Briefing: Can mutuals regain our interest?

Another month, another thousand conversations about AI. So, naturally, I’ve found myself thinking about mutuals.

That is partly because I have been following the fascinating journey of James Sherwin-Smith, who is seeking to become the first new member-nominated board director at Nationwide Building Society in more than 20 years.

He has already cleared the first hurdle by getting onto the ballot. The mission clearly matters to him, as does the mutual model Nationwide operates so impressively.

As Nationwide thrives, and attracts attention for its democratic model and governance transparency, I found myself wondering, why has the mutual model become so unfashionable in insurance? And who might have a vested interest in seeing a new wave of mutual authorisations?

The answer, unexpectedly, appears to be the UK Government.

Mutuals could be brilliantly useful to both the UK’s strategic challenges and the insurtech and innovation market. At its best, the model is elegant – designed to maximise member benefit rather than shareholder return. The surviving herd of mutuals and friendly societies are often intermediary-distributed, sometimes exclusively, and many are small and nimble enough to diversify their offering.

But the numbers are striking. According to the Bank of England, mutual insurers serve around 26 million people in the UK. The broader mutual landscape includes 93 mutual insurance firms, 42 building societies and 350 credit unions.

Yet, in insurance, just three of these mutuals account for 84% of sector assets. That alone suggests it is hard to scale a mutual – and that many incumbents remain small despite their relative longevity.

Mutual support

The regulators announced last December that plans were afoot to support mutuals. Proposals included a new dedicated Mutual Societies Development Unit (MSDU), free pre-application support and a reduction in application service-level times.

So, there is a successful sector with millions of customers already. The model is relatively democratic and shareholder value is replaced with member value. These are all attractive ingredients for a thriving and competitive landscape and you can see the appeal to the current national leadership. 

Yet, surprisingly, the UK has not seen a new mutual insurer created since 1988. 

Contrast that with the 41 new insurers the PRA has authorised since 2018 and a picture starts to emerge – one of unintended consequences in modern regulatory structures and, perhaps, even in the underlying legal model of the mutual itself. It’s doomed to never be started in any scalable way. 

There are areas where the mutual opportunity feels obvious for state-crossover. Out-of-work benefits, mental health, physical health and workplace protection all offer attractive ways to bridge traditional mutual models with modern issues, for example. Health mutuals, in particular, could carry far less political toxicity than health insurers when it comes to redistributing some of the NHS’s many known challenges.

But the UK insurance sector is, by and large, built around the incentive of shareholder returns, isn’t it? So it is hard to see what incentive an incumbent has to create a new mutual, even with the MSDU regime sounding so amenable to the prospect.

Structured incentives

But perhaps there would be something in it for the market. Compliance and supply chain costs are now so high that the minimum support expectation for many new schemes or MGAs often runs into seven figures. Reinsuring mutuals would doubtless offer an alternative route to this arrangement for carriers and brokers should always be seeking to create solutions that maximise the effectiveness of risk transfer for their clients.

Adding to that is the fact that starting a mutual insurer is entirely possible, especially for annual premiums of less than £7m, or £25m over three years. That would classify the mutual as a non-Solvency II firm under regulatory rules.

However, this has not been a route insurtech has chosen, for obvious reasons. Who would invest in a startup that intends to mutualise returns into member value? That would be a heroic pitch even to a philanthropist, let alone a venture investor. 

But some new models have been tried that border on mutuality. Laka has created price spreads – a model that seems to be thriving. And Lemonade in the US offers a “give back” on surpluses, when they arise, and allocates itself a captive cut of premium, like an in-house brokerage commission. 

In theory, an insurtech could even create a mutual to serve as its own capacity. But a board seat or loan covenants would not really satisfy the need to control the entity, or solve its supply-chain risk. It would likely be as volatile as the current status quo. Even if a sibling intermediary entity were distributing the product, you would risk creating your own competition. So why bother, even if investors did give it the green light?

Future focus

Perhaps, therefore, a new class of mutual insurer is required. Let’s call it a hybrid mutual.

Under that model, an entity or startup could own a minority interest, entitling it to a portion of equivalent member value. Its equivalent member caucus – yes, I just made that up – would constantly and dynamically change based on the number of members in the majority. It would always be entitled to a board seat and would maintain blocking rights on any sale. Its master membership could be sold with precisely the same rights. That would make the lead out role genuinely incentivised. 

Or perhaps the solution lies instead in who holds the distribution. What incentive would there be for a broker to offer a homogeneous scheme group of customers the chance to flip themselves into a mutual? In the MGA and delegated markets, we are seeing new automated capacity allocation systems mature and new fronting models grow impressively. Is it possible that technology could offer a route back to market for the mutual model of insurance, especially when the government is outwardly signalling its desire?

That, too, feels tenuous.

In practical terms, the traditional mutual suffers from ignition inertia. To secure the number of members needed to meet solvency requirements, it needs capital. But members only become members by buying a product and that product cannot be offered or sold without both PRA and FCA authorisation.

So, back to earth – who is actually going to create a new mutual insurer?

Even with the best regulatory and government will in the world, it does not yet seem to be something the private market is naturally equipped to deliver.

The feeling, at least for now, isn’t mutual.