AFM welcomes FSA consultation on mutuals and with profits

AFM and its members very much welcome the approach taken by FSA in CP12/38, coming as it does after more than six years of active engagement with mutual insurers.  The consultation demonstrates some fresh thinking from the regulator on their approach to mutual insurers with a with-profits fund, and therefore reflects the wider trend in public policy to, as the government has said, 'foster diversity and promote mutuals'.  .

The consultation recognises that for some mutual insurers volumes of new with-profits business have been reducing, and that the rules create barriers to effectively developing alternative business plans.  Mutuals are currently at a competitive disadvantage to PLC insurers, because most or all of their assets are subject to conduct of business rules, and there are therefore constraints on the amount of capital available.  The FSA proposals envisage that mutual insurers can develop a supervisory-led solution to this, which might include, but is not limited to separating the various interests in the with-profits fund, in other words to create separate pots for with-profits policyholder funds, non-profit policyholder funds, and mutual members' (capital) funds.  Any solution would need to satisfy the FCA that the solution is fair to all policyholders, and satisfy the PRA that the mutual remains financially sound, and the consultation stresses that the regulators will take a proportionate approach which will not preclude smaller mutuals.

As the consultation acknowledges, mutual market share in insurance has fallen from over 50% 30 years ago to around 7% today.  The fresh approach from the FSA may have come a little late in the day, but should help to remove some of the motivations to demutualise, or for a with-profits mutual to have to wind up- as long as it has a relevant future business plan, and can demonstrate it remains wholly accountable to its members.

AFM will respond to the consultation by the deadline of 19 March, and we aim to be positive about the likelihood of these proposals providing a secure foundation for a stronger mutual sector, whilst looking for a little more explanation of some of the finer points in the paper.