Corporate social responsibility and the profit motive
THE FUTURE is mutual, according to Shaun Tarbuck, the chief executive of the International Co-operative and Mutual Insurance Federation (ICMIF). This is far from the universally accepted view, particularly within the financial services sector. But right now, it is not that easy to dismiss Tarbuck, a tireless campaigner for the mutual and co-operative cause in the insurance sector during the past 20 years, who has been newly empowered by events and changing attitudes in the aftermath of the financial crisis.
Tarbuck has been closely involved with most of the major developments and issues that have shaped the mutual insurance industry over the past two decades. For much of the time it has been pretty hard work explaining the value of the services provided by mutuals (which are owned by their customers, members or policyholders rather than shareholders) to consumer groups, governments and the regulatory authorities. It was especially tough at certain times during the past decade, when the case for financial mutuals (including insurers) had to be made against the background of yet another wave of demutualisation by building societies and life insurers.
Organised and proactive
But the view within ICMIF at present is the mutual movement has got quite a few things going for it. For a start, the federation and its affiliated national and regional associations (following some deep soul searching) have significantly restructured and consolidated over the past five years, resulting in the mutual and co-operative insurance movement, particularly in the UK and Europe, now being much more organised and proactive as a lobbying force. The process started when ICMIF conducted an extensive review of its strategies and objectives in 2005. It also coincided with Tarbuck’s promotion to chief executive of the organisation. He was formerly ICMIF’s finance director.
ICMIF was established in 1922 as the insurance committee of the International Co-operative Alliance (ICA) and became an independent organisation for co-operative and mutual insurers in 1972. Another huge change occurred in 1992, when ICMIF restructured to align itself more closely with the changing needs of its members, particularly the provision of business-related services. Indeed, the far-reaching changes introduced then very much determined the shape of the present ICMIF secretariat. The organisation, which has just named a new chairman, is in the process of conducting another review of its strategy and objectives for the next three years.
A single voice
Briefly, the trend of consolidation included the merger of AISAM (Association Internationale des Sociétés d’Assurance Mutuelle) and ACME (Association des Assureurs Cooperatifs et Mutalistes Européens) to create the Association of Mutual Insurers and Insurance Co- operatives in Europe (AMICE) in January 2008 to ensure the interests of the sector were represented with a single voice. ACME was set up by ICMIF to represent the interests of mutuals and co-operative insurers in Europe. AISAM, like ICMIF, had a global outlook but over the years the association had become more and more focused on Europe.
There was an identical strategy behind the launch of the Association of Financial Mutuals (AFM) in the UK at the start of this year. The AFM also came about through the merger, similarly overseen by ICMIF, of two previously existing organisations: the Association of Mutual Insurers (AMI) and the Association of Friendly Societies (AFS).
It is significant the membership of the AFM is overwhelmingly dominated by mutual insurers. This is, of course, a reflection of the large number of mutual and co-operative banking and savings organisations that have fallen victim to demutualisation over the past 10 years in the UK. But probably more importantly, it explains ICMIF’s strong belief the mutual and co-operative insurance sector represents the most powerful voice at present in terms of preserving the 200-year-old legacy of mutuality in the financial services industry. It also explains why Tarbuck exudes the air of a man leading a crusade.
Unique set of challenges
He notes the financial services landscape was significantly transformed by the financial crisis. Although in some ways this increases the pressure on mutuals as they face a unique set of challenges associated with their corporate and capital structures in the wake of the crisis, they also, according to Tarbuck, have been presented with an equally unique set of opportunities. For him, it is precisely the latter that makes the future so glowingly mutual.
He describes the challenges faced by the mutual and co-operative sector over the last two or three years as the same as those faced by the commercial sector. These include poor investment market conditions characterised by falling equity prices and low interest rates. On the underwriting side, there are pressures on insurers to reduce premium rates because of the straighten times. All these factors contribute to the pressure on insurers to reduce operating costs.
“But what we have seen is there have not been any mutuals that have been directly affected by the financial crisis,” Tarbuck says. “Indeed, what we have seen from our perspective is a return to the principles of mutuality, which are based on trust, good value and customer service. And this is not just on our part. The commercial insurance sector is also saying this is what it should be doing, so you see many chief executives talking about customer service in a way they have not done in the past. The advantage we have is this is what we have been doing for hundreds of years. Our main focus has always been our customers. We have never had this duality of focus, of shareholder versus customer. In shareholder-based companies, the shareholder always wins when it comes to any decision- making. Our sole focus is to serve the customer and that focus has assisted us considerably in coming out of recession much stronger than we went in.”
Customers, he says, are now looking for a different type of business model. “They are looking for a caring model with a set of values and ethics. Now I am not saying commercial companies can’t do this, because they can and they are. But we have a natural heritage in this area.” This trend, he points out, is entirely consumer-led and unrelated to any measures introduced by government.
