An upcoming webinar will dispel myths about insurance alternatives – including that discretionary mutual funds are intended to tackle uninsurable or bad risks.

The free 45-minute webinar, Alternative Risk Transfer – Debunking the Myths About Insurance Alternatives, is hosted by Insurance News and Picnic Labs and takes place at noon this Thursday.

Picnic says that, using property as an example, an organisation could be considered a bad risk or uninsurable if:

• It has a high volume of claims, preventable or otherwise
• Buildings have high natural perils or catastrophe exposure
• There is poor maintenance history
• There is limited COPE (construction, occupancy, protection and exposure) data available
• Valuations are not current or do not reflect market data
• An incumbent insurance provider or reinsurance provider has a change in risk appetite for a specific industry.

Discretionary mutual funds (DMFs) are financial services organisations that issue risk protection as an alternative to insurance. A DMF is collectively owned by its customers, who are referred to as members.

Like all financial services organisations, DMFs require a capital base to operate. Members pay a contribution for risk protection, which forms the basis of the operational capital.

This capital covers things such as small claims and reinsurance for large single losses or catastrophes, Picnic says.

Member contributions may be underwritten using actuarially determined risk-based pricing drawing on the usual data of claims history, valuations, COPE data, and catastrophe and perils exposure. The contribution amount can be based on the genuine risk of each member.

These three factors – capital, risk-based pricing and reinsurance – determine the long-term viability of a DMF.

“Anything that would deplete the capital, like having members with lots of claims, will make the DMF unviable to operate,” Picnic says.

“This means genuine bad risks and uninsurable organisations are not suitable members for a DMF, as the capital base would be quickly eroded.”

Because DMFs are non-profit organisations, after claims and fees are paid, surplus funds are retained in the DMF.

The surplus is used for the benefit of all members – such as reduced renewal contributions, increased risk retention in the mutual and correspondingly reduced funding of reinsurance, or adding new products. So organisations that are “good risks” are the preferred members of a DMF.

“Sometimes, industries or organisations that have been deemed as ‘bad risks’ are misunderstood, and therefore mispriced in the general insurance market,” Picnic says.

“Such risks may, in reality, be ‘good risks’ and eminently suitable for DMFs. In this circumstance, the underwriting model of a DMF may create a different view of an organisation’s risk.”

Register for the webinar, which will feature observations from Picnic Labs CEO Charles Pollack and Picnic’s chief actuary Simone Collins, here.