Any mutual organisation must be watching with great interest the current debate over the future of t...
Any mutual organisation must be watching with great interest the current debate over the future of the sector in the UK, with the battle constantly focused on insurance companies and building societies.
Ignoring the temptation for short-term gains, there is no doubt that the long-term benefits of mutuality outweigh those of conversion to a public limited company.
Members of friendly societies benefit from clear advantages which, it could be argued, would be eroded by converting to plc status. For instance, it is the case with many societies providing income protection that while their contracts provide valuable protection for members against loss of income due to illness or injury, at the end of each year all profits are returned to members in the form of dividends and interest. There are no outside shareholders who have their own agenda, not least of which is maximising dividends.
The provision of income protection insurance is particularly suited to delivery by a mutual organisation where the level of service provided goes beyond that necessary for profit maximisation.
The Holloway contract
With a question mark hanging over the ability of the Government to maintain welfare provision at current levels, the time has never looked more positive for forward-looking mutual organisations. There are a number of friendly societies that specialise in offering day one and short deferred income protection insurance. The contract was originally known as the 'Holloway contract'.
This is essentially a with-profits income protection insurance contract named after George Holloway, a Gloucestershire MP and businessman who founded the first Holloway society in the early 1870s. The contract is offered by a small number of friendly societies.
Although it is much the same as that offered over 100 years ago, it is only in recent years that the name 'Holloway' is becoming more recognised in the financial services sector as a bona fide contract suitable for the income protection needs of many clients.
Friendly societies, all of which work on a mutual basis, provide shares or units for which their members pay regular contributions with each share denoting their monthly contribution rate, level of sickness benefit and the amount they will receive at retirement in the form of tax-free bonuses.
Pooled contributions
Societies pool their contribution and investment income, pay their management expenses and their sickness claims and apportion the profits on an annual share basis which provides for a fund at retirement that is currently free of all taxation.
While various life companies offer with-profits income protection, such contracts have been around for no more than 25 years and offer a small return when compared with Holloway plans.
Some societies give the choice of a wide range of deferred periods and act in the same way as life companies by increasing premium rates for more hazardous occupations and female lives. But most societies still offer the same contract that was available before the turn of the 20th century, which gives an immediate benefit payment from the first day of a claim resulting from illness or injury, the same rates for both males and females and has no occupational loadings.
The majority of societies have only a handful of excluded occupations and these would typically include the armed forces, police, fire fighters and oil rig workers. This means that the traditionally difficult risks to place, such as workers in the construction industry, engineers and taxi-drivers, can be covered.
The basic contract normally pays full sickness benefit for the first six months of a claim, reducing to half-benefit for the next six months and then reducing to approximately one-third of the original benefit until recovery, death or retirement - whichever occurs first.
However, societies have refined their contracts in recent years so that IFAs' clients can obtain substantial income protection cover that pays benefits from the first day of a claim resulting from illness or injury and which maintains full cover throughout the incapacity or to retirement age. Many also offer optional indexation to all applicants linked to the Retail Price Index so that the benefit and benefit in claim increase.
Value for money
Although some contracts have been modernised, many societies still offer traditional features. For example, the scope of what the society can or cannot do and the interaction of the members with the society are contained within a rule book, which is generally available on request.
Holloway societies - which have no shareholders to account to - are generally able to act in a way that ensures the best possible value for money is provided to their members. Although some societies will offer level annual premium rates, it is normally the case that rates increase with age to reflect the increasing morbidity risk.
Members generally feel this is a much fairer way of charging for their cover as it is difficult to plan five years ahead, let alone the 30 years ahead which may be necessary to accomplish any savings through paying level rates.
It should become apparent from the nature of the Holloway contract that those who would benefit most from this type of cover would be the self-employed and those in employment who rely on State benefits during periods of illness or injury. In addition, and very importantly, it should not be forgotten that these contracts do not generally attract the typical 50% loading for females, meaning that in many instances, these contracts will look extremely competitive even for Class 1 and 2 occupations.
Health advice services
A number of friendly societies have also developed health claims advisory services, offering professional services to members covering preventative healthcare and also advice at the claims stage. These societies have had great success in getting members back to work rapidly as a result of such counselling services, which is, of course, a particularly important consideration to the self-employed, who like to guard their clients from the approaches of the competition at every possible opportunity.
Counsellors often liaise with the claimant's GP to provide a private medical examination with a relevant specialist at the society's expense and then arrange a treatment programme, the cost of which could be borne partly by the claimant, depending on their personal circumstances.
Although Holloway societies can offer their valuable cover to a much wider spectrum of applicants because they generally do not discriminate against occupation, it should be noted that their underwriting is broadly in line with that carried out by life companies. With regard to regulation, societies are regulated by both the Personal Investment Authority and the Friendly Societies Commission.
The increasing interest IFAs are expressing in income protection contracts offered by friendly societies will undoubtedly ensure that their popularity continues to soar.
David Macgregor is national sales manager at Pioneer Friendly Society
