Considering the Mutual Insurance Model



These two articles argue the case for a return in Australia to the mutual life insurance company ownership model…


When Life Insurance and Banking Don’t Always Mix – The Case for the Mutual Insurance Model

PPS Mutual’s Michael Pillemer considers the evolution of life company structures in Australia as he outlines his reasoning for a return to the mutual insurance model of life company ownership…


Another day, another major Australian bank selling its life insurance business. I believe that the recent news of the sale of Westpac-owned BT Life to TAL is the final piece to be played in a complex, 20-year-old jigsaw puzzle.

It emerged in the 1990s, beginning life as a buzzword for the banking world’s aspirations to upsell customers with non-bank financial products and services. Banks selling life insurance policies? Sure. Let’s call it bancassurance.

It was a much-hyped strategy at the time, complete with its catchy 90s buzzword. It envisioned a brave ‘one-stop-shop’ world beyond the once established mutual brands (venerable names now gone by the wayside like National Mutual, Mercantile Mutual and Norwich Union to name a few) and those it was ready to subsume, such as Colonial Mutual.

Forget the centuries old mutual model placing the member front and centre of product and purpose, the modern juggle to balance the competing interests of policyholders against shareholders was on in earnest.

Twenty years later and the bancassurance idea is virtually sunk.

Why? The inevitable challenge is not just the vertical integration issue of in-house product being sold to bank customers through owned intermediary channels. It is an even bigger story of age-old conflict between the interests of shareholders versus customers.

With the tide turning against the public reputation of Australia’s major banks over poor consumer outcomes especially in life insurance product sales, each of the big four banking brands began in 2016 to move away from their life insurance investments.

The end of the grand privatisation experiment into life insurance by the banks (as well as other non-core wealth management services such as financial planning, superannuation, and investment administration) was imminent.

A key measure in the publicly listed company paradigm – return on equity numbers – had stretched to breaking point. Life insurer subsidiaries were also sucking up huge amounts of capital.

People also need banks and banks become used to being in a position of power vis-à-vis their customers. To me, this has resulted in a lack of understanding and complacency by the banks when it comes to life insurance distribution.

So it was that in 2016 NAB sold 80 per cent of its life insurance business MLC Life to Nippon Life for $2.4 billion.

ANZ followed suit in late 2017, with the sale of its OnePath life insurance arm to Zurich Insurance for $2.85 billion. This was followed by AIA Group’s purchase of CBA’s life insurance interest CommInsure in 2018.

Ironically, while CBA and ANZ divested themselves of their life insurance assets – they have not divested themselves of their conflicts of interest, in that they have entered 20-year strategic alliances with AIA and Zurich.

A reset underway?

Is the divestment of life insurance assets by the banks reflected elsewhere in their operations?

Yes, a parallel has also played out in the financial planning space. A key reason for setting up Centric Wealth (in my previous life prior to PPS Mutual) was that the banks were buying out all of the medium to large size privately owned financial planning businesses.

So, there was a great opportunity for a substantive non-aligned ‘client centric’ wealth advice business which put its clients’ interests first. Those same financial advice brands the banks bought, have now been sold off or shut down.

Think of the financial planning brands Securitor and Magnitude now closed by Westpac. Or the Count Financial business sold by CBA in 2019 Or the Millennium3 and RetireInvest brands once ANZ-owned, now also sold.

Similarly, the rush we have seen by the banks to accumulate investment assets under management on portfolio administration platforms or in superannuation products has also tapered, as the four major banks revert to their traditional banking roots and business models.

A divestment and simplification trend of this magnitude is open to various points of view and interpretation. For some it is retrograde and risky. For others, such as myself, it represents a welcome ‘back to the future’ scenario and invites the re-emergence of a future made brighter for the provision of high-quality financial products and services to the Australian community.

Further, the question has been asked: will this bank-induced ‘reset’ deliver more or less appropriate outcomes across the spectrum of financial advice, insurance, investments, superannuation, and portfolio administration?

I feel that a renewal of purpose aligned around the best interest of the consumer is underway and will indeed deliver a more sustainable outcome both for industry and the human beings it serves.

A central argument is that, with the constraints that ultimately killed off the bancassurance business model removed, remaining industry and the emerging profession of financial advice (not product sales) can grow by focus on an abiding core purpose: client centric customer care.

