Mutual benefits: in the rush to DMFs, core principles must not be forgotten

By Melina Morrison, CEO of the Business Council of Co-operatives and Mutuals

It comes as no surprise that there has been a surge of interest in Discretionary Mutual Funds (DMFs) as business owners in “hardening” insurance markets seek alternative sources of risk cover.

A number of industry associations operating in the leisure and entertainment industries have signalled intentions to launch DMFs, acting in response to reports from members of up to four-fold insurance premium increases that threaten their livelihoods.

But in the rush to find solutions to the soaring cost of traditional insurance, there is a risk that one of the core values of mutuality – member control – is being overlooked.

DMFs are not a panacea for the perils of economic cycles, natural disasters and extreme weather events and shocks (such as the war in Ukraine) that can add to the normal challenges of risk management.

What they do offer is a viable alternative form of financial protection in the event of property loss or damage and third-party liabilities. Where DMFs differ from traditional insurance contracts is that cover is provided on a discretionary basis with fund members having a right to have their claim considered, but no automatic right to indemnity.

Claims are considered at the discretion of the DMF board or management, with the benefit of members in mind. DMFs are not set up to reward external shareholders by selling insurance cover profitably, rather to ensure risk protection for members of the fund who also control the fund through a jointly owned and governed mutual.

This democratic control by members is at the heart of what it means to be a true mutual business and should be enshrined as part of every DMF.

DMFs have been around in one form or another for 150 years. But until last year there was no clear Australian framework providing “best practice” guidelines as to how they should be structured and governed. That changed with the launch in November of a voluntary code of conduct prepared by the Business Council of Co-operatives and Mutuals (BCCM) after consultation with a working group consisting of some of Australia’s most successful DMFs.

The establishment of this code was encouraged by the Australian Small Business and Family Enterprise Ombudsman’s 2021 Inquiry into the insurance crisis facing the amusement, leisure, and recreation sector.

The Ombudsman’s report The Show must Go On found that a DMF was the only workable solution to the crisis that threatened the closure of showgrounds, school fetes and amusement parks around the country after ride operators and stall holders were left without affordable risk cover.

A key message in the ASBFEO inquiry report was the need to ensure ethical standards and a duty of care to members. There have also been changes to the Corporations Act which have made it possible for mutuals to raise investment capital through Mutual Capital Instruments.

The voluntary code created by the BCCM for the first time set out a blueprint for the creation of risk pools that meet market demand while adhering to the core values that underpin all mutuals.

Signatories to the voluntary Code of Conduct agree to abide by eight international co-operative principles and 20 behaviours, while also committing to 42 “good practices” relating to structure, board composition, management, audit and risk, finance and compliance that underpin the operation of sustainable member focused DMFs.

At the time of launch, there were four signatories to the Code of Conduct – Capricorn Mutual (motor trade), CivicRisk Mutual (local government) Employsure Mutual (small business) and Unimutual (universities).

Certainly, it is encouraging to see the recent growth in the DMF sector and the many examples where they have assisted members who would otherwise be unable to obtain risk cover for their businesses.

Last year’s payment by Capricorn Mutual of around $40 million in claims to members affected by floods in Queensland and NSW highlights the role that DMFs can play.

Another example is the work that Unimutual did with one of its flood-affected members to address not just property damage but losses relating to a significant research project. Similarly, through joining together to pool risk, members of CivicRisk Mutual were able to ensure cover for flood affected councils in the Hawkesbury and Richmond Valley areas. Each of these examples demonstrates the unique benefits that can flow to DMF members in times of need.

It is critical, however, to ensure the longevity of this burgeoning business sector that DMFs are not viewed as a quick fix for skyrocketing insurance premiums.

If the sector is to thrive and DMFs are to emerge as a long term, sustainable solution for communities and likeminded business operators to share risk, there must be a commitment to best practice governance and capital management. Most of all, there must be a commitment to the principle of member control.