A Discretionary Mutual Fund (DMF) is a mutual organisation that provides an insurance-like product known as risk protection.
With insurance, if a claim meets all the terms and conditions as stated in the policy, the insured has a contractual right to have the claim paid.
Risk protection entitles the protected to have a claim considered for payment by the Mutual; the Mutual has the discretion to pay the claim when it meets the terms and conditions of the risk protection product.
Discretionary Mutuals are usually established by a group of people, organisations or associations who share a common interest.
This means that claims are assessed by people who understand the nature of the industry or business of the insured – not someone who has no understanding or interest in the plight of the member.
Better yet, discretionary risk products can be tailored to provide cover that is specific to an industry or common cause. Discretionary Mutuals are able to design products that give cover quickly and easily.
Plus, as a Mutual, the resulting benefits can be aligned for what’s best for members.
Indeed, it is even more likely that members in a Mutual will ‘do the right thing’ by each other to minimise their risks and exposure to hazards that may result in claims.
In effect, everyone in the Mutual is involved for the common good of their industry or other common cause.
Discretionary Mutuals are increasingly being created to provide viable risk protection options to traditional insurance by industries, aligned companies or around a common cause.
With increasing insurance premiums while exclusions increase and claims decrease, Discretionary Mutuals created by aligned associations, organisations and industries are a new force in long-term protection from risk and loss.
Discretionary Mutuals are not to be confused with discretionary trusts
They are legally different structures and operate in different ways as alternative risk transfer options.
Read the detail on the differences between Discretionary Mutuals and discretionary trusts here.
Insurance taxes, like stamp duty, do not apply to Discretionary Mutuals. Nor does income tax. This is a significantly lower tax burden compared to insurance companies.
Plus, Discretionary Mutuals can be less expensive to set up, capitalise and operate than an insurance company.
The discretion to manage the structure and exposure to risk allows the Discretionary Mutual to maximise its buying power for reinsurance (insurance that the Mutual buys to protect itself from excessive claims).
The primary way for Discretionary Mutuals to be funded is via the contributions paid by members for their risk protection cover.
At the discretion of the Mutual, contribution payment methods may be created to suit the operations of the industry. For example, farmers may pay contributions of cash and forward grain contracts.
Capital can also be raised by issuing Mutual Capital Instruments to investors without affecting its member-owned status.
With a lower tax burden and operating costs than an insurance company, funding is less under pressure from operational expenses, leaving more capital in the Mutual and available to pay claims.
Both the aggregate liability of the Mutual and reinsurance limits are capped , so it does not exceed the funds pooled from the contributions and MCIs to protect itself from the risk of a major claims event.
Discretionary Mutuals have been used for many years in Australia and are an accepted alternative risk protection product.
The risk protection products are regulated and can only be offered by organisations with specific licenses issued by ASIC. As with insurance, there must be a Product Disclosure Statement for members.
As the pool of funds from the premium grows, Discretionary Mutuals can provide extensive benefits to members that are beyond what is available in the traditional shareholder-owned insurance market.
To mitigate sudden financial peril, professionally operated Discretionary Mutuals are a rising force in the market for risk management and are being embraced as a viable alternative to insurance by industries, businesses and organisations that share a common cause.
If you are a member of a community, business or industry that is looking for viable, alternative to insurance, there are two ways we can help:
1. Find out if membership in one of our existing Discretionary Mutuals suits your needs or,
2. We can create and operate a new, branded Discretionary Mutual on behalf of your community, industry or common cause aligned member base.
To discuss your specific instance, please email us at Hello@picniclabs.io.