No return on equity pressure, no shareholder dividends nor short-term sales targets to meet the next quarterly return nor subsidised advice models to uphold. Simply providing appropriate products, services or professional counsel that aligns with the very best interest of one master – the consumer.

Interestingly, two of Australia’s largest insurers, TAL and MLC, are now owned by mutuals. In 2011 Dai-ichi Life purchased TAL and as mentioned previously, Nippon.

Life acquired a majority stake in MLC Life. So, TAL and MLC are essentially assets in Dai-ichi and Nippon’s portfolios with the profits going overseas.

In contrast, PPS Mutual is owned by its Australian members who share in the profits of the products that they buy. But mutual ownership should help ensure that they all take a longer-term view – where the long-term nature of insurance contracts and profit emergence is more fully understood.

Additionally, we believe that the trustworthiness and reputation of mutual companies is a large part of their continued success and growth around the globe. With the worldwide economic impact of the Covid-19 pandemic still reverberating, the capacity for recovery after a crisis is a key part of the mutual promise.

Recent evidence backs this up, with research by the International Cooperative and Mutual Insurance Federation (ICMIF) showing that, after the 2007 Global Financial Crisis, the mutual and cooperative insurance market was the fastest growing part of the global insurance industry in the 10-year period since.

In fact, premium income of the global mutual/cooperative insurance sector grew by a total of 30 per cent over 10 years to 2017. Also, some 1.16 million people were employed globally by the sector in 2017 representing a 24 per cent growth rate of employment since the challenging days of the 2007 GFC crisis.

Above all the strong economic signs, I feel that it is the fundamental mutuality principle of sharing profits with policyholder members and looking after their interests and needs first that has stood the greatest test of time.

This is so vitally important and explains how far we have come in Australia from the ‘bancassurance experiment’ to go full circle and create a strong and sustainable mutual business with products and services that follow this most eminent member first principle.

Michael Pillemer is the chief executive of mutual insurance company PPS Mutual.


Bringing Back the Mutual Life Insurance Model

Career industry stakeholder, Barry Daniels, is calling for a return in Australia to a mutual life insurance model within an industry he says has lost its focus and sense of purpose…


Since its inception, the financial services industry in Australia prospered immensely from the life insurance mutual companies that existed for nearly 150 years by protecting and raising the standard of living of the nation’s people.

Intermediaries were introduced to facilitate the realisation of consumers financial aspirations and/or concerns into direct obligations via life insurance policies or wealth creation strategies. By doing so, the financial sector improved both the quantity and quality of peoples’ lives while simultaneously contributing immensely to the country’s economy.

Unfortunately, in the 1990s the industry in Australia abandoned its long-held conservative principles and the new breed of managers went on a frenzy devouring itself. One household brand after another was lost in a steady stream of amalgamation and buy-outs that saw one group after another disappear.

Not only did Australia lose long-established mutual groups such as Colonial Mutual, National Mutual, Mercantile Mutual and City Mutual, other brands like Norwich, Scottish Amicable, Legal & General, T & G, Prudential, AC&L, Friends Provident and Tyndall were lost too.

To compound the dilemma, in 2001 the intervention of government in seeking to improve the performance of the financial sector has proven not to have been beneficial or constructive.

In fact, many will argue the detrimental effects of regulation on both the structure of the financial services sector, and the real economy, have worsened the situation.

Industry reform fatigue and constant legislative/regulatory changes have contributed to many advice practitioners’ decision to terminate their careers and exit the advisory sector. It’s been estimated that more than 6,000 planners (predominantly life insurance specialists) will exit the industry by 2026.

If matters couldn’t get any worse, after having been the ultimate beneficiary of industry amalgamation, the major banks are now seeking to jettison their insurance/wealth sector arms.

A mutual, mutual organisation, or mutual society, is an organisation (which is often, but not always, a company or business) based on the principle of mutuality, not too dissimilar to the co-operative model.

However, unlike a true cooperative, members or policyholders of a mutual life insurance company usually don’t contribute to the capital of the business by direct investment. Instead, they derive their right to profits and votes through their customer/policyholder relationship.

Hence, a mutual organisation or society is often simply referred to as a ‘mutual’.

The mutual existed for the purpose of raising funds from its membership or policyholders which were then used to provide common services to all members of the organisation or society.

A mutual was therefore owned by, and run for the benefit of, its member policyholders. Without external shareholders, there was no need to divert member benefits in the form of dividends – thus maximising the profits and gains for the members.

