Insurance News and Picnic Labs will host a webinar this month examining the risk protection offered by discretionary mutual funds, and how they are sometimes confused with discretionary trusts.

The free 45-minute webinar, Alternative Risk Transfer – Debunking the Myths About Insurance Alternatives, takes place at noon on Thursday September 26.

Discretionary mutual funds (DMFs) and discretionary trusts (DTs) are often confused due to the same words being used in different contexts.

Legally, DMFs are different to DTs. DMFs are usually:

• Not-for-profit, public companies limited by guarantee
• Operated under an Australian Financial Services Licence
• Governed by a constitution and board of directors that includes members. The board must act in the best interest of all members
• Collectively owned by members

Members are usually customers of the DMF. Together, all customers part-own the company and vote at annual general meetings, and have access to annual audited AASB17-compliant financials.

DMFs do not issue contracts of insurance; they provide discretionary risk protection. Discretion applies to:

• Product wordings that can be tailored to an industry
• All claims – the board has discretion on the treatment of claims

A DMF’s capital strategy routinely includes:

• Reserving, after fees and claims are paid
• Mutual capital instruments (MCI) investments
• Reinsurance 

MCIs allow mutuals to raise capital without affecting collective ownership.

“For decades, discretionary mutuals have provided proven alternatives to insurance in Australia,” Picnic Labs CEO Charles Pollack, the appointed manager of six DMFs, said.

Discretionary trusts

A trust is a legal relationship where a trustee holds something of value for the benefit of others – the beneficiaries.

The trustee is often a private company and is required to act in the best interest of beneficiaries.

DTs are a type of Trust that can be used to accumulate funds from beneficiaries to buy negotiated bulk-rates for insurance.

• The trustee typically has discretion over:
• Accepting insurance wordings and quotes
• Annual disbursement of any surplus funds after insurance premiums and commissions are paid

Confusion from common words

Both solutions use discretion, yet for different things:

• DMF: board discretion over management of claims
• DT: trustee discretion over acceptance of policies and quotes

Both refer to “mutuality”:

• DMF: mutual ownership by customers is the core legal attribute
• DT: mutual benefit for beneficiaries is the responsibility of the trustee

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