Mutuals should handle diversification with caution: Willis Re

Although some mutuals are being encouraged to explore new lines of business or enter new territories, a report from Wills Re cautions this is intrinsically riskier for the insurers, adding that mutuals should ensure any such move is a good fit before proceeding.

Among the reasons for encouraging new business “is the potential benefit from diversification relief in regulatory capital calculations and more favourable consideration from rating agencies,” notes Navigating the Pitfalls in Pursuit of Successful Diversification, a report released today by Willis Re, the reinsurance arm of Willis Group Holdings. “Clearly a well-diversified insurer has greater wherewithal to withstand a problem arising in one particular area of its operations.”

That said, “committing capital to new lines of business or new territories, especially where the organization may only have limited expertise or experience, is intrinsically riskier for mutuals given the relative importance of the capital at stake compared to non-mutuals.”

Mutuals tend to be specialized rather than generalist, having the advantage over general insurers of a greater degree of focus and expertise in their particular field. “This, in turn, can be leveraged to support better decision-making, more informed underwriting and superior customer service, ultimately translating into better value for members,” the report adds.

The disadvantage is the “mutual business model exposes them to geographic and homogenous concentrations of risk.”

Armed with the correct information, mutuals can realize success. “A key lesson is to pursue diversification only where it is in line with the long-term aims of the organization, stands a reasonable chance of being profitable, and does not come at the expense of a loss of focus on other aspects of business,” says Robin Swindell, one of the report’s authors.

The full report can be viewed: here