Mutual Insurers And Corporate Governance

Mutual Insurers And Corporate Governance

This note is produced by the Association of Financial Mutuals, to provide an explanation of the way mutual insurers are governed.

Being owned by your customers places a different form of accountability on mutuals. Rather than block ownership by institutional shareholders, member companies of AFM have between them over 8 million owners - and in most cases operate a one-member-one-vote approach. That means ownership is very widespread, and it is not possible for a minority of owners to exert undue pressure on a company's strategy. It also means that mutuals often need to explore a range of routes to understanding what their owners think about the strategy of the business and the way it is run.

The Annual General Meeting is part of that, and each year over a quarter of a million members across AFM companies take part in these. Many mutuals operate customer panels or run customer roadshows to canvass opinion, whilst some are still established on a branch basis, where members come together locally to help manage the business. Mutuals are democratic organisations, where there are many opportunities for ALL owners of the business to have a say in how it is run. Indeed, for many AFM companies, having customer-members on the Board is an effective way of ensuring the interests of the members is taken into account.

AFM research indicates that people trust mutuals, and that whilst the public in general is more confident in the actions of mutuals compared to PLCs, members of mutuals in particular recognise that mutuals by nature are more trustworthy. That also means customers of mutuals are more likely to be advocates of the organisation, and more likely to recommend the company to friends or family.

Whilst many AFM members are very small, a condition of membership of the trade body is that each organisation must comply with our corporate governance code. The code is an annotated version of the Financial Reporting Council's UK Corporate Governance Code, which means that even very small mutuals are seeking to deliver standards of governance consistent with those in big listed companies.

The annotated Corporate Governance Code was first issued in 2007, and is based on the underlying principles of all good governance: accountability, transparency, probity and focus on the sustainable success of an entity over the longer term. In the words of the Financial Reporting Council: "To achieve good governance requires continuing and high quality effort."

The stated levels of compliance with the self-regulatory annotated Code have been consistently high. In 2012 members of AFM indicated that on average they complied fully with 91.2% of the principles in the Code. Where a mutual is not in full compliance with any provision in the Code, they are expected to provide a statement in their annual report and accounts explaining why they were unable to comply, or why they felt their approach has been beneficial to their business. We provide a report each year on compliance to the financial regulators and to HM Treasury.

Amongst some of the most notable achievements we have seen as a result of the Code are:

  • There is a culture of good corporate governance across mutuals, and all members including very small ones, aspire to the same standards as PLCs wherever appropriate.
  • There has been a significant increase in the professionalism of Boards, with rigorous recruitment, ongoing training and appraisal of Directors, and greater time committed by Directors to their role.
  • The Board is assisted in their role by a range of sub-committees that ensure arrangements for risk, audit, remuneration and recruitment are all effective.
  • There has been an increase in the frequency of Board appointments, and in the gender diversity of Boards.
  • Boards receive more timely and relevant information, which enables them to support the executive more effectively, and to challenge more productively.
  • The annual report and accounts now gives clear insight into the way that an organisation is run and the risks the Board is managing, as well as in providing a background to key decision-making.
  • Boards have improved the way they engage with members about the key issues that affect them and the business strategy, and continue to develop more effective ways of presenting the value of membership.
  • In contrast to other financial sectors, there have been no reported significant failures in governance of AFM members within the regular reviews undertaken by the regulator.

Where there are no shareholders in an organisation, the management can focus their efforts on running the company in the best interests of their customers. It also means there is no annual dividend to pay: AFM has researched the impact of the 'dividend drag' in shareholder owned insurers. This indicates that the equivalent of 3p in every £1 of premiums is extracted from the balance sheet to cover the costs of dividends. The extra 3% retained within the business enables the organisation to provide better investment rates, take less risk investments, make lower charges, deliver high standards of customer care, and serve customers that might otherwise not have access to savings or insurance products.

Perhaps the clearest litmus test as to the culture of any organisation and how well it is run is the attitude of its staff. AFM sponsored research by Oxford University in 2012 into the view of employees in the mutual insurance sector. Over 1,000 staff took part in the survey, which yielded the following results:

  • 90% of staff believed the organisation was run in the interests of its customers and members;
  • fewer than 10% believed their organisation lacked a clear statement about the importance of being a mutual or that the way it operated was not consistent with that statement;
  • only 4% disagreed that they were 'proud of the ethical record and reputation of the business'.

In short, mutual insurers have made enormous strides in recent years to evidence that the standards of corporate governance in the sector are strong- and balanced to the needs of their members.

Research by Opinium undertaken in January 2012 on behalf of AFM gave mutuals a net trust score amongst the public at large of +32, versus -5 for PLCs. The net trust score for mutuals amongst members of mutuals was +62. The Association of British Insurers ran a customer impact survey across its members for a number of years: results for mutuals across a broad range of customer satisfaction measures and advocacy scores were consistently higher than for PLCs. The last full set of data was published in 2009/10, and this showed that 60% of customers of mutuals would recommend their provider, compared to 53% of PLCs. 'Measuring Mutuality', Professor J. Michie and Dr W. Davies, Kellogg College, Oxford, November 2012,

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Corporate Governance Questionnaire Keyx



AFM Predecessors are Association of Mutual Insurers and Association of Friendly Societies

Annual election

Annual election of all board directors has become commonplace in PLCs, since it was incorporated into the Code in 2010. This was a reaction to governance failures and their contribution to the financial crisis. Annual elections give members an opportunity to react to the performance of the company and are also required for directors that have served for more than nine years.



