Why de-mutualisation is bad for consumers, and how it will affect the UKGI market

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With LV= revealing it was considering the sale of its remaining life and pensions businesses, Insurance Times takes a look at the implications of wider de-mutualisation for policyholders, and what it means for the future of insurance

If you look back 50 years, the UK insurance market was dominated by mutual insurance companies, with these mutuals accounting for around half of all insurers in the market.

Today, mutual insurers account for less than 10%.

LV= is the latest mutual insurer to leave the UKGI market after it merged with Allianz, and the business also recently revealed that its remaining life and pensions businesses were also potentially up for sale.

Consumer conflict

The latest wave of de-mutualisation could spell bad news for consumers, with mutual insurers often coming out top of customer service surveys. James Daley, managing director at Fairer Finance, says this is because mutuals do not face the internal conflict other insurers face around paying claims.

“Mutuals don’t have that conflict between shareholders and customers that shareholder-owned companies have,” he says. “That means they can be a bit more single-minded in servicing their customers. With most insurers there is a very real conflict between the interests of the customers and the interests of the shareholders, and that is something that insurers are not very honest about.

“Insurers love to say that they are in the business of paying claims and that they care about their customers, but internally they are acutely aware that every claim they pay is less profit for their shareholders.”

“We know that behind the scenes there are some insurers that are quite ruthless in terms of trying to stave off claims and keep claims paid to a minimum,” he adds.

Mutual insurers also don’t face the same pressures from shareholders, with quarterly reporting forcing listed insurance companies to take a more short-term approach to running the business.

EY executive director Tony Sault says this allows mutuals to have a clearer purpose, and more empathy for their policyholders.

“Mutuals are able to take a longer term view because they are not pressured into reporting a profit every quarter,” he says. “Profit isn’t the primary objective of a mutual, it is more around their purpose, the ethics and supporting the needs of their customers, which are very clear and well understood.

“Mutuals have a clear purpose and empathy with their customer base, which other insurers would like to have but struggle to have.”

Reversing the race to the bottom

And Daley says this points to a wider problem in the insurance industry.

“[The way mutuals are struggling] speaks to a wider problem that it is very hard to make these businesses self-sustaining if you run them in a customer friendly way, which is very alarming,” he says. “The problem we have had over the last 20 years is that comparison sites have stimulated a race to the bottom on quality as well as price. [In that market landscape] to compete to write business you have to have low prices, and to have low prices you have to hollow out your products to keep your claims ratios down.

“That ultimately isn’t good for customers and is widening the gap between customer expectations and the reality.”

To combat this disconnect between customer expectations and the reality of policy wordings, Daley says the industry needs to rethink the way it approaches designing its policies and support services.

“This is a worrying time for the general insurance industry, and I have long thought that we have to reverse the race to the bottom on quality, and instead get insurers competing on quality,” he says. “If through better information flow you can empower consumers to see which companies are not treating their customers as well as they should be, then it makes it a business critical priority for insurers to refocus their efforts [on improving customer service and meeting customer expectations].”

And Sault says that this could once again give mutuals the upper hand.

“Mutuals should know their sector better than anyone else, and they should be able to use that insight to create broader and better propositions than other insurers in that market,” he says. “That is particularly important at the moment with the Covid-19 crisis. Everyone is re-evaluating what is important, and the idea of businesses having a purpose is coming up more frequently.

“It is not good enough just to make money anymore, you have to be giving something back to society and be more sustainable [in your operations].”

But while this could be a great opportunity for mutuals, Sault also warns of increasing pressure on the mutual players as a result of the emergence of FinTechs able to disrupt their model.

“The advent of FinTechs can also identify niche segments in a market using technology in a novel way,” he says. “That technology can point insurers towards very discreet customer groups, and that will bring some added pressure for mutuals.”