The unique characteristics of mutual insurers mean that some are being encouraged towards diversification by regulators and rating agencies, according to a report by Willis Re.
The report, subtitled Navigating the Pitfalls in Pursuit of Successful Diversification, examines the reasons why some mutual insurers are being encouraged towards diversification by regulators and rating agencies, and considers issues that need to be addressed by mutuals to ensure success in diversifying.
According to the report, regulations introduced in association with Solvency II and its equivalents around the world have encouraged some mutual insurers to consider exploring new lines of business or entering new territories in order to benefit from the potential relief in regulatory capital calculations that diversification can offer.
In addition, a greater level of diversification invites favourable consideration from rating agencies.
The report states that "committing capital to new lines of business or new territories, especially where the organisation may only have limited expertise or experience, is intrinsically riskier for mutuals given the relative importance of the capital at stake compared to non-mutuals".
John Haydon, one of the authors of the report, said: "The potential benefit from diversification relief in regulatory capital calculations makes this an ideal time to open a broad discussion on the issues faced by mutuals when contemplating diversification strategies."
The report states that, while reinsurance alone cannot resolve all the issues facing mutuals in the face of diversification, it can offer significant benefits in managing the process by recognising and reflecting on the unique nature of the relationship between a mutual and its members' capital.
The report will be a topic of conversation for the Willis Re team attending this week's 2012 International Cooperative and Mutual Insurance Federation Meeting of Reinsurance Officials in Paris, at which Paddy Jago, president of Willis Re, will deliver the keynote speech.
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