DISCRETIONARY MUTUAL FUND
Frequently Asked Questions
What is a Discretionary Mutual Fund?
A Discretionary Mutual Fund (DMF) is a way of providing insurance-like cover that is managed within the Baptist family. Effectively, we would establish our own co-operative to provide protection to members. A DMF is not insurance, but an alternate way of managing risk and protecting property. There are many DMFs which have been established to do just this. For example, ACS (Australian Christian Services) has been providing this type of cover for its constituents for many years. Through this vehicle they have been able to provide consistent and cost-effective cover to their constituents.
DMF members (churches and organisations currently insured through BIS) would contribute funds (like a premium you pay for insurance policies) to create a pool of funds. These funds are utilised to manage property and contents claims up to a pre-determined amount. Should this amount become exhausted, either by way of an excessive number of claims or by a single massive claim, additional insurance will be in place to provide protection. This is called Reinsurance and is used by all insurers to help protect against major losses.
Why is BIS considering a Discretionary Mutual Fund?
Our December 2022 Newsletter provides information around this question. Please use the link below:
How will a Discretionary Mutual Fund work?
Simply put, the DMF would be like an ‘insurance co-operative’ for the Baptist Ministry. Payment for any claim would no longer be by the insurer but paid out of the DMF.
DMF ‘members’ (churches and organisations currently insured through BIS) would contribute funds (like a premium you pay for insurance policies) to create a pool of funds. Claims would be paid out of this pool. These funds are utilised to manage property claims up to a pre-determined amount.
BIS would administer the DMF on behalf of the members (constituents), and the Fund itself would be protected by re-insurance in case of catastrophes such as cyclones, bush fires and the like. Any surplus (profit) after considering operating fees, claims paid, claims reserves, etc, would be available to be redirected and utilised in reducing contribution costs over time and pay for risk management services with the goal of reducing claim costs.
What protections are there? Is this safe?
DMF members contribute funds to create a pool of funds. These funds are utilised to manage property and contents claims up to a pre-determined amount. This amount will be determined by an external actuary company who specialises in DMFs. They will look at our claims history, current funds, our portfolio of properties, etc and advise on the appropriate limit for claims payout. Should this amount become exhausted, either by way of an excessive number of claims or by a single massive claim, additional insurance will be in place to provide protection. This is called Reinsurance. Reinsurers are employed by all insurers to help protect against major losses. If our limit is reached, the Reinsurer will step into fund claims above that amount.
This model means that the DMF is protected should the collected funds be insufficient to meet all claims costs.
Will my premium go down?
Any contribution to a DMF (premium) would initially be based on the number of members and the size of the asset pool. Preliminary investigations indicate that, as a DMF is not an ‘insurance’ product, member contributions (premiums) may not be subject to government taxes such as Stamp Duty and Fire Services Levy, which may provide an initial saving. However, BIS is waiting on Legal and Actuarial advice to confirm this. The idea of a DMF is that members may benefit from economies of scale and increased Risk Management behaviour as the DMF is essentially member’s own money. The more members there are, the bigger the fund to pay out claims, the bigger the base to smooth premiums and the greater the chance for a surplus.
The establishment of the DMF itself would go a long way to protecting members from the volatile Insurance market. A DMF can operate on a lower profit margin and is not required to make returns for shareholders, which also reduces costs to members. The size and performance of the DMF would have an impact on future contributions. Whilst we can guarantee that staying with a traditional insurer will mean premiums will steadily and sometimes significantly increase each year, the goal of a DMF is to minimise this risk.
Will my cover change? Will I have less cover?
The basis of settlement/paying out claims will not change. For example, all members will receive protection based on their own building and/or contents valuations. The Product Disclosure Statement (policy document) which includes information regarding key features, covers, exclusions etc, of the protection has been compiled and is undergoing review. We will be using the same principles for determining claims as we currently do against policy wording.
Will the potential DMF cover all insurance, or just the property and contents portion?
At this point we can confirm that property cover will be included in the DMF. However, due to an increasingly hardening and unstable market movement, it has meant that we will need to look at the feasibility of including liability cover into the Mutual if the insurance market won’t support it.
How would I make a claim?
The claims process will not change. Your local BIS Insurance Manager will remain your contact for lodgement as well as settlement of claims. Any claims settlement would be at the discretion of BIS on behalf of the DMF (members), rather than an Insurer.
How do I make a complaint?
BIS is currently developing a Complaint Handling and Dispute Resolution Process for members of the DMF to raise any concerns that they may have regarding the services or protections provided and have those concerns considered by someone not involved in any initial discussion.
What will my church/organisation need to do to become part of the DMF?
If we establish a DMF, BIS will draft a member agreement document. Each individual constituent will need to sign this document and return to us by the date specified. To facilitate this we will use an electronic contract service named Docusign to distribute the agreements. Any constituent who does not sign up, will be unable to join the DMF. For those constituents who do not have access to a computer, we will contact you direct.
