What is a Discretionary Mutual Fund?

As global factors like high inflation, border conflicts and environmental change push insurance premiums higher and higher, another protection product is being embraced by brokers as a viable alternative. Time to get the lowdown on discretionary mutual funds.

What is a mutual?

A mutual is a public company limited by guarantee, that is owned by its customer, who are referred to as members. Every mutual has a business purpose that seeks to achieve fair outcomes for its members. Typically, mutuals are established by a group of people, organisations or associations that share a common interest.

Mutual companies are not-for-profit organisations, meaning that surplus funds are kept by the organisation for the benefit of its members.

Membership of a mutual when a purchase is made of a product or service offered by the mutual. Members are owners of the mutual and have voting rights for corporate actions.

What is a discretionary mutual fund (DMF)?

DMFs are mutuals that issue an alternative to insurance, and their products are known as ‘risk protection’.

For example,

• Aussie Farmers Mutual is a DMF that was created by, and for, Australian farmers. It offers members risk protection for their crops against events such as drought, weed infestation and bushfire.
• UniMutual protects some of the largest universities, research, and education centres in Australia.
• Civic Risk Mutual has been established for local government councils in New South Wales.
• Capricorn has operated for 50 years for the motor trades industry in Australia and New Zealand.
• Xenia Mutual protects mature hospitality organisations.
• Our Ark Mutual is for community focussed organisations.

DMFs are governed by a board and directors that have a fiduciary duty to act in the best interests of members of the mutual.

What is risk protection?

Risk protection and insurance both offer protection against certain risks. Risk protection is created using actuarial analysis and underwriting parameters to provide financial support when an event results in a claim. Risk Protection products are not insurance contracts and are not bound by the Insurance Contracts Act 1984.

The board has discretion over all risk protection claims. The member is entitled to have any claim considered by the board.

This is the ‘discretionary’ aspect of the product. Even if there is uncertainty about whether the claim meets all the terms and conditions of the product, a member can request the board to consider the claim. The board has the discretion to pay all or part of the claim, or decline the claim.

It’s important to remember that the board has the fiduciary duty to act in the best interests of the members of the mutual; it is not in the best interest of members for claims to be arbitrarily declined or accepted.

How are DMFs funded?

Members fund DMFs via contributions paid for their risk protection cover. Unlike insurance premiums, contributions can be paid through alternatives to cash, at the discretion of the mutual. For example, farmers may pay contributions of cash and forward grain contracts.

DMFs can also be funded by investors through Mutual Capital Instruments (MCIs). Investors do not have to be members of the mutual; they may be seeking to support the industry or organisations that are members. MCI Investors are not owners of the mutual, rather the MCI sits on their balance sheet as an asset.

As DMFs do not incur stamp duty or insurance tax, risk protection may be priced differently to insurance products.

DMFs are not for profit organisations, so surplus capital after fees and claims are paid, is retained to benefit the members. This surplus capital can be used to increase reinsurance, held to pay future claims, or offset against future contributions.

Who uses DMFs?

DMFs are used by a wide range of industries and organisations for a variety of reasons. The collective ownership, alignment around a common purpose of belief and the flexibility of product design are all reasons why DMFs have been established.

Learn more

Our Miscellaneous Financial Risk Products online training course covers essential knowledge for advisers seeking accreditation to provide advice in miscellaneous financial risk products, particularly Discretionary Mutual Funds.

The course has been designed to cover knowledge ASIC would expect someone to have if they were seeking to:

• Be licensed to deal or advise on Miscellaneous Financial Risk Products (i.e. have this authorisation included on a new licence or on a variation to an existing licence) OR
• Become an authorised representative of a licensee with an MFRP authorisation.

It is also suitable CPD for MFRP licensees under RG 104 or insurance advisers under RG 146.