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LGM will operate as a hybrid discretionary mutual, in which the mutual self-insures claims up to a certain limit and uses an insurance contract to protect itself against a particularly large, individual loss or an aggregation of losses.
Key features of a hybrid discretionary mutual are:
- It provides financial protection for its Members against risk
- It is a company controlled and governed entirely by its Members – its customers – and always acts for their benefit
- Typically, the Directors are elected from the Membership
- Members pay contributions into the Mutual fund based upon the risks they bring. These contributions provide a funding pool that is sufficient to meet the cost of claims up to a predetermined level (known as the ‘retention’)
- The Mutual pays all ‘expected’ (predictable) claims from the Mutual fund and buys insurance in the names of the Members to provide protection against the ‘unexpected’ which may arise from a particularly large individual loss or an aggregation of losses
- Any surplus funds belong to the Members and can only be used for the benefit of Members or as the Members agree
- The Rules of the Mutual dictate that all claims are paid on a discretionary basis and based on the Member’s Protection Wording. The Board also has the discretion to pay for any losses, costs or expenses excluded by the Rules or the terms of the Member’s Protection
Under LGM’s constitution, it cannot make a secondary call on Members, so claims activity will not generate a request for further contribution for the period in question.
This is because the hybrid-discretionary business model we have elected to use means that LGM’s exposure to Member claims is fully funded by Member contributions, with its wrap-around insurance covering claims above its retention. Funding will be set aside each year to pay for expected (‘attritional’) losses. Losses in excess of this, whether large individual claims or an accumulation of claims, will be covered by the Mutual’s insurance programme.
Who is responsible for the running of the Mutual and what influence do Members have over the way in which the Mutual is run?
The operation of the Mutual is the responsibility of the Board of Directors. The majority of the Board will be made up of councillors and Chief Officers from Member councils who have a close interest in ensuring that the Mutual runs smoothly and efficiently. All Members placing cover with the Mutual will be entitled to vote. Directors will have to stand for re-election every three years.
The Board has contracted Local Government Mutual Management Services Ltd (LGMMSL) to provide management services to the Mutual. The appointed Managers will facilitate a calendar of formal events providing Members with the opportunity to express their views and will be available to build relationships with the Membership at every level. It is also the intention that the Directors themselves will be accessible to the Membership.
Mutual membership can produce financial benefits over time in the form of cost savings as a result of:
- Possible surplus of mutual trading. Surplus funds belong to the members of the Mutual and must be used for the benefit of members. The members will decide whether surplus is to be redistributed to members or used in some other way, such as investing in risk management improvements.
- Tax advantages. Contributions to a discretionary mutual fund are not subject to Insurance Premium Tax and mutual trading surpluses do not attract Corporation Tax.
- Ownership and control is in the hands of its member local authorities – there are no private shareholders seeking a profit.
- All contributions are based on the risks the Local Authority brings to the Mutual.
- Over time, there may be additional benefits from sharing best practice in effective risk management with other Members, drawing on sector-led improvement approaches, which further reduce the total cost of risk.
Members enjoy complete transparency as they own the Mutual. The Mutual will act purely in the interests of Members and it is the Membership which, through the appointed Board, exercises ultimate control of the Mutual.
The Mutual’s risk-management framework will be established and maintained by its Members who govern and control it.
Through proactive risk management and sharing of best practice, the number and cost of claims could be reduced for many councils. One of the benefits of the Mutual is an increased emphasis on the identification and control of risk.
LGM will work with Members’ risk and insurance managers to drive and shape the work underpinning this framework, as well as engaging with the many high-quality in-house claims-management teams that have been retained or established by local authorities.
We currently receive and rely on risk-management services from our insurer/broker. Will the Mutual be able to provide this?
Members and potential Members will be consulted on the range of services they require. It is anticipated that the range of services on offer will expand with the size of the Mutual and demand. Mutuals can and do use trading surplus to fund risk management initiatives for their members.
Members are, of course, free to purchase services from other providers.
The LGM will operate a hybrid discretionary mutual model. Members cover will be set out in their protection wording and claims settled in accordance with that wording. Claims payments will come from either the fund maintained by the Mutual or, if they exceed the level of risk retained by the Mutual, by the insurers providing the Mutual with its insurance support.
Remember, the Mutual exists only to serve its Members – there is no profit motive and no motivation to decline or seek to reduce a valid claim.
All Members will have access to a dedicated claims handler/underwriter who they can contact directly with any claims or queries.
The Mutual Managers will provide expertise for loss adjusting and legal advice for claims as and when required. Large claims, those falling outside the Mutual retention, will be handled by the Mutual working closely with the Member and the supporting insurers.
The admissions process involves a qualitative and quantitative assessment by the Mutual of the risks potential Members bring to the Mutual. Local authorities will be asked to provide insurance information including their claims history and to provide internal policy documents. This is similar to the information required in preparation for a contract extension or a market tender process.
Once a cover offer has been prepared council officers then need to prepare a business case for councillors to decide whether to join the Mutual.
No. An OJEU procurement procedure is not required for a council to join LGM as its corporate governance structure satisfies the Regulation 12 (Teckal) exemption under Public Contracts Regulations 2015. LGM does, however, use OJEU-compliant process to procure the wraparound insurance for the Mutual to protect its retention and its Members.
Membership is for a minimum of one year, during which time you may serve notice to leave, with a notice period of not less than three calendar months.
Members that leave will have contributed to their IBNR costs through the usual process of actuarially based reserving at year ends and will have contributed to the insurers’ long-tail exposures through that element of their contribution. No future contributions can, therefore, be required from former Members (other than the £100 they are contracted to pay towards the debts of the Mutual in the event of the Mutual being wound up).
We currently use the placement and advisory services of an insurance broker. Is there any role for a broker if we join the Mutual?
We understand that many councils will have good working relationships with their insurance brokers and value their advice. Any Member of the Mutual is entitled to retain the services of an insurance broker if they wish to and the Mutual has no objection to accepting instructions from appointed brokers. The Mutual does not, however, pay commissions or make any other form of payment to placing brokers.