Prior to this, comprehensive information about the DMF will be made available with the opportunity to ask clarifying questions.
We understand that each constituent has different approval processes. For example some churches have delegated these types of decisions to the church leadership, others need to go through church meetings, etc. Schools and Aged Care Facilities also have their own internal and external approval mechanisms. We would ask each constituent to make allowances for your relevant processes so that agreement documentation is able to be signed and returned by the due date.
What if we just own contents and don’t have a building?
The reason we are looking to establish a DMF is that we may not be able to obtain a ‘property’ insurer next Renewal. The term property includes both buildings and contents. So this means that even if you just have contents, you will also need to be a part of the DMF should that be our only option.
What if I don’t sign up to the DMF?
If we are unable to source a property insurer as well as other potential covers at our 30 September 2023 renewal and have to set up a DMF, for any constituents who are currently insured through the BIS scheme, should they decide not to become a member of the DMF they would need to source their own cover for all insurance classes listed below:
- Public Liability
- Professional Indemnity
- Management Liability
- Corporate Practices Protection
- Personal Accident – Volunteers & Youth
- Cyber (for churches only)
The reason BIS can provide insurance cover at a substantially lower premium than what you would get in the market for property and the covers listed above, is based on the number of constituents that are a part of the overall scheme. If we have a scheme where we break up the package, this will severely reduce our capacity to obtain competitive rates and potentially make the above covers unaffordable to churches.
So for those members who choose not to be a part of the DMF, they would need to source cover for all covers that form part of our Standard Package.
Will the surplus be reserved in the mutual for future claims?
Any surplus will be retained within the mutual fund and used for risk management programs and smoothing premiums as well as future claims. The mutual will be regularly audited to ensure that we are managing our reserves effectively and for the benefit of its members.
Is BIS removing the insurer and moving into that role?
BIS already manages claims up to a limit (self-insured amount) of $1.2M, so we are already acting in that space and operating like a mutual. Whilst BIS is not the insurer, we already have the experience required to manage the mutual.
How many churches are required for the mutual to be viable?
This is currently being determined by our actuary, Finity. For example, they will look at historical claims data, building and content valuations and map out for us what the premiums should look like in the first year. The more members in the mutual, the more beneficial it will be!
Is the mutual sustainable?
Based on actuarial analysis and number of members and working with a Reinsurer, the mutual will be sustainable
Will BIS be branching out to other faiths?
At this time we are not considering other faiths. However, this may be a consideration at a later stage.
What is the timing of the mutual?
We are aiming to have the mutual operating by this renewal 30th September 2023. If that is not possible, we will move to the 2024 renewal. We will also approach the insurance market for renewal terms as a contingency.
Will the investments be managed by BIS and the mutual board?
The mutual will have its own board and the board will control all investments. We intend for the same board as BIS to be the board of the mutual to streamline processes, to protect the level of insurance industry experience and qualifications so that we are a viable partnership for reinsurers as well as ensuring consistency.
Will the mutual be risk rated?
We are still considering the best method of rating and input from our actuary is part of this consideration.
How long is BIS’ licence valid for and has consideration been made for legislative changes ?
Australian Financial Service Licence (AFSL) is renewed annually, but we have an ongoing extension for miscellaneous financial products of which the mutual falls under. As with all changes that have occurred within the financial services industry, organisations will have time to adapt to any future legislative changes.
Is there a risk that churches and the Baptist ministries may be asked to make further financial contributions in years where claims are more than expected?
BIS has been operating for many years, so we have historical claims information that our actuary will look at to ensure we have enough funds between member contributions (each year) and reinsurance. It is not our intention to make a call on members for further contributions in a policy period (unless you make changes to your property cover that result in extra costs).
Who needs to vote on joining? Is it church members or board or other?
The answer to this is defined by your organisation’s governance structure. Each church/school/organisation has a governance structure particular to the legal structure of the organisation (eg unincorporated association, company etc). The nature of that structure will determine who has authority to bind the insured entity. For example, for some churches the decision will be made by their Council, or Pastor, others a church-wide meeting. Once the member has agreed on joining the DMF, a nominated leader will be required to sign the DMF Agreement.
Can you comment again on viability” i.e., running out of money if there is an earthquake?Your Title Goes Here
In looking at the viability of establishing a DMF, BIS obtained the services of one of Australia’s leading actuarial firms to model the claims history of BIS to see its anticipated capital requirements. The mutual will be well capitalized, with access to additional funds if required. Further¸ for large claims the DMF obtains its own insurance protection to protect member funds in case of a large loss. If the costs of claims rise to a certain agreed level between the DMF and the Reinsurer, the Reinsurer will step in to pay claim costs. This ensures the protection of the Mutual and members’ funds.
Is there a framework for surpluses to best support members?