Mutual market share
But much of the increased force behind ICMIF’s lobbying and marketing efforts in recent years is down to the fact the frequent references to the strength and scope of the mutual insurance market are based on solid, well-presented research rather than on some idealistic recourse to the superior ethics or morality of the mutual or co-operative way of doing business. A key part of the organisation’s strategy to market the sector on a more consistent and effective basis is the publication of the results of its annual global “Mutual market share” survey.
In its third year of publication, the report is based on data from 70 countries (including all the European Union countries) which together represent 99.2% of the global insurance market. According to ICMIF, the survey incorporates data from nearly 2,750 mutual and co- operative insurers around the world. These companies, Tarbuck says, account for 99.5% of global insurance premium income from mutuals and co-operatives. The 2008 ICMIF “Mutual market share” Report revealed nearly one-quarter (24%) of the world’s insurance industry in 2008 was represented by mutuals and co-operatives. The sector generated slightly more than $1trn in premium income, representing a growth rate of 3.3%. This compares with a growth rate of 0.3% in the global commercial insurance market. The sector’s 24% share of the global insurance market in 2008 represents a growth rate of 3% over the previous year. By comparison, the commercial market expanded only 0.7%. ICMIF, for the first time, decided to record the sector’s total asset value in 2008, the year the world’s financial markets went into complete meltdown.
The exercise, which is clearly intended to drive home the point of the mutual sector’s highly conservative approach to asset management compared to its commercial counterparts, could not have been more flattering. While the asset value of the sector declined 1.6% to $6.1bn in 2008, the asset losses of the commercial market were significantly larger.
Tarbuck explains that while there are no definitive figures available on the fall in global asset values for the commercial insurance sector, figures of 20% are widely quoted. He also refers to a Swiss Re report, based on six of the world’s largest insurance markets, which indicated shareholder equity fell by an average of 15% in 2008.
Viable business model
For Tarbuck, this demonstrates mutuals and co-operatives around the world play an important role in protecting the financial wellbeing of individuals and their families. “This may come as no surprise, given some of the world’s oldest insurance companies are mutuals or co- operatives. It also underlines the mutual co-operative form is a sustainable business model that is well suited to contributing to the economic development of diverse markets.”
There are 220 ICMIF member organisations at present, according to ICMIF’s website, in turn represent more than 400 distinct mutual insurance entities. However, a further 1,700 mutual insurers are indirect members of the federation through their national trade associations. Tarbuck says it is mainly a question of creating an awareness of what ICMIF stands for and what benefits it provides to members. In recent years, the federation has been particularly successful in its appeal to the larger mutuals. “We are getting an average of 15 new members a year – 10 years ago we only had 75 members,” he says. “That represents an almost threefold increase in ICMIF’s direct membership numbers in a decade.”
ICMIF, he says, is not only seeing an increase in its membership numbers but also an increase in its influence and profile more broadly as a result of the federation’s involvement in the micro- and low-cost insurance sectors in Africa, Asia and Latin America. “As an organisation, we probably have the most extensive outreach into the microinsurance and takaful industries globally. These are areas we want to encourage because their inclusion is very important to us,” he says. Indeed, takaful (Islamic insurance) companies account for 11% of ICMIF’s membership at present.
Solvency II
There is no doubt the advent of Solvency II in 2013, with its emphasis on risk-based regulation, will focus attention on the capital resources of mutual insurers. There is likely to be pressure on the smaller mutuals (ie, those with premium incomes of between €10m ($13m) and €20m. It is understood the very small companies (those with premium income of less than €5m) will be exempted from Solvency II requirements. In response, ICMIF is looking at measures to help maximise the capital resources available to its members through pooled solutions. However, for Tarbuck the challenges of Solvency II extend far beyond the European insurance sector.
Although the legislation is being developed in Europe, Solvency II, he says, is really a global issue. “Most national regulators, through their membership of the International Association of Insurance Supervisors [IAIS], will be looking to the Solvency II measures as best practice. So we know it is going to go global and affect insurers everywhere.”
He notes mutual insurers statistically have had a higher solvency margin than commercial insurers. “They always have done. If you go to any country and identify the most solvent insurer, it is virtually guaranteed to be a mutual. Now how will Solvency II impact on those margins? Will large and medium-sized mutuals need to raise more capital? Probably not, because they are well capitalised already and are not going to be more disadvantaged than other companies.”
