A discretionary mutual fund is a pool that members pay into to cover each other's losses, where the fund decides at its discretion whether to pay each claim. It is not insurance: members have a right to have a claim considered, not a right to be paid. Councils, professions and industry groups use them where insurance is scarce or expensive.
This article is general information, not legal or compliance advice. Check the current text of the code, standard or legislation, and take advice for your situation.
Key takeaways
- A discretionary mutual fund pools members' contributions and pays claims at its discretion, through what is often called a certificate of protection.
- According to APRA, a discretionary mutual fund offers "discretionary cover", an insurance-like product where the fund decides whether to pay.
- APRA ceased its data collection from discretionary mutual funds in 2016, after consulting the industry.
- According to the Small Business and Family Enterprise Ombudsman, members of a fund "may or may not" have their claim approved, at the board's discretion.
- The Business Council of Co-operatives and Mutuals launched a voluntary good practice guide for fund operators in December 2022.
What is a discretionary mutual fund?
A discretionary mutual fund, or DMF, is a fund that members contribute to so it can meet their losses, where a board decides each claim at its discretion. Members usually receive a certificate of protection rather than a policy. They have a right to have a claim considered, but no contractual right to be paid.
The difference from insurance is the discretion. According to the Australian Small Business and Family Enterprise Ombudsman, under insurance "a policy holder has a contractual right to have their claim paid" if the terms are met. Under a DMF, members may submit a claim to the board, "which may or may not approve the claim, at its discretion".
DMFs are often set up where insurance is unavailable or poor value. A group with a shared, well-understood risk, such as councils or a profession, can pool it and manage it closely. Because a DMF has no shareholders to pay, it can run on slim margins.
How is a DMF different from insurance?
A DMF differs from insurance in its legal promise, its regulation and its governance. Insurance is a contract enforced by law and regulated by APRA. A DMF offers discretionary protection, sits largely outside insurance regulation and is governed by its members. Many DMFs still buy insurance or reinsurance above what the fund retains.
- Legal promise. Insurance: A contractual right to be paid valid claims; Discretionary mutual fund: A right to have a claim considered; payment is discretionary.
- Document. Insurance: Insurance policy; Discretionary mutual fund: Often a certificate of protection.
- Regulation. Insurance: Insurer authorised and supervised by APRA; Discretionary mutual fund: Not regulated as an insurer.
- Who owns it. Insurance: Shareholders or, for a mutual insurer, members; Discretionary mutual fund: Members.
- Large losses. Insurance: Insurer's capital and reinsurance; Discretionary mutual fund: The fund, often backed by insurance or reinsurance above its retention.
The discretion cuts both ways. It lets a fund respond flexibly to unusual losses. However, a member cannot force payment, so the fund's governance and reputation matter more than a policy wording.
How are discretionary mutual funds regulated?
DMFs are not regulated as insurers. APRA collected data from them for several years, but according to APRA, it ceased that collection in 2016 after consulting the industry. Some DMFs provide financial services that bring other obligations, so each fund should take advice on its own position. The sector also has a voluntary good practice guide.
The legal definition turns on discretion. Under the Financial Sector (Collection of Data) Act, a fund is not a discretionary mutual fund if a contributor has a right in law or equity to be paid. That definition was used for APRA's data collection.
Self-regulation fills part of the gap. On 15 December 2022, the Business Council of Co-operatives and Mutuals launched a voluntary good practice guide for DMF operators. It followed the Small Business and Family Enterprise Ombudsman's work on DMFs as a response to insurance shortages.
Who uses discretionary mutual funds?
Councils, professions and industry associations use DMFs most. Local government mutual schemes pool councils' property and liability risks. Professional groups use them for indemnity-type risks. Industry groups, such as amusement and leisure operators, have considered them where insurance became unavailable or unaffordable.
Insurance shortages drive interest. According to the Small Business and Family Enterprise Ombudsman's October 2021 report overview, the amusement, leisure and recreation sector sought government support to establish a DMF after many members faced closure without cover.
DMFs have limits. Many laws and leases require a business to hold insurance, which a DMF cannot provide. The Ombudsman noted that such rules would need to change to allow DMF membership instead. As a result, a DMF suits some risks better than others.
How do claims work in a discretionary mutual fund?
A member lodges a claim with the fund, which assesses it against the fund's rules and past decisions. The board, a committee or a delegated claims manager then decides whether to pay, and how much. Many funds use a claims manager or TPA to handle claims day to day, while keeping the final discretion.
Fairness and consistency are the tests. Because members cannot enforce payment, they rely on the fund treating similar claims alike and explaining its decisions. Records of the facts, reasons and decision-maker are therefore central.
Claims software helps keep those records. ClaimsGateway (claimsgateway.com) builds cloud claims software for insurers, TPAs and self-insured organisations, and its self-insured and mutuals page describes its approach.
Other options exist too. The mutuals claims software list compares them.
Frequently asked questions
Is a discretionary mutual fund insurance?
No. A discretionary mutual fund offers discretionary protection, not insurance. Members have a right to have a claim considered but no contractual right to be paid, and the fund is not regulated as an insurer. Many funds buy insurance or reinsurance above their own retention to cover large losses.
Who regulates discretionary mutual funds?
DMFs are not regulated as insurers by APRA, and APRA ceased its data collection from them in 2016. Funds that provide financial services may have other obligations, so each should take advice. The Business Council of Co-operatives and Mutuals publishes a voluntary good practice guide that some funds follow.
Can a DMF refuse a claim?
Yes. A DMF decides each claim at its discretion, so it can refuse a claim even where the loss falls within the type of risk it covers. Members can expect the claim to be considered fairly and in line with the fund's rules, and should ask for the reasons for any refusal.
Are DMFs covered by AFCA?
It depends on the fund. AFCA handles complaints about its members' financial products and services, and a DMF is not an insurer. Members should check whether their fund is an AFCA member or offers another dispute process. The fund's rules and certificate of protection usually explain how disputes are handled.
Who uses discretionary mutual funds?
Councils, professions and industry associations use them most. Local government mutual schemes pool councils' property and liability risks, professional groups cover indemnity-type risks, and industry groups have considered them where insurance became scarce or unaffordable. Members usually share a well-understood risk and can manage it together.
About the author
ClaimsGateway builds cloud claims management software for insurers, underwriting agencies, brokers, TPAs and self-insured organisations in Australia and New Zealand. Every regulator figure in this article links to its source, and every vendor fact was checked on the vendor's own site on the date shown.
Related reading
- What is self-insurance?: when an organisation pays its own losses.
- Captive, self or mutual: three ways to retain risk compared.
- Self-insured claims software: systems for organisations handling their own claims.
Sources
- APRA. "Discretionary mutual funds." Consultation page, last updated 27 March 2020. https://www.apra.gov.au/consultations/discretionary-mutual-funds
- Australian Small Business and Family Enterprise Ombudsman. "The Show Must Go On: Is a discretionary mutual fund the solution to the insurance crisis facing Australia's amusement, leisure, and recreation sector?" Report overview, October 2021. https://www.asbfeo.gov.au/sites/default/files/2021-11/DMF%20Report%20Overview.pdf
- Financial Sector (Collection of Data) Regulations, declaring discretionary mutual funds. 2018. https://legislation.gov.au/F2018L00736/asmade/2018-06-08/text/original/pdf
- Business Council of Co-operatives and Mutuals. "Conduct code for mutuals launched as 'traditional' premiums rise." 15 December 2022. https://bccm.coop/?p=75488