The board of the DMF have an obligation to manage member contributions to the DMF. As well as overseeing the payment of claims and the prudent investment of contributions, the board will consider when and how it may spend any surplus. Distributions on any surplus funds will be considered for a range of activities for the benefit of members, eg premium smoothing, risk management/education initiatives to reduce claims costs.
Will there be a tailored protection wording for the DMF. Will this be on an entity or individual basis?
The Protection wording is based on all the Baptist entities and will provide protection across all the segments being, Aged Care, Care, Education and Churches/Ministries. The property policy wording has been the basis for BIS providing coverage to Baptist entities to date, which has been amended to `protection wording’ for the DMF. The protection wording will be a part of the membership agreement pack that will be sent out to you prior to you considering joining the DMF.
Will we receive 2 invoices? One for property and contents cover through the DMF and another for all the other classes of cover?
No, we are going to provide one invoice that will clearly identify both the DMF and insurance components. However, if you have a motor vehicle, marine or a standalone cyber cover, you will receive additional invoices for these products as per the current practice.
Will the Constitution, PDS and FSG be made available?
Yes, these documents will be made available through the member pack agreement.
Does there need to be a minimum number of constituents required to sign up to make the DMF viable. What will happen if the target is not reached?
Our modelling has been based on both 100% and 85% of member take-up and also calculated asset-based percentages. The actuary used to complete our modelling has advised that the DMF is still viable for a lower uptake of 75%. At this stage we are confident of those entities that have provided an indication that they will join (85% take-up) will accept the offer to join the DMF when it is sent at the start of September. In the unlikely event that we do not reach this target, we will revert to the traditional insurance program which will have lesser coverage, higher excess, and increased premiums.
Could you provide some more information about any risk associated with a DMF and mitigation strategies being put in place?
Capital Risk: We will run a Hybrid model which means we will be purchasing reinsurance cover to make sure we don’t run out of capital. We will engage an actuary on an annual basis to assist us with our capital modelling. We also have underwriting and claims-handling guidelines and processes in place that need to be followed when paying out any claims or making an ex-gratia payment.
We have an extensive selection of Risk support materials on our portal to reduce risk within the constituent’s space – help desk along with the DMF having their own set of Risk triggers and mitigation strategies that has been agreed by the Baptist Mutual board.
Protection wording will be in place, so any damage to property still needs to meet the terms and conditions of the protection wording in order to treated as a claim.
Within the DMF we have our own set of protection layers. Excesses will be applicable for each claim payable by the relevant constituent. As has been advised we will also have reinsurance in place. If we hit a year where claims costs exceed our agreed limit (otherwise known as an aggregate deductible), the reinsurer will step in to pay those claim costs.
The Reinsurer will protect the DMF in the same way an Insurer will step in for example to cover a liability claim.
How will the split of premiums/contributions to the DMF be determined e.g. Size of organization, Asset value, claims history or other.
Our modelling will be similar to our current modelling. The contribution amounts will be based against asset values and risk associated to the property being covered, as well as taking into account the constituents’ claims history. Our actuary is also assisting BIS in these calculations.
Is it correct that the DMF would consider claims as discretionary, as opposed to indemnity cover. What are the disadvantages in the approach that were considered?
The Protection wording is based on all the Insurance wording currently provided to Baptist entities and will provide protection across all the segments being, Aged Care, Care, Education and Churches/Ministries. The protection wording will be the basis for considering all claims that are submitted. There will be limited discretionary scenarios where a payment is made or not made. These will be determined on a case-by-case basis and may involve an established Claims Committee or the Baptist Mutual board for their final decision and sign off. All decisions made will be for the overall benefit of the members.
Can members be called on to contribute to pay excesses or costs of claims under the DMF and what protection is in place for members around this other than reinsurance?
Once a member makes their ‘contribution’ payment to join the DMF, it operates the same as it would for traditional insurance cover. A once-off fee is paid for cover calculated around your specific property/contents portfolio for that renewal period. Should a claim arise, the relevant constituent will pay an excess amount, then claim costs will be covered by the pool of funds collected from members’ contributions. Should the cost of the claim exceed $500,000 (the point where the Reinsurer will cover claim costs), then claim costs above this point will be covered by the Reinsurer. Members will not be asked for additional funds to contribute to a claim.
Other members will not be at risk in covering another member’s claim. Enough funds will be included in the DMF to cover property claims, with the Reinsurer stepping in at our agreed limit. No other members will be at risk for those who are making claims.
The Fund is fully protected by the Reinsurer.
Is 85% taken up of total policy (Asset) value or 85% of current policy holders?
We have worked with our actuaries and have completed capital modeling on both scenarios at 85% member take up against the overall Asset values across the entire portfolio.
Are individual members disadvantaged if there is a discretionary component on claims?
All decisions will be made in the best interest of the members within the Mutual. Any discretionary payments will be made on a case-by-case basis and any amount paid will not have an impact on the pool of funds in the DMF. There is a review process within the DMF allowing for any member that has its claim denied the right to seek review by the actual board of the DMF.