. The rules may look much like an insurance policy but aren't contractual and don't necessarily provide indemnity.
The discretionary mutual will usually buy insurance to protect itself against any obligations to its membership. This means it is licensed as an intermediary rather than an insurer, so IPT is not due on member contributions.
Conversely, a mutual insurance company is licensed and regulated as an insurance company and issues insurance contracts. The way these are managed can vary from a pure mutual with a simple pooling of assets and liabilities to a more sophisticated approach that looks much more like a conventional insurance company. In this instance there may be no long-term tie in, but longevity is encouraged through membership credits.
The mutual insurance company is usually limited by guarantees provided by its members. These guarantees may be contingent or partly called up to provided liquidity.
So much detail still unknown about the LGA's proposed mutual, including the model it is looking to pursue, we recommend that clients do not make any decisions until they have had an opportunity to assess all the information.
The following questions can help with this assessment:
- What is the structure?
- Insurance or discretionary?
- How will the mutual be governed?
- What say will members have and how will this be exercised?
- What are the membership criteria?
- How will membership be solicited / accepted?
- How will selection against be avoided?
- How will poorly behaving members be addressed?
- Who are the service providers (general operations, claims, etc)?
- Is there a minimum membership period?
- What are the exit criteria?
- Are hard/soft financial guarantees necessary from members?
Underwriting and cover
- How does cover compare to commercial?
- Is it intended to offer enhanced local authority specific covers?
- What is rating philosophy? e.g. for profit with dividends / credits v break even to what extent can cover, retentions etc be tailored?
Security and stability
- What external excess / stop loss is provided?
- How will large losses / accumulations be managed and what will be the impact on rating year to year?
- To what extent will there be credits/penalties based on individual risks/performance and what variations could these represent?
- Will the mutual seek a Financial Security rating?
- What timeframes are in place?
- How will mutual entry/renewal fit with procurement rules?
- What is the critical mass for mutual formation?
- What access to knowledge sharing / data insight will be available?
At Aon, we are carefully watching developments in this space. We have experience of supporting organisations who have explored mutual options and, with this issue coming to the fore again, would be happy to engage with any local authorities seeking an independent assessment of the LGA's proposals and how they compare to the more traditional insurance options.