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Australia’s amusement and leisure industry insurance dilemma: Is a Discretionary Mutual Fund the solution?

The Australian Small Business and Family Enterprise Ombudsman (ASBFEO) has provided preliminary support for a Discretionary Mutual Fund (DMF) to address the insurance crisis plaguing Australia’s amusement, attractions, and tourism sector. 

The interim report, The Show Must Go On released by ASBFEO examined whether a Discretionary Mutual Fund (DMF) can be a long-term solution and discusses the legislative changes that states and territories must implement to ensure it is ‘fit for purpose.’ It also emphasised the need of municipalities and showground administrators recognising and accepting a DMF as a viable alternative. 

ASBFEO Bruce Billson explains, “there is a clear and present risk facing the amusement and recreation industry since an inability for these businesses to obtain insurance cover means that many of the attractions people know and love won’t be able to operate.

“The lack of insurance coverage could lead to the closure of businesses in the amusement and leisure sector, significant job losses – particularly in regional areas, stranded assets and loss of economic activity generated by metro and regional shows and amusement parks.”

He adds, “We are calling for submissions from those in the industry so we can further understand any issues before we release a final report to the government,” and that the interim report seeks urgent feedback from all stakeholders by November 3rd on the ideas and questions raised in the report.

“As businesses look to re-open after lockdowns, this issue is a shattering blow for those small and family businesses in the amusement, leisure and recreation sector which will be forced to stay shut because they can’t get insurance.

“There is a very real possibility the show won’t go on – something has to be done for the show to go on. A DMF may represent the only workable solution.”

What does the report say?

The Australian Small Business and Family Enterprise Ombudsman (ASBFEO) is now reviewing a request by the Australian Amusement, Leisure and Recreation Association (AALRA) to establish a DMF as a solution to the sector’s acute and immediate need for insurance. 

The interim report found the lack of affordable insurance was not the fault of the amusement industry but due to a hardening in the global insurance market. Few insurers are prepared to insure the industry, and premiums – when they are available – have jumped by up to 200 per cent.

The report further states that “in many instances the policy is priced such that it may as well not exist because small operators have no capacity to pay for the cover they need to continue operating.” s.

“In the case of the amusement, leisure and recreation sector, there isn’t an offering that provides full coverage.”

Public liability insurance coverage is a legal requirement for the operation of rides at showgrounds and fixed installations, both through contractual obligations and obligations imposed on councils and other landowners by state and territory governments.

DMFs operate to provide cover on a discretionary basis to a group of individuals or organisations that have a similar risk profile. Under a DMF, members who meet requirements would have access to a certificate of protection, enabling them to operate these amusement rides.

What is a Discretionary Mutual Fund?

A Discretionary Mutual Fund (DMF) is a financial vehicle used for risk management. It is essential to understand that DMFs are not insurance. As a result, a DMF is an alternative risk financing technique. 

DMFs are formed by companies or associations with a common commercial goal. More than one entity/person is required for mutuality; these entities/people become members of the DMF.

Members of DMFs contribute funds to form an Aggregate, which is used to manage the primary layer of risk. This capital is frequently reallocated from the purchase of insurance to the DMF. DMFs operate on a discretionary basis to provide risk cover to a group of individuals or organisations via a certificate of protection.

Moreover, DMFs do not offer an insurance product — Under traditional insurance coverage, a policyholder has a contractual right to have their claim paid upon meeting the policy’s terms and conditions. However, under DMF coverage, the members are entitled to submit a claim for indemnity to the DMF’s board, which may or may not approve the claim.

Is a DMF the solution?

In 2020, the Australian Small Business and Family Enterprise Ombudsman (ASBFEO) conducted a self-initiated inquiry into the small business insurance market, finding significant dysfunction in several sectors. 

According to preliminary findings, a DMF is appropriate for the industry represented by the Amusement, Leisure, and Recreation Association (AALARA). A DMF could be a viable solution to the industry’s present insurance dilemma. The suitability and long-term viability of a DMF solution for the sector will be heavily influenced by:

  • Support for legislative reform from states and territories, and willingness to accept the solution by councils and land/showground managers. 
  • The final makeup of the membership. 
  • The cost of premiums and reinsurance, the management of the DMF and any management costs, and the size of any claims in the first years of operation. 

What are the benefits of a DMF? 

DMFs are often created to address market failure or significant dysfunction. DMF members are accepted or rejected by the Directors, who have significant industry knowledge, allowing them to more closely monitor risk profiles of those covered. 

DMF membership can also be predicated on compliance with a range of risk management and training protocols to lessen the risk profile across the membership. 

Because DMFs do not have shareholders to make returns to, they are able to operate on slim margins, potentially reducing costs to members. They can offer additional services to their members, adding value over the protection offered. 

What are the challenges facing DMF?  

For the first year, the DMF should be fully-funded, with a reasonable amount of start-up capital required. Many sections of state, territorial, and local government legislation and regulation require businesses operating on their property to carry insurance, which a DMF cannot provide. 

To address this, several elements of legislation and regulation could be modified to allow DMF participation in lieu of insurance where insurance is unavailable or the market is considerably dysfunctional. A DMF should be established in such a way to ensure its ongoing durability. Consumers may have concerns about the discretionary nature of coverage.

Okay, but are there any other alternatives? 

A range of alternative options have been considered to address the insurance issue, including a captive, self-insurance, group insurance schemes, a reinsurance pool, tort reform to address risks, implementation of a National Injury Insurance Scheme, and hybrid models. 

The Show Must Go On interim report and overview can be found at www.asbfeo.gov.au/reviews/discretionary-mutual-fund-review. Submissions should be sent to: inquiries@asbfeo.gov.au by COB 3 November 2021.

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Yajush Gupta

Yajush Gupta

Yajush is a journalist at Dynamic Business. He previously worked with Reuters as a business correspondent and holds a postgrad degree in print journalism.

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