Mutuals insurers provide capacity, but require capitalization

LONDON—Public entities having difficulty finding capacity in the traditional insurance market have an option: form a mutual, the chairman of the U.K. public entity risk management association said.

With budgets already tight for public sector entities, however, the costs of capitalizing an insurer and potential added volatility might be an impediment, said Simon Davis, chairman of Sidmouth, England-based Alarm and risk manager at Llangunnor, Wales-based Dyfed Powys Police.

In 2007, 10 London boroughs established London Authorities' Mutual Ltd. But, RMP filed suit challenging local authorities' right to participate in the mutual under their statutory powers, as well as through procurement rules. LAML was placed into runoff in 2009, although legislation was passed later that year to grant local authorities the authority to establish and participate in mutuals. The U.K. Supreme Court also clarified procurement law in 2011.

“Local authorities should continue to consider mutuality as an alternative approach to financing their risks and exposures, particularly in the light of market conditions,” said London-based Martin Fone, chief executive and senior underwriter at Charles Taylor Services Ltd., which managed LAML. “However, unless mutuality particularly resonates with the mood music of the time, it requires some significant opinion-forming catalyst to generate momentum. The replacement of one A+ rated insurer with another is not likely to be that catalyst,” he said.