Mutuals were established in the 18th century as a social function; pooling people’s small savings into a capital fund that they turn to during a time of monetary need. Rooted in a purpose to serve its members, rather than providing a profit to shareholders, mutuals were typically created to benefit people of modest means excluded from other financial services options.
Mutuals continually evolved into the 20th century with a particular bloom following the end of World War II. Simultaneously there was a geographic expansion to Europe and beyond, spanning as far as Japan and Australia, where mutuals flourish today. However, a different story unfolds when considering the last 25 years of the mutuals industry in the UK. The industry has been the subject of significant change and a once sizeable mutual sector has significantly shrunk through both M&A and de-mutualization activity (held roughly 50% of the insurance market in the 1990s, down to only 4% in 2007 ).
Whilst the financial crisis played a role in helping mutuals begin to reverse this trend, they still only account for 10% of the insurance market  and considerable threats remain within the sector.
So, what is the role of the modern mutual in the current financial services (FS) climate, and do mutuals remain relevant today? To answer this question we draw on both our own knowledge gained from working with, and within the mutual sector, as well as interviews with leading industry experts to detail key challenges the segment faces, and the untapped opportunities that mutuality offers.
The UK mutuals industry is facing a plethora of challenges. Whilst some of these challenges are not unique to the mutual industry, they manifest themselves differently because mutuals, by definition, operate differently to their commercial competitors. These differences encompass regulatory requirements, inability to raise equity capital and specific products and benefits provided to members.
These challenges include:
- Growth: Growth is either stunted by high barriers for new mutuals wanting to enter the market, or difficulty attracting new customers (with customer decision often based solely on price i.e., through price comparison sites). This restricts both the access to capital markets, and the growth of funds under management.
- Corporate Governance: A lack of external stakeholder pressure can result in fewer independent objections and a lower management incentive to change. A strong board and strong with profits committee are paramount to holding management to account, providing strategic direction, and managing parameters and risk profiles. Otherwise, it is up to the members to intervene to force action (but such engagement is typically low e.g., limited Annual General Meeting, AGM, attendance).
- Regulatory Pressures: There is a strong possibility that many smaller mutuals could face significant operating challenges due to their inability to operate in the future economic and regulatory environment; an expense viability challenge, with significant management salaries to keep up with regulatory change, plus lower capacity to raise new capital. For all mutuals, unlike stock insurers, they cannot raise capital on the stock market and hence there exists a self-perpetuating challenge that investment can only increase in line with growth. As well as this, the competitive disadvantage on mutuals is being increasingly recognized and the sector should continue to work with regulators to seek options to resolve disadvantages.
- Consumer Expectations: A discrepancy exists between customer expectations and firms’ agility. This discrepancy is particularly evident in digital channels, which has resulted in increasing requirements for technological advances such as apps, video chat, and instant messaging. However, for several reasons, many firms have not altered their processes in response resulting in costly back-office activities and higher expense ratios.
- Customer Understanding: There remain some strong advocates of mutuality but as the number of mutuals has decreased, so has customer understanding. Customer awareness of mutuality varies according to age, gender and socio-economic factors but, on the whole, it is not well understood and many customers come in through workplace pensions or adviser suggestion.
These challenges are echoed across key industry experts, and marry well with patterns we observed. However, it is important to note that not all mutuals are created equally; Royal London is around seven times the size of the next largest insurance mutual, NFU Mutual. There is wide disparity in asset values and a wide variation of investment across the different asset types to aid diversification . Therefore, other challenges more specific to the size of the organization must also be considered.
- Firstly, for the larger mutuals (e.g., Royal London, NFU Mutual, OneFamily, LV=, Scottish Friendly Assurance Society Ltd) in order to compete nationally against the major non-mutual providers, as they are aware they must improve their capital strength through substantial transformation programs to drive value and service. This includes e.g., fund consolidation, legacy simplification, digital and analytics strategies, and data archiving. Subsequently, a significant knock-on challenge arises in attracting new talent and driving change whilst maintaining the culture both for members and current employees.
- The smaller mutuals who are less commercially aggressive, must ensure product and service differentiation for their specific affinity groups, (if affinity based). These mutuals must consider either an element of diversification or, at the very least, a sensitivity analysis of the business plan and targeted risk management to limit concentration risk. Additionally, the sustainability of the small-mutual business model is challenged by the disproportionate regulatory and technical overhead experienced by smaller mutuals coupled with lesser capacity to raise new capital – which is typically done organically rather than through go-to-market activity.
The fruition of mutuals lies with their ability to adapt, with many already having begun this journey…
It is crucial that mutuals differentiate themselves by clearly explaining the benefits of mutuality to customers, future employees and the adviser population.
This could be achieved through:
- Creating marketing activity, perhaps as a sector, that captures the non-value add aspects and promotes the mutual ethos and philosophy. Highlighting improved customer service, greater flexibility due to less short-term commercial pressures, customers leaving a legacy whilst helping themselves, and a purpose of serving the member should all help to increase trust and improve customer following and loyalty.
- Adopting terminology to a digestible level for the layperson to understand, such as adopting the Australian used ‘Profit to Member’ or ‘Customer-Owned’ phrases instead of ‘Mutual’ or ‘Friendly’ to support this.
