Study tests arguments to demutulise

A recent study commissioned by the Association of European Cooperative and Mutual Insurers, (ACME) concluded that arguments for demutualisation are not so much based on hard facts as the ideology of demutualisation.

The report highlights that most recent major European demutualisations have taken place in the UK. It suggests the demutualisation trend in the UK is following the pattern already noted in Australia, Canada, South Africa and the USA - all Anglo-Saxon countries with legislative frameworks based on the UK.

The debate about the merits of mutuality has brought into question the efficiency of different forms of insurance companies - do publicly listed companies, (plc's) really perform better than mutual societies.

The arguments for demutualisation are familiar to Australian audiences. They include increasing efficiency, gaining access to capital for expansion; increasing commercial flexibility, unlocking the value of ownership rights and benefits for staff, customers and future shareholders.

ACME decided to test these arguments. Their research compares mutual insurance companies and plc's directly and is based on a comprehensive sample of 97 insurers, representing a total premium volume of 24% of the Western European insurance market.

Several aspects of performance were examined:

1. premium income and growth,
2. claims payments,
3. costs and,
4. financial performance.

Contrary to many of the arguments advanced in support of demutualisation, the study shows that mutual insurance companies are competitive and in many instances outperform their plc counterparts. The accusation that mutuals are less efficient has no empirical basis.

The study notes that the demutualisation process is usually initiated at management level, not by policyholders. It promises considerable financial benefits to at least the staff (and usually at executive levels). The authors make the point that this is a force or motivation not to be overlooked.

The important role of legislation is recognised by the authors of the report. They claim it is arguable that, at least to some extent, the UK carpetbagging phenomenon of recent times was initially driven by legislation. The building societies legislation passed in 1986 - and welcomed by the societies at the time - provided an extension to their relatively limited powers, enabling then to offer additional retail financial services and compete more effectively with the banks. This legislation included specific rules on exactly how the conversion of a society into a stock company could take place. In practice, these rules became a blueprint for the demutualisation process.

Further details of this study are available at the ICMIF website.

If you require additional information please contact Garry Cronan.