Is the mutual insurance company model under threat?

Mutuals were some of the first insurance companies to settle in Canada. But despite their longstanding history, there are existential threats that could “end the ability for mutual companies to participate in the market,” a mutual insurer executive said during an industry conference. 

Constraints on capital, increased consolidation, customer service innovation and climate change raising reinsurance costs (in some cases, equalling close to a quarter of a mutuals’ premiums) are causing challenges for mutuals.

But mutuals, particularly the small ones, have agility as their advantage. And that may be the key to their longevity.  

In 1809, Halifax saw the establishment of the first insurance company, The Nova Scotia Fire Association—a mutual—on Canadian soil. Prior to this, foreign firms had dominated Canadian territory. A decade later, The Nova Scotia Fire Association was transformed into a joint stock company and renamed Halifax Fire, according to Swiss Re’s A History of Insurance in Canada. 

“If you go backwards in time, there were a lot of mutual companies; the industry was built by those companies. But times have significantly changed and market pressures are very, very different today than they have been in the past,” said Paul Jackson, COO at Gore Mutual Insurance Company during the Insurance Brokers Association of B.C. (IBABC) AGM and Leader’s Conference in Whistler, B.C., in June.

Antique photograph: Halifax, Nova Scotia, Canada. iStock.com/ilbusca

The challenges 

One of the biggest challenges faced by mutual insurance companies is access to capital, or more specifically, “our inability to access external capital,” said Jackson. 

Because mutual insurance companies are owned by policyholders, any profits earned from premiums go back to the policyholders in the form of dividends or lower premiums. The draw for policyholders is that they are often offered more competitive pricing. 

However, this also means mutuals can only raise capital by borrowing money or increasing rates. 

“In effect, we can spend what we earn, so earnings have to be consistently strong. And you’re spending a balance of surplus to fuel the investment in your business. This is a major constraint for us,” Jackson said.  

“It’s one that we’re working on through lobbying the government, talking about other opportunities for capital raising, [and] trying to find a way of modernizing and putting innovation into the Canadian regulatory environment that allows us to raise capital that we can then reinvest in our business.” 

With constraints on capital, Jackson says mutuals also tend to be limited with innovating their business for the betterment of their customers.  

“A lot of mutual companies are what we call dynamically conservative. Their number one priority is to protect the balance sheet because, of course, there is no ability to access third-party capital,” said Jackson. “That, of course, comes at a tradeoff of innovation in new technology, new ways of accessing customers, and providing customers with what they need.” 

Consolidation is also beginning to threaten small- to medium-sized mutuals who find themselves working with brokers owned by their own competitors, said Jackson.  

“For example, there is a small mutual company, much smaller than ours, where more than 50% of their portfolio of business is, in fact, with brokers that are owned by their direct competitors,” he said. “Without scale, without diversification, those companies find themselves in a position where they are not in the driving seat of their own future.” 

But the number one challenge mutuals are facing is climate—more specifically, the pressure that increased climate events are putting on mutuals’ reinsurance costs, Jackson said.  

“Just to put it into context, we spend about 5% of our premiums on reinsurance, and we’ve taken a number of actions recently…to ensure that that number does not increase much past 5% or 6%.” 

But some smaller mutuals may not have the resources to manage their reinsurance costs. “And for some of them, they’re now paying somewhere between 12 to 18% of premiums on reinsurance,” said Jackson. “That materially threatens those company’s ability to be economically viable, particularly if those numbers grow.” 

Increased reinsurance costs also mean some mutuals may have to pass the costs down to consumers by raising premiums.  

The opportunity 

While mutuals are certainly facing several threats toward their viability, their size and simplicity may be their key to success.  

Small insurers are well-positioned for being agile to change and adapting from the ground up when challenges arise. 

“One thing that certainly works in our favour is that we are a relatively small, simple business, and that gives us the inside track,” said Jackson. “The challenge for smaller companies, is to use that inside track as a competitive advantage.” 

Feature image by iStock.com/z_wei