The mutual insurance sector has demonstrated the sustainability of its model amid an increasingly challenging operating environment. Mutual insurers, especially larger ones, have looked to enhance their competitive positions with ongoing investments in their business. As regulatory and competitive pressures increase, European mutuals have used a variety of structures in their attempts to gain scale, resulting in the creation of leading groups in various markets. In line with their ethos to operate for the benefit of their members, European mutuals tend to report marginal profitability compared with stock companies.
As customers’ expectations evolve, European mutuals adapt and innovate
Mutuals generally benefit from strong ties with the affinity groups they serve. Customer centricity is at the heart of their model, as they operate for the benefit of their members. In this context, over recent years, mutuals have focused their efforts on maintaining strong access to their customer base and enhancing the quality of services they provide. These efforts help maintain the strong relationship between mutuals and their members, which is crucial to the long-term success of the segment.
This focus has translated into sustained investment in IT systems and the enhancement of their digital presence, a trend that the COVID-19 pandemic has significantly accelerated.
Over time, investments in IT infrastructures and data analytics are also expected to result in better pricing capabilities for underwriters, while increased automation should help streamline operations and drive down expense levels.
Within the rating process, AM Best explicitly considers the impact of a rating unit’s innovation efforts on its credit profile within the Business Profile building block (see AM Best’s Rating Methodology at the end of the article).
AM Best’s definition of innovation is broad, to take into account the various forms that it can take. The assessment explicitly considers the inputs, or components, of the innovation process and the outputs, or the impact, of the innovation efforts.
Globally, the majority of (re)insurance companies rated by AM Best (mutuals and non-mutuals) have a “Moderate” innovation assessment.
While mutuals’ innovation assessments are also skewed towards the “Moderate” category, a lower proportion of mutuals receive an innovation score falling in the “Minimal” category and a correspondingly higher proportion of them are described as “Moderate” or “Significant” innovators (see below).
However, no mutuals are assessed by AM Best as being a “Leader” in innovation, with this assessment only assigned to a marginal proportion of stock (re)insurers.
The difference between mutuals and stock (re)insurer peers becomes more notable when comparing larger companies.
Generally, larger insurance companies (mutual and non-mutuals with available capital of at least USD 1 billion) rated by AM Best globally have better innovation assessments than their smaller peers (87% of them score “Significant” or “Prominent”, against 28% for the smaller companies).
Source: AM Best data and research
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Published June 2021
AM Best notes that this is generally driven by the fact that larger, well-capitalised mutuals tend to invest significantly in developing innovative solutions. These companies have more resources and latitude to future-proof their business models and maintain their relevance in an increasingly competitive landscape through investments in innovation.
Consolidation continues within Europe’s mutual industry as scale becomes increasingly important
Over the last decade, growing regulatory and competitive pressures have weighed on the European insurance industry, prompting significant consolidation as smaller participants looked to gain economies of scale. Such pressures have been even more pronounced on smaller companies, which tend to prevail within the mutual segment, as mutuals typically cater for the insurance needs of specific affinity groups.
Despite their unique ownership structure, mutuals have found different ways to grow and create mutual groups over the years.
Some mutuals have been able to grow by acquiring (or creating) stock (re)insurance companies. Germany’s Talanx Group, for example, has developed its profile beyond its traditional membership base through acquisitions, and established a significant global presence, including in North and South America.
In other instances, European mutuals have used a variety of legal structures to group together. In France, a number of mega-sized mutual groups have emerged in recent years, taking advantage of regulation allowing mutuals to pool resources within a legal structure, while preserving their independence and brand.
These can take the form of group mutual insurance company [société de groupe d’assurance mutuelle, or SGAM], mutual insurance union group [union mutualiste de groupe, or UMG]) and group social protection insurance company [société de groupe assurantiel de protection sociale, or SGAPS] For example, Société de Groupe d’Assurance Mutuelle Covéa has established a leading presence in various domestic non-life lines of business through its founding members’ brands.
More recently, a group of French health mutuals got together to create the largest player in the French health sector, Groupe VYV, using the UMG structure. The group includes complementary insurance and non-insurance entities, enhancing its profile throughout the health value chain.
Taking advantage of legal consolidation tools such as these available in France has allowed mutuals to create large groups benefitting from economies of scale, with enhanced financial capabilities, as members develop financial solidarity links between each other. Mutual groupings in other European countries include the LocalTapiola Group in Finland and Coöperatie Univé in the Netherlands.
Notwithstanding these successes, this type of collaboration carries significant risks and challenges. The pressures of balancing a mutual’s autonomy with collaboration and integration at the group level have contributed to some notable failures over the years.
Sferen SGAM, created in 2009 as a partnership between Macif, Maif and Matmut, was ultimately dissolved in 2016. In 2019, AG2R La Mondiale and Matmut announced they were calling off their “merger” after less than a year, because of differences in governance and strategic vision. AM Best considers that finding an agreement in terms of governance and strategic direction remains a key challenge for mutuals looking to create prudential groups.
European mutuals’ member-centric ethos shows in profitability
Technical profitability for European mutuals has been positive but marginal in recent years. Relative to stock (re)insurers, European mutuals tend to report higher non-life combined ratios (see below).