- Considering ways to increase member involvement and incorporate their views for example, incentivizing attendance at AGMs in the short term to generate a deeper understanding and bolster engagement.
- Enhancing data strategies to better understand the requirements of the current customer base – then creating specific products that cater to those needs. This opportunity is applicable across mutuals, irrespective of size, and is further enforced by new Consumer Duty regulations. This could greatly support the design of new products for affinity groups to enable mutuals to boost differentiation or diversification in their offering. Furthermore, understanding potential future customers and creating targeted marketing strategies is equally valuable.
- Developing digital channels within the mutual sector is pertinent. With the rise of easy-to-use direct to consumer (D2C) investment platforms, the consumer is becoming increasingly aware and actively involved in the management of their finances. Mutuals will be forced to adapt to this new digital environment or otherwise risk the attrition of customers to more user-friendly digital platforms. Those companies who do adapt and can offer low cost, easy-to-use platforms will be perfectly placed to fill the advice gap (i.e., significant numbers of people with decisions to be made and with limited means of using expensive advisers). Huge opportunities exist for those organizations that can provide in a digitally first way.
- Mutuals within the UK insurance market should take learnings from other mutual sectors (e.g., National Trust, Nationwide) and work with other countries, where mutuals still represent a significant proportion of the insurance market, to understand the market conditions that have enabled them to survive and indeed prosper, and look to see how these can be embedded in the UK.
- New mutuals could be created to address current gaps in the market. In particular, there is an opportunity for mutuals to support sectors where there is feeling that solutions from traditional sources are either poor value for money, have a low commitment to paying claims or extract too much money from the sector. Whilst barriers to entry exist, including high regulatory demands and arguably current market players’ resistance, there are recent success stories for example, Education Mutual, with potential scope for many more. The key is creating a relevant and competitive product at the right price.
To aid with the costs and reduce the operational burden of the high amount of change detailed above, the mutual sector should welcome opportunities to work collaboratively in areas where competition is unwarranted.
Barriers to collaboration exist and whilst they are not specific to the mutual sector, they do represent real concerns regarding control (with potential loss of autonomy or power struggles), differing company goals and objectives, losing competitive advantage and potential concerns over management team reduction. Plus, regulation may also make the business case more difficult to justify. However, for the mutual ownership structure to confer genuine competitive advantage, rather than just promoting mutualism as a concept, mutuals must overcome these barriers.
Successfully overcoming these barriers will result in the realization of longer-term benefits, for example, economies of scale achieved through shared services, subscriptions, licensing, outsourcing, and office space in addition to access to complex skill sets and competencies (which are not easily transferred). Ultimately allowing mutuals to reduce overall spend and operational burden and create space for the industry to focus on differentiating customer offerings and sharpening key distribution channels. A stronger alliance would also better place the sector to push for change with both governmental and regulatory bodies.
To help mutuals take this step, and address concerns, loose alliances could occur in the first instance to build up trust and identify opportunities before advancing into partnerships .
These loose alliances could undertake a joint benchmarking exercise to understand the range of costs affecting the industry and to identify which next steps would have the most positive impact. For example, the arrangement of distribution agreements which permit one mutual to sell another mutual’s products may provide an opportunity for each mutual to concentrate on differentiating, value-additive activities.
This sort of exercise should be structured as below, culminating in an understanding of how best to proceed .
Additionally, mutuals could consider forming partnerships or alliances with universities and other public bodies to develop and test new technology in turn establishing a pool of candidates with technical knowledge which can be tapped into when recruiting in the future.
The consideration of mutuality being reborn through a shared interest may feel extreme however, to succeed in today’s FS climate, a coordinated and cohesive approach may be best particularly for smaller mutuals.
So, is there a need for mutuals in today’s society? Definitely, yes! In fact, there are strong arguments to suggest that due to the current cost of living crisis, increasing ESG concerns, the societal benefits being more greatly demanded from upcoming generations, the move by regulators away from strict barriers to more assisted governance advice along with new regulations on consumer duty both playing to mutual’s strengths, and the public’s general lack of trust in FS markets that this need is as great as it ever has been. Mutuals must now work together to both obtain increased regulatory support and to capture the minds and hearts of their customers.
Alpha’s propositions are uniquely well-positioned to support our Insurance Division, which specializes in Pensions, Retail Investment (P&RI) and Life Insurance and has recently launched into the GI and Specialty markets. We bring a unique blend of skills and experience, including specific mutuality experience, that continually enables us to deliver successful global change programs for our clients.
 Shaw, M (2022). Association of Financial Mutuals
 OAC PLC, Spinks, C. (2021). SFCR-Analysis_2021 http://www.financialmutuals.org/wp-content/uploads/2022/07/SFCR-Analysis_2021-1.pdf
 Alpha FMC (2021) Alpha Financial Markets Consulting paper – Mutuals cost reduction
With thanks to the following key participants:
Phil Carey (Tees Mutual), Steve Ferrari (OneFamily), Jamie Jenkins (Royal London), Stephen McGee (Scottish Friendly), John Perks (Just Group plc), Martin Shaw (Association of Financial Mutuals), David Thompson (Dentists & General), and Stuart Tragheim (Holloway Friendly).