Board includes committee of management.



The UK Corporate Governance Code (previously called The Combined Code), subject to the annotations made by AFM in the Annotated Corporate Governance Code (current version dated 2012).


Company means a mutual insurer and includes a friendly society.


Code Provision of the Code.



Diversity includes but is not limited to gender. Directors may differ in many important characteristics, such as educational and functional background, industry experience, social connectedness, insider status, gender, and race. The Davies report in 2011 put forward a voluntary target for gender diversity for the boards of listed companies of 25% by 2015.


Entrepreneurial leadership

The organising of a group of people to achieve a common goal using proactive entrepreneurial behavior by optimising risk, innovating to take advantage of opportunities, taking personal responsibility and managing change within a dynamic environment for the benefit of the organisation

Externally facilitated performance evaluation

An external facilitator brings rigour and struture to the performance evaluation of a board, as well as an independent and impartial perspective. Evaluation of the board of larger companies should be externally facilitated at least every three years. The external facilitator should be identified in the annual report and a statement made as to whether they have any other connection with the company.


Fair, balanced and understandable

This broad definition of the basis on which the annual accounts was prepared is intended to address the concern that the narrative report should reflect the board's considered view of the information that members and other users of the annual report and accounts needed, rather than being viewed as promotional in nature, and to ensure that the narrative and financial sections of the report were consistent.


Independent non-executive director

Member of the Board of Directors of an entity who is an outsider, meaning he or she is not an employee of or otherwise closely connected with that entity. An example is a broker sitting on the Board of a client company. Such directors are important because they bring unbiased opinions regarding the company's decisions and diverse experience to the company's decision-making process. In order not to have a conflict of interest, independent directors should not participate on the boards of directly competing businesses. Directors are typically compensated based on a standard fee for each board meeting, or on an annualised basis.



A Large Company is any mutual that does not meet the definition of a small mutual i.e. because it has gross premium income on average over the preceding three years of £20 million per annum or more and/or it has assets on average at the end of the last three financial years of £100 million or more.


Major shareholders

Although mutual insurers do not have shareholders, the principles underpinning the provisions of the Code are relevant and should be considered in relation to appropriate methods for facilitating direct member dialogue and involvement that may be in place (such as member forums or panels and/or delegate systems) and/or any members with significant membership rights. Also referred to as principal shareholders and significant shareholders in the Code.


Main Principle of the Code.


A recommendation from: "The Myners review of the governance of life mutuals published in December 2004"


Performance evaluation

Performance evaluation is a key means by which boards can recognise and correct corporate governance problems and add real value to their organisations. Boards who commit to a regular evaluation process find benefits in terms of improved leadership, greater clarity of roles and responsibilities, improved teamwork, greater accountability, better decision making, improved communication and more efficient board operations.


Senior independent director

The role of the Senior Independent Director includes the following:

  • Providing support for the Chair in the delivery of his or her objectives;
  • Ensuring the views of the other Directors are conveyed to the Chair;
  • Attending sufficient meetings with a range of members, perhaps in company with the Chair, to develop a balanced understanding of their issues and concerns;
  • Ensuring that the Chair is passing on the views of the members and especially that any concerns are conveyed to all Directors;
  • Ensuring that appropriate succession planning procedures are in place in relation to Board succession;
  • Carrying out the annual evaluation of the Chair in conjunction with other Non-Executive Directors while also taking account of the views of the Executive Directors; and
  • Taking responsibility for an orderly succession process for the Chair.


Small Company means a mutual with gross premium income of under £20 million per annum on average over the preceding three financial years and assets of less than £100 million on average at the end of the last three financial years.


Supporting Principle of the Code.

Statutory duties

The Companies Act 2006 codified certain common law and equitable duties of directors for the first time. The Act sets out seven general duties of directors which are:-

  • to act within powers in accordance with the company's constitution and to use those powers only for the purposes for which they were conferred
  • to promote the success of the company for the benefit of its members
  • to exercise independent judgement
  • to exercise reasonable care, skill and diligence
  • to avoid conflicts of interest
  • not to accept benefits from third parties
  • to declare any interest in a proposed transaction or arrangement.

The statutory duties do not apply to the directors of friendly societies, although they must comply with very similar duties under the common law.


Unfettered powers of decision

No one person should be able to make major decisions about the organisation on his or her own.

Unitary board

Unitary boards include both executive and non-executive directors and make decisions as a unified group. By comparison a two-tier board has a separate management and supervision board



"Year" means the financial year of the company in respect of which the questionnaire is being completed