What are the differences between Staff Absence Insurance and a Mutual Arrangement?

                                                        Limits of Cover and Transfer of Risk 

Lot 1: Staff Absence Protection 

Lot 2: Discretionary Mutual 

Policies are underwritten by an insurer, who takes on the risk from the institution. This guarantees payment in the instance of absence where the claim is valid. 

Funds are pooled together for all members of the mutual (institutions) and held in a pot. A mutual cannot guarantee a full transfer of risk as it is limited by the total value of the pot. 

                                                                        Claims Guarantee 

Lot 1: Staff Absence Protection 

Lot 2: Discretionary Mutual 

Offers a guarantee that all raised claims that are valid will be paid to the claimant. Within the terms of an insurance contract, this is a legal right of the institution.  

Offers a right to have claims considered. Claims maid to members of the mutual (institutions) will be paid at the mutuals discretion. There is no contractual guarantee of payment. 

                                                                         Additional funds 

Lot 1: Staff Absence Protection 

Lot 2: Discretionary Mutual 

As there is a full transfer of risk, there is a chance that claims may exceed the premiums paid. Insurers are bearing this risk, and so the insurer will retain any surplus premiums paid which have not been claimed. 

Remaining surplus left once reimbursements for absences are paid and fund administrator charges are accounted for, stays within the mutual. Mutuals can have varying methods of distributing funds amongst its members, so it is worth asking what the process is if you are interested. 

                                                                    Profit making method 

Lot 1: Staff Absence Protection 

Lot 2: Discretionary Mutual 

Insurance companies are profit making due to the retaining of additional funds. Profits are determined by how much the insured claim in comparison to how much they pay. An insurer can make a loss if an institution is reimbursed more than the premium they pay. 

Mutuals  are not profit making, however the fund administrator guarantees a profit by taking a cut of the premium up front. A portion of all contracts goes to the fund administrator regardless of premiums or claims, so it is worth checking what this portion is. 

                                                            Regulatory Bodies and Protection 

Lot 1: Staff Absence Protection 

Lot 2: Discretionary Mutual 

Insurers are regulated by the Financial Conduct Authority (FCA) and can be held to account through them and the Financial Ombudsman Service (FOS). In the instance that an insurer becomes insolvent or is forced to close, the Financial Services Compensation Scheme (FSCS) will pay the institution 90-100% of all valid claims. 

Mutuals are not regulated by the FCA, so the actions of the mutual are not held to account by a regulatory body. Mutuals must follow guidance set out by the Association of Financial Mutuals (AFM). In the instance a mutual agreement becomes insolvent or is forced to close, there is no protection for outstanding payments due to members. 

                                                                               Flexibility 

Lot 1: Staff Absence Protection 

Lot 2: Discretionary Mutual 

The terms and conditions of the insurance policy govern whether or not a claim is finished, and the wordings can vary vastly between insurers. If an absence claim falls within the policy wording, there is a guarantee that the claim will be covered. If it falls outside the policy wording, there is no such guarantee. 

The aim of a mutual is to cover as many absences as possible as long as there are the funds to do so. There is greater flexibility to cover absences that would not usually be covered under standard terms. This does however depend on the performance of the mutual fund.  

                                                                                     Tax 

Lot 1: Staff Absence Protection 

Lot 2: Discretionary Mutual 

All insurance policies include a 12% government levy called Insurance Premium Tax (IPT). This, along with the guarantee of cover, generally means insurance policies are the more expensive option. 

Higher cost – full risk transfer – lower risk 

There is no IPT applied through a mutual as it is not insurance. Due to this and the non-guarantee of cover, a mutual is generally lower cost than a comparative insurance. 

Lower cost – cannot offer full risk transfer – higher risk 

                                                                 Due Diligence considerations 

Lot 1: Staff Absence Protection 

Lot 2: Discretionary Mutual 

Check if the insurance provider or broker is FCA registered. Check the financial rating of the insurer, and ensure you read and understand the policy wording or policy summary. 

Check what portion of the contribution is being paid to the Fund Administrator. If the mutual has taken one out, check the terms of the insurance policy e.g. is there an excess, and if so, who is covering the excess. Check how surplus funds are returned to members.