Most consumers think of insurance as large multinational corporations, with their brand names on skyscrapers. This corporatised, publicly-listed model of insurance is where most of us go to buy cover for a house or car, because that’s the most obvious option and in many cases the only option.
Corporate insurance companies are listed on stock exchanges, which provides a ready source of capital for the insurer. But in corporate insurance, the owners of the insurance company are the shareholders. So two groups of people provide money to the company - the shareholders and the customers. Yet, as we found out recently when executives from AMP were questioned at the Australian Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, it’s the shareholders who are preferenced over customers.
This is a conflict of interest. The policy-holders want stable premiums, comprehensive cover on their insurance - with few exclusions - and a claims system that pays them when they need the funds. But shareholders want to maximise their returns, which means they want the insurance company to always increase their value. Unfortunately, the easiest way to increase profits is with high premiums, high excesses on claims and a culture of disputing claims.
Insurance should benefit those who pay their premiums. That’s the point of insurance. So how do we, the insurance policy-holders, promote our own interests over the external shareholders? The answer could lie in the past - the ‘mutual’ insurance company.
In an insurance mutual the only ‘shareholders’ are the policy-holders, who we call ‘Owners’. There is no misalignment between policy-holders and the Owners in a mutual - they are one and the same.
All insurance used to work this way and it’s where the big-name insurance companies started, most of them in the 1800s. In a mutual, members pay premiums for insurance cover and those premiums form a pool. When one of the members suffers a motor accident or a house fire, they make a claim under the terms of their policy and they receive their payment from the pool, administered by the managers.
Let’s say there’s 100 home owners in your neighbourhood who cannot afford to replace their home if it burns down. But they can pay $1,000 premium each year to be insured against a fire. Not everyone in the neighbourhood will claim all the time - but all of those 100 people are covered if there is a fire. This is the mutual aspect of mutual insurance: the small regular payments of the many insure the few who suffer bad luck. It is mutual insurance against losing an important and expensive asset. We essentially insure one another. Importantly, the insurance mutual’s pools are used to employ management and pay claims. The mutual doesn’t pay external shareholders. Because of this, members of a mutual are ‘in this together’. Their premiums create the pools that pay-out claims and they know in the future they may be one of those people in need. So the members want fair premiums and a transparent claims system that releases funds to them in their hour of need. These are two interests that the shareholders of a corporate insurer don’t necessarily have.
There are other features of corporatised insurance that suit the shareholders more than the policy-holders. One of these is the claims excess. Most insurance companies have excesses on their policies. This is really double-dipping because an excess requires you to pay again, when you’ve just suffered the financial loss that you’ve paid to be covered for. Doesn’t make sense, does it? There’s a similar problem with the number of exclusions in modern insurance policies. Excesses and exclusions encourage the policy-holders to not claim.
So how is the Picnic Insurance mutual different? We believe insurance starts with people - insurance is a bond of security between the people it protects. When people insure one another as a mutual, they are in a collective and a collective provides humane protection when people are most vulnerable. We believe insurance should be simple to understand, completely transparent and fair for everyone. And just as people fund and share the cost of insurance through their premiums, so too should they share the benefits of a favourable experience.
This doesn’t mean the insurance mutual is amateurish. In fact, members of mutuals have a real interest in the business being run with integrity and efficiency, because a professionally-managed insurance mutual is sustainable and able to pay claims. And in well-managed insurance mutuals, strong trading periods see the profits returned to members via lower premiums and loyalty rebates. For this reason Picnic Insurance has appointed an experienced and motivated team of executives to run the company.
Other benefits can be leveraged from a mutual. A mutual is effectively an ecosystem, set-up to benefit the members. So if this mutual ecosystem can keep economic value circulating among the members - rather than contracting it outside - it helps reduce costs and can create revenue for Owners. We have a Picnic Insurance Owners’ programs that reward Owners for making peer-reviews of claims and be paid in Picnic crypto-currency, called Tokens. We also have a bonus scheme for Owners referring new members. We’d rather have a referral system than expect Owners to pay for big advertising campaigns to attract more policy-holders.
Picnic is resurrecting the mutual not only because it fulfills our charter of building a people-first insurance organisation, or because a mutual is the best way to ensure simplicity, transparency and equity in our products and service; in the end, a mutual still remains the best environment from which to operate an insurance business, both for the insurer and the insured. The mutual insurance company exists for the benefit of its member policy-holders; it’s capital-base consists of members’ premiums - not investors’ funds - and it’s rules on what can be insured and to what value, ensures the stability of the mutual and its ability to pay claims. Most important, the management of an insurance mutual answer to the Owners, not to external investors.
If you want a people-first insurance organisation, it should be enabled by next-generation technology, lead by experienced, motivated people, and it should be in a structure that aligns with the people who are insured. When an insurance company insures people, it has to be a mutual.