The problem, he says, lies with the smaller, niche market mutuals because Solvency II attributes great weight to a diversified portfolio of business. “If you are a company that specialises in doctors’ or solicitors’ indemnity insurance then you are penalised under Solvency II. You have the same capital levels that qualify you as well capitalised under Solvency I but, all of a sudden, you need more capital under Solvency II. So the issue for us is the capital requirements imposed on niche market insurers that generate around €20m in premium income, but whose portfolio contains only one product that caters to one particular area or affinity group. Now that is a fault of the regulation, not of the companies.” The issue of proportionality, he says, is one that still has to be addressed by the Committee of European Insurance and Occupational Pension Supervisors (Ceiops). According to Tarbuck, mutuals make up 90% of the companies that write a single line of business.
In favour
Despite such challenges, he describes the mutual sector as very much in favour of Solvency II. “It’s a good piece of legislation. It is going to drive efficiency in the whole of our industry and that can only help.” In this regard, the mutual sector will seek to lower its cost base through partnership agreements whereby groups of companies share back-office resources. This, he says, is already happening in France among the group of insurance mutuals known as SGAMs. In the US, mutuals are looking at ways to share back-office services through some sort of pooling structure. “We will do things together as a sector because that is how we operate and Solvency II will encourage that,” Tarbuck says.
In this spirit, the sector is considering its options for raising capital when Solvency II is in place. Indeed, ICMIF has a well-established specialist loan fund in the US called Allnations, which provides subordinated debt facilities to members globally. There are also arrangements in place in the US for mutuals to issue surplus notes, while in Japan there are certain “kick-in” funds they can access. “As soon as the debate around Solvency II settles down, we will know what the demands on our capital resources will be,” he says.
Tarbuck believes once certainty is established, it is likely the financial markets will come up with products for the mutual sector. ICMIF, he says, will want to be involved in the development of those products. Indeed, there is already an AMICE working group looking at the issue of capital and what type of products could prove useful for the mutual sector.
Allnations has a capital base of $2.5m, which is provided by 24 ICMIF member companies. “It is a venture capital fund for our smaller members that would not normally be able to access capital in any other way. We run it as a professional investment operation. We always insist on having other member companies sharing the risk with us. So, for instance, in our first investment in Uruguay we had two members, one from Argentina and one from Puerto Rico, both investing a similar amount into the company. That was four years ago. That company is now doing very well. It has grown from the sixth- to third-biggest insurer in Uruguay because it has the capital to operate within the requirements of the local solvency rules.”
The regulators
However, one of the big hurdles for the sector is – even in the aftermath of the financial crisis – insurance regulators do not see the mutual corporate structure as representing a safer business model. “They should do, but the reality is they don’t see it as being any different,” he says. “It is the same all over. You go to any co-operative or mutual in any part of the world and they will all say: ‘The regulator does not understand our business model.’ That is partly our fault as a sector. We need to get out there more and tell the regulators, other decision-makers and stakeholders why we are different and why we add value to a diverse insurance sector. We need to be more proactive in the whole process.”
Sustainability
Tarbuck believes the insurance sector needs to address the issue of sustainability more wholeheartedly. The mutual sector, he says, has already made a start. Six of ICMIF’s members have written a report that looks at what constitutes sustainable business practices in the insurance sector. “It is not just about the short term, about what will happen to investor returns in three months’ time. The question is how do we take responsibility for our businesses in terms of what we will be doing in 25 years’ time? What role is insurance going to play in the developed world, as well as in the developing world? So it is about the nature of your appeal to customers, about how you look at all your areas of your business model and how you structure it so your business remains sustainable in 25 years’ time. It involves looking at the products you offer, at your investment criteria, at your underwriting practices. It is about going into every area of the business saying: ‘Well, if we are going to be around in 25 years, what will appeal to the customers, how are we going to get the best talent into our business?’ This means having your corporate social responsibility objectives up there alongside your profit margins. You need to have the whole picture. It is about how to run an insurance company in the future. So the capitalist model is not dead, but it is going to be transformed into a caring model that fits with our values.”
The future
Tarbuck describes the prospects of the mutual insurance sector over the next five years as a good growth story. “The more we empower our customers to make their own decisions, the more we listen to them in terms of product offering, in terms of how we treat them, in terms of our claims service, the more it will benefit the sector. The time is right for our sector, almost like it was 100 years ago when the first insurance mutuals emerged to offer a safety net to certain sections of society. It’s a different time now, but I think we will see a resurgence of the mutual sector. We always talk about the customer being king, but I don’t think the power of the individual has yet hit the insurance sector yet.
“Here I am talking about the power of the social networking sites, the power of the Facebook generation. A whole host of new people are coming into the market. Young people going out into the workplace now only do business in one way and that is through the internet, which now represents the biggest mutual community in the world. Young people are much better informed about corporate social responsibility than we were. I think the values and the ethical approach of the mutual sector would appeal much more strongly to the new breed of insurance buyers than the old commercial ways of doing of business. If we are smart enough and organised enough to appeal to that group, I really think the future is mutual.”
