November 2010

Further evidence of the Mutual Advantage

Over the last few months we have presented within Mutually Yours an ever growing library of evidence that shows that policyholders in a mutual insurer or friendly society enjoy a mutual advantage.  This month we provide new evidence that investment returns, charges and service are all better in a mutual.

Investment returns

During the late 1990s and early 2000s there was a spate of demutualisations.  There has been a great deal of evidence about the impact of demutualisation in building societies, but rather less about mutual insurers.

Using data from Money Management, we have looked at average payouts for each year from 1992, and split out mutual firms and compared them to insurers that began the 1990s and subsequently demutualised.

graph 1

* demutualised firms used here, plus their date of demutualisation and average payout to policyholders were: Clerical Medical, 1996 (£520); Scottish Amicable, 1997 (£1,430); Norwich Union, 1997 (£1,200); Scottish Widows, 2000 (£6,000); Scottish Provident, 2000 (£2,636); Friends Provident, 2001 (£1,200).  Standard Life demutualised in 2006, and is excluded due to their relatively short period as a plc.

As the chart shows, prior to their change in ownership, the demutualised insurers were amongst the strongest performers in the industry, with payouts well above the average.  Mutuals by comparison showed a remarkable level of consistency through the decade. 

From 1999 onwards the situation changed dramatically, and as the pace of demutualisation gathered pace, so did the rate at which payouts fell. Since the recession of the early 2000s, payouts from demutualised insurers have been in freefall- during that period, the average payout of a demutualised insurer fell from £95,553 in 2000 to £32,524 in 2009.  Payouts from mutual insurers have since 2004 varied between 26% and 39% higher.

To assess the impact of demutualisation further, take as an example Scottish Widows, now part of Lloyds TSB. They paid out the largest windfall to policyholders of £6,000, but a policyholder paying in £50 per month over 25 years would have seen a maturing value for 2009 of £27,802- the lowest of the demutualised companies- had Scottish Widows remained mutual and paid at the average for mutuals, the payout would have been some 54% more.  In other words, the £6,000 demutualisation bribe has translated into a payout reduced by over £15,000.  Not quite the rosy picture painted at the time- and one must assume the result of a combination of meeting the needs of shareholders, poor investment performance and/ or higher charges.


Did I just suggest that charges are higher in a plc?  That can’t be right I hear you say - mutuals are known for the inefficiency and higher charges. Well, our latest research on charges seems to suggest this is another popular misconception.

The Consumer Finance Education Body, CFEB, recently took over a range of consumer responsibilities from FSA, including the publication of comparative tables which allow consumers to compare the features of product providers in a standardised way.  See:

This includes a table for savings endowments. The first thing a customer or adviser seeking to understand the charges on a £50 per month policy will discover is that the only insurers available to them are mutuals.  Charges vary across providers, but on average are £1,031 over 10 years for a 40 year old.

The closest comparisons available are to be found in the tables for “Unit Trust and OIEC ISAs”, where the balanced managed category most closely matches the investment profile of a savings endowment.  The average charge on these policies is £1,160- 12.5% higher than a mutual policy.

graph 2

Worth mentioning as well that savings endowments include life cover and underlying guarantees that ISAs do not.  An investment manager would tell you that you get what you pay for, and the higher cost correlates to better performance- but you only have to look at the previous section to know that isn’t true.

The comparative tables don’t provide comparison for products like income protection, where mutuals are a growing force as a result of consumer friendly features and service.  However, one Holloway friendly society told me that their contracts were usually much less than plc counterparts, and quote one example of a policy offered by the largest UK insurer that was five times the price of the Holloway contract.

Customer Service

So, if mutuals are providing better policies and higher returns whilst charging less, their service must be dreadful, right?  Wrong!

A number of AFM members are also members of the Association of British Insurers, and subscribe to ABI’s Customer Impact survey each year.  This forms part of a wider scheme to deliver better outcomes for consumers, under which subscribers are obliged to publish summary data of their performance.  We’ve obtained data from each firm’s public report to explore the differences between mutuals and non-mutuals.

The data is published against three commitments, broadly comparable to the product lifecycle: 

• Commitment 1: Developing and promoting products which meet the needs of customers

• Commitment 2: Providing customers with clear information and good service when they buy products 

• Commitment 3: Maintaining appropriate and effective relationships with customers once they have bought a product

Each commitment draws on questions around product design and performance, service, and fairness.  There are 12 AFM members that subscribe to the Customer Impact Survey, and 15 non-mutuals, so mutuals account for nearly half of the data amongst the 20,000-odd customers surveyed. 

The chart below shows the difference in customer perceptions in 2009.  In each of the three customer commitments mutuals massively outperformed their plc counterparts.

graph 3

(source- company websites; 100% equates to industry average for each commitment for the top two boxes of a five point scale, i.e. a score of 120% means the result is 20% better than the industry average)

With such a large survey to draw on, these results are significant and provide clear evidence that the customers of mutuals experience superior customers outcomes and higher standards of customer service.


A recent letter from the FSA to mutual insurers drew on the concept of “Policyholders Reasonable Expectations”- widely regarded as a precursor to FSA’s focus on Treating Customers Fairly.  In the letter FSA construed that policyholders of a mutual organisation should have expectations at least as great as those of proprietary insurers.

Policyholders’ expectations, as the Customer Impact survey demonstrates, are focused around critical factors such as product performance, charges, service and fairness.  As this report shows, in every one of those factors the mutual advantage is abundant.

Mutual insurers add diversity to the provision of insurance, contribute to a more stable financial services marketplace, and almost always produce superior outcomes for customers.  But a recent report by Professor Michie of Oxford University concluded that regulation is biased against the mutual corporate form, and that this should be addressed as part of the review of the regulatory system. Otherwise, a regulatory system that continues to see the plc model as the norm risk undermining all the good work that mutuals are doing, some of which we have covered in this report.

Martin Shaw, AFM

November 2010

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