Starting a Mutual Insurance Company
Identifying a need
A marketing plan identifying customer’s needs and why they will convert to the new mutual will need to be drawn up. Focus group and market research work should be undertaken to create a business case which will not only be important for the mutual but also for enlisting the support of partners such as a mutual manager or a reinsurer.
Designing the Insurance Product
An advantage of the mutual approach is the ability to design insurance products which can be tailored to the prospective audience. Any gaps in coverage can be addressed and premiums can be adjusted for any savings in administrative costs and sales commissions.
As the mutual is at risk for any claims that exceed its net premiums (after the deduction of tax, administration and marketing costs), a new mutual should take a cautious approach until such time as the potential positive impact of mutuality on the mutual’s underwriting results has been proven.
Unless premiums are being supplied by reinsurers to whom the mutual is initially ceding part of the underwriting risk, actuarial input is normally required to create the initial premiums.
Taking Legal Advice
Legal advice is an important feature in establishing a mutual as different countries will have different regulations. If the mutual is working with an experienced mutual manager in this field, then the mutual manager will be able to assist with this and often provide the required advice.
Protecting a Mutual Insurance Company
Financial risk-transfer tools known as reinsurance play an important role in protecting a mutual and its members from unexpected poor underwriting results that could adversely affect the mutual and its members.
For example, it may be prudent for a mutual not to retain all of the underwriting risk in the first few years until predictable loss patterns have been established.
Consequently, a new mutual will often seek reinsurance on a quota share basis (known as proportional reinsurance) where a reinsurer pays the same proportion of losses that it receives in premium.
Quota share reinsurance protects policies underwritten during a specific period until expiry or renewal, regardless of when losses occur. Using the quota share method, a mutual cedes a pre-agreed percentage of its premium to a reinsurer after the deduction of administrative and marketing commissions. The reinsurer then, in turn, agrees to pay the same percentage of claims.
Once a portfolio is established and loss patterns can be modelled and predicted, quota share reinsurance can be reduced in favour of non-proportional reinsurance such as a risk excess or aggregate excess of loss contract.
Aggregate excess of loss reinsurance protects a mutual’s overall portfolio from unexpected poor underwriting performance in any given underwriting year. Aggregate excess of loss reinsurance can be a useful tool in managing the potential for unforeseen attritional losses to the mutual that might impact its reserves.
Financing a Mutual Insurance Company
As mutual insurance companies are owned by policyholders, financing the creation of a mutual is a unique challenge compared to traditional start-up ventures in that equity finance is unavailable since there are no shareholders. Consequently funding a mutual requires seeking finance from other sources.
Often the body that is starting the mutual will have funds which it can lend to the new mutual. These can then be used for marketing and administration. Starting with an existing interest group who are currently purchasing their insurance from other sources is often an easier process than targeting a new group as revenue can be more accurately projected and leveraged against.
Appointing a Board
Mutual insurance companies are legal corporations owned by the policyholders who appoint the board of directors. The board of directors then, in turn, appoint the executives who are responsible for managing the mutual.
Appointing a Mutual Manager
Often the day-to-day administration of the mutual will be outsourced to a mutual manager. This avoids the costs of hiring employees to issue policies, collect premiums and pay claims.
In some cases, the mutual may outsource all of its activities to the mutual manager who will the report directly to the board of directors. This can include responsibilities for marketing the mutual with budgets being set as agreed by the board.
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