Discretional Mutual Fund (DMF)

Discretional Mutual Fund (DMF)

What is a Discretionary Mutual Fund?

A DMF is one alternate risk transfer to a conventional insurance.
Simply speaking the basis of DMF is a pool of likeminded businesses who are risk averse acting in a self-insured styled arrangement.

Approved members must embrace risk mitigation, be prepared to finance the first years or so of the alternate solution. Then subsequent years generally revert to costs which are significantly below commercial insurers.

The solution is based upon a promise to pay, and is underpinned by reinsurance and managed by the members own management council. It is professionally managed by actuaries, and other risk professionals who manage the mutuals activities such as claims, risk management strategies  and loss assessment and claim payments for the benefit of the members.

Mutuals can produce significant insurance premium savings because typical costs items are excluded from the members contribution costs such as stamp duty, emergency services levies, and broker commissions.

Each member makes an annual contribution to the fund based on the nature, risk profile and size of the business and in return, the fund provides a statement of cover and assumes liability for their risks. These annual payments create the aggregate pool, out of which claims, and operating expenses are paid. Reinsurance is designed and arranged so that member liability is capped, DMF’s buy excess of loss cover from reinsurance companies.

Why use a DMF?

The term ‘discretionary’ is used because the insurer (through a board of directors) uses its discretion to decide whether any claims made will be paid. The DMF also decides how any surplus money that hasn’t been paid out in claims will be used. It could be reinvested for the benefit of members, such as in programs to improve risk management, or used to lower the future annual payments each member makes to the fund.

Typically, the more members a DMF has, and the more diverse they are, the more successful it is, as the risks the DMF assumes will  be spread more broadly. A DMF is a long-term proposition – to access the full benefits of membership, a term of five to 10 years is recommended.

How does a discretionary mutual fund differ to traditional insurance?

Under a traditional insurance arrangement, an insurance company agrees to take on the risks of policyholders in exchange for the payment of an insurance premium and commits to provide a payout in the event of a valid claim being made.

Insurance companies invest the money received from insurance premiums, with any financial returns distributed to shareholders, or kept for their benefit. If a policyholder makes a claim, it’s likely their insurance premium will increase the following year, and sometimes insurance premiums increase even if a policyholder hasn’t made a claim.

We provide general advice and can assisted access to the creation of DMF structures with our key strategic partners.  Specialized skills are required to protect consumers and design a tailored  program and  to deal and advise in what is termed by ASIC as miscellaneous financial product.

Benefits of a discretionary mutual fund:
A DMF may help some industries facing rising insurance costs manage their costs if member annual payments are set lower than insurance premiums and  because it isn’t legally classed as insurance, DMFs attract lower regulatory charges.
A DMF can typically provide more extensive benefits and industry-specific coverage due to its specialized nature.
By reinvesting surplus funds from the DMF into risk management initiatives, industries can improve their collective risk and reduce the incidence of losses.
A DMF is industry-owned and based on the principle of mutuality, it’s subject to a lower tax burden.