To ensure the ongoing sustainability, security and growth of the organisation, necessary financing was used for operational purposes. The profits generated were then re-invested for the benefit of the members.

This was a very simple and effective business model that had been successful for nearly 150 years until the 1990s, when the industry lost direction resulting in a downward spiral.

The inevitable return of mutual model

Although it’s impossible to undo the failures of history – there is hope for the future if legislators and industry could revisit the mutual life insurance model with a modern-day adaption that would restore much-needed certainty, trust and confidence to the life insurance sector.

The efforts of the federal government to bring about change and restore confidence has only resulted in the industry experiencing a state of constant and reactive chaos.

The Hayne Royal Commission legacy has shown that the post mutual era has been a disaster and against this backdrop of the major banks and AMP reconsidering their positions, the re-emergence of the mutual insurance model in Australia could be the answer to the industry’s future viability.

For mutual companies to succeed they need to be aligned with the best interests of their policyholder members. What’s more, mutual companies are owned by their policyholders, not shareholders – and that’s a very important and crucial distinction.

Mutual companies share their profits with policyholder members, look after their interests and needs first and develop products and services accordingly. This differs from the current bank-owned model that sells and markets products to generate profits / dividends for their shareholders without necessarily benefiting policyholders.

Furthermore, the profits of mutual insurance companies are distributed to policyholders in the form of lower premiums or bonuses on policies.
Two further differentiators to shareholder ownership are:

  1. Mutuals are driven by decisions that deliver long-term benefits to their members as opposed to short-term gains to equity holders
  2. Policyholders can be elected to the board as opposed to shareholder owned institutions

The Hayne Royal Commission and adverse media coverage have highlighted the depth of reputational damage and how much work is needed to restore the public’s trust and confidence in the life insurance sector and industry more broadly

At the core of the industry’s failings has been the principle that shareholders’ interests are prioritised ahead of those of consumers.

Then there were the revelations surrounding conflicted advice and denial or avoidance of claims that highlighted the misalignment of internal interests that in turn drove the behaviours that adversely impacted policyholders.

A horse with two jockeys can’t win the Melbourne Cup. This also applies to financial services with the competing interests between shareholders and policyholders.

The interests of the institutional shareholder will always be the priority, while on the other hand, the mutual will only have one jockey and priority – the policyholder!

The re-emergence of the mutual in a modern-day format and entity in Australia will be inevitable.

According to the International Cooperative and Mutual Insurance Federation (ICMIF) in its Global Mutual Market Share 10 report released in February 2019, the mutual and cooperative insurance market has been the fastest growing part of the global insurance industry in the ten-year period since the GFC:

  • Premium income of the global mutual/cooperative insurance sector grew by a total of 30 per cent over 10 years
  • The global market share of mutual/cooperative insurers rose to 26.7 per cent in 2017
  • 922 million members/policyholders were served by mutual/cooperative insurers in 2017
  • 1.16 million people employed by the sector in 2017 – a 24 per cent growth since 2007

In the foreword of the report, Hilde Vernaillen, Chair of ICMIF said: “At this financially volatile time, as consumer trust, consumer spending and interest rates plummeted, the cooperative/mutual insurance sector began to emerge, even flourish, outperforming the insurance industry average and capturing more market share.

“Additional qualitative research carried out by ICMIF during this period suggests that this positive performance is linked to consumers’ preference for providers that can demonstrate characteristics most commonly associated with cooperatives and mutuals: trustworthiness, security and service excellence.”

This article is an extract taken from a white paper released by Barry Daniels in September 2019. Click here to access the full white paper.

About the author

Barry J Daniels BEng (Mech), Fellow IML, MAICD, Adv Dip FP SAFIN. He has a 36-year career in financial services and property including 15 years in funds management, holding qualifications in the combined disciplines of mechanical engineering, financial planning and funds management.

Over the course of his career, Barry has owned financial planning practices with in excess of 6,000 clients with $350 million funds under advice, providing financial planning advice to investors large and small.

Barry has been involved in various residential infrastructure property development funds since the 1980s with end-value valuation in excess of $580 million on behalf of fund managers, residential property syndicate investors, land developers and private financial planning client investors, specifically including property funds management and residential property development syndications.

He has also had roles involving site acquisition, site due diligence, site financial analysis, syndication, Information Memoranda preparation, chairing compliance and investment committee functions, and AFSL Keyman and Responsible Manager roles, through to site project management and investor relations.


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