European insurers – 3-year non-life combined ratios (%) by size, May 2021
| Organisation type |
Small (less than EUR 50 million) |
Medium (EUR 50 million – EUR 1 billion) |
Large (more than EUR 1 billion) |
|---|---|---|---|
| Mutual | 86 | 96 | 100 |
| Stock | 84 | 95 | 96 |
Source: Best’s Financial Suite- Global, AM Best data and research
The difference in technical results generally reflects mutuals’ lower cost of capital compared with their stock (re)insurer peers, as they do not have any shareholders. This structural advantage allows mutuals to price closer to underwriting break-even, and to accept higher loss ratios than stock insurers.
Mutuals usually also benefit from lower acquisition expense ratios, as they tend to leverage and benefit from their proximity to their affinity groups, which can allow for more direct distribution and translate into a loyal customer base.
Balance sheet strength
The majority of AM Best-rated[1] EU mutuals have a balance sheet strength assessment of “Very Strong”. This is underpinned by these mutuals’ risk-adjusted capitalisations, which are comfortably in excess of the minimum required for the “Strongest” assessment, as measured by Best’s Capital Adequacy Ratio (BCAR). Rated EU mutuals also tend to have robust regulatory solvency levels. This generally reflects the strong ability of mutuals to generate capital organically through earnings retention, as they do not have shareholders to remunerate. Maintaining strong capital buffers can also be a way for mutuals to mitigate their strategy their limited financial flexibility, with restrained access to capital markets.
Risk-adjusted capitalisation is not the only factor considered in AM Best’s assessment of the balance sheet strength, and a number of other qualitative elements also play a role in the evaluation.
AM Best notes that rated EU mutuals generally have lower financial leverage than stock companies, which tend to rely more heavily on hybrid debt instruments in their capital strategy.
This also implies that mutuals often have a high quality of capital and lower financial leverage, which is viewed favourably from a credit stand point. In line with their strategic plans, some rated mutuals have a moderate dependence on reinsurance, which can be an offsetting factor to the balance sheet strength assessment. The associated risks are partially mitigated by a stable reinsurance panel of high credit quality.
Another element considered in AM Best’s assessment is the usually limited financial flexibility associated with mutuals, in the absence of shareholders. AM Best notes however that some mutual groups have adjusted their legal structure to get around that shortcoming by creating intermediate holding companies. These allow them to enhance their access to the capital markets, and more easily manage their capital allocation in the group.
Operating performance
The operating performance assessments of the rated EU mutuals are currently either “Strong” or “Adequate”. Mutuals with a “Strong” operating performance generally have a track record of solid underwriting profitability with low volatility. In line with their conservative investment portfolios, some rated EU mutuals tend to see smaller contributions from their non-technical accounts compared with stock companies.
Business profile
The business profile assessments of EU mutuals range from “Limited” to “Favourable”. Mutuals with “Favourable” assessments typically have strong brands and leading positions in their markets along with a good level of product and geographic distribution – these tend to concern entities that are part of a large mutual group.
As previously noted, rated mutuals generally have strong ties with their members. When mutuals provide commercial insurance solutions, they tend to be embedded in their members’ risk management programmes. These close relationships strengthen these mutuals’ competitive positioning, translating to leading and sustainable positions (even in niche markets), which can benefit the business profile assessment.
Enterprise Risk Management
The ERM assessments of all EU mutuals rated by AM Best are “Appropriate”. This reflects risk management frameworks and governance structures that have developed well over recent years, to which the Solvency II regulatory regime has probably contributed. While the sophistication and complexity of enterprise risk management programmes varies by mutual, depending on their risk profile or size, AM Best notes that the risk management capabilities of the EU mutuals it rates are generally in line with their risk profiles.
Mutuals continue to demonstrate their adaptability
Over the years, mutuals have adapted and responded to the challenges posed by an increasingly complex environment, characterised by growing regulatory requirements, changing customer expectations, and intensifying competition.
In some cases, these adaptations have taken the form of changes in mutual groups’ legal structures, allowing mutuals to gain in scale and develop leading positions in their markets despite challenges related to their legal structure.
Mutuals that invest in innovation should be best placed to prospectively enhance their profile, and continuously future proof their operations.
AM Best’s Rating Methodology
To determine the ratings of mutuals, AM Best uses the same building block approach as it does for other insurers. Included in this approach are quantitative and qualitative evaluations of balance sheet strength, operating performance, business profile and enterprise risk management (ERM).
AM Best’s rating process – Building blocks
Source: Best's Credit Rating Methodology
Within AM Best’s “Best’s Credit Rating Methodology (BCRM)” process, the first step in the rating process is an evaluation of balance sheet strength, the outcome of which (the baseline assessment) is represented on AM Best’s Issuer Credit Rating (ICR) scale (e.g. bbb+). Next the other rating factors – operating performance, business profile, and enterprise risk management (ERM) – are evaluated. The analysis of each of these rating factors results in a positive, negative or neutral adjustment from the baseline assessment. Full details of the process can be found in “Best’s Credit Rating Methodology (BCRM)” on AM Best’s website.
[1] In the European Union, AM Best currently rates eight mutuals (or members of mutual organisations); globally, AM Best rates over 300 mutuals. The EU mutuals (or members of mutual organisations) that AM Best rates have historically had stable credit fundamentals, with no movement in their ratings over the last year
