Cp12/38

[dgw201]

Hello - would appreciate someone's help on this.

As I understand, CP12/38 suggests that mutuals should be allowed to continue writing non-with profits business when their with-profits business is in decline, rather than closing to new business.

If this is the case, would the mutual eventually be expected to demutualise? Otherwise, who will "own" the business?

 

[dok87]

Hello - would appreciate someone's help on this.

As I understand, CP12/38 suggests that mutuals should be allowed to continue writing non-with profits business when their with-profits business is in decline, rather than closing to new business.

If this is the case, would the mutual eventually be expected to demutualise? Otherwise, who will "own" the business?

The proposal is to facilitate Mutuals to make it easier to focus more on writing NP business when WP business is in serious decline. I think one of the aims is to reduce/stop the increased levels of demutualisation (Scottish Widows, Standard Life, Norwich Union etc.) and closures to New Business. The Regulator believes closure does not serve the interest of NP members interests and mutuals provide genuine competition to proprietaries as well as choice for consumers .

The scheme will require mutuals to identify from the Composite Fund which part is deemed "With-Profit Fund" and which part is "Mutual Members Fund". Not all the mutual members will be With-Profit Policyholders so I should think there may be non With-Profit members out there who may have beneficial "interest" when WP policy membership nears "extinction". Currently the rights of the WP policyholders within the mutual are so high that these other members are pretty much non-existent - which is one of the objectives the the regulator is hoping to address.

All said, I still support the notion that it may come a point when demutualisation may be inevitable, so the scheme is probably just deferring this activity (hopefully, for a very long time) to keep the mutuality concept going.

 

[dgw201]

Thanks dok87

Although I'm still not clear on what will happen in the following situation:

NWP continues to be written, WP business continues to decline (lets say it's run-off completely).
We're left with a "Mutual Members fund". There are no sharholders or WP policyholders. NWP policyholders are only entitled to guaranteed benefits. Who owns the remaining capital?

 

[dok87]

If fund segregation is attainable then I think within the "Mutual Members Fund" there will be different membership levels with varying status of "ownership". Some will be with-profit policyholders with an interest in the "With-Profit Fund" too. Others will be NP members entitled to their usual guarantees as well as some form of reward/control, not necessarily bonuses but say regular cash payments, voting rights etc which the traditional NP policyholder will not have. So, I think as long as members exists within in the "Mutual Member fund" (not necessarily WP policyholders nor are they shareholders) the capital belongs to someone.

However over the very long term, I would think funds are likely to demutalise; via an IPO (floatation) and operate as a public company or the management could buy into it via Venture Capital, say, so that they will assume ownership and operate as their private company. They may also be acquired/merged.

I agree its not clear-cut as we are meant to believe Mutuality is all about With-profit policyholders. I have tried to convince myself this is how it operates. May be other folk can correct or add to it.

Hopefully this throws more light.

Regards