Mutual insurance is an organizational and legal form of insurance, the essence of which is the combination of individuals or legal entities in mutual insurance societies to protect their property interests. At the same time, each policyholder becomes simultaneously a participant in such a society, which is an organization of a non-commercial type, since it does not aim at making profit. This method of insurance protection is based, as a rule, on the professional, commercial or territorial unity of its participants.
The causes of the need for mutual insurance:
- the lack of proposals for this or that type of insurance services from commercial insurers;
- dissatisfaction with the quality of insurance services offered in the insurance market;
- the desire to provide themselves with insurance protection at lower insurance premiums (which is achieved by reducing overhead costs by not having to pay for insurance intermediaries and non-profit insurance operations).
Agreements, in the content of which the features of mutual insurance are viewed, existed in ancient times. These agreements were treated as real estate, as well as commercial and loan transactions. Their meaning consisted in the desire to disperse between all stakeholders the risk of possible damage, when the joint property interests are exposed. Most brightly, mutual insurance was developed in ancient Rome, where it was widely used in various trade unions and colleges. One of the main goals of such colleges was to provide their members with a worthy burial, as well as material support in cases of illness, injury, etc. In accordance with the existing rules, members of the professional collegiums, upon admission to them, paid a lump sum of payment, and then paid monthly installments. In the event of the death of a member of the college from its fund, heirs were paid a pre-agreed amount. Similar insurance was carried out in ancient Rome in military and religious organizations. Medieval insurance was also characterized by the fact that the insurer had not yet been separated from the insured, the members of this or that collective insured themselves and did not set out to profit, that is, insurance operations were carried out on the principles of mutual insurance. The most widespread such insurance was received in the countries of Western Europe in X-XII centuries.
In modern terms, mutual insurance began to form in Western Europe and the United States in the middle of the XVIII century. The first mutual insurance pool in case of fire was founded in the USA in 1752, and the first company of mutual life insurance – in the Great Britain in 1762.
Mutual insurance is a common form of conducting insurance operations in many countries of the world. So, by 1990 the number of mutual insurance societies in Western Europe exceeded 2 thousand, and in the USA it was about 2 thousand. Mutual insurance accounted for almost 90% of the life insurance market in Japan, almost 60% in the USA, more than 50% in Canada, almost 50% – in the UK; in property insurance more than 50% of the Swedish market, more than 40% – in Finland, almost 30% – in the USA. On the principles of mutual insurance, in particular, operate marine insurance clubs, insuring the civil liability of shipowners, many of the largest life insurance companies, they are insured by farmers in the US and a number of European countries. Mutual insurance societies are known to carry out pension insurance, property insurance against fire and other hazards, professional liability of notaries, doctors, accountants, auditors.
Mutual insurance is one of three known methods of creating insurance products (along with self-insurance and commercial insurance).
Characteristic features of the method of mutual insurance at the present stage of development:
- the association of financial resources by insured persons in a specially created organization-insurer for the insurance of their property interests by means of calculating the damage among themselves;
- formation of an insurance fund that is jointly owned by all members, at the expense of their contributions;
- Absence of each insurer separately of the sole right to dispose of this fund and its use;
- the right of the insured to take part in the management, the disposal of this fund and the use of the fund;
- the existence of each of the insurants of material liability for the obligations associated with the creation of insurance products from the funds of this fund;
- distribution of liability for obligations related to the creation of insurance products, between the insurer and its insured.
In mutual insurance, each person (legal or physical) for the insurance of property interests unites his material resources with the resources of others who have a similar intention with respect to their own property interests. Such an association takes place on the basis of the agreement of its participants that with the purpose of creating insurance products they co-operate with their means in the formation of an insurance fund.
The right of ownership of each insured (i.e. each member of the created community) to the funds contributed to the fund is transformed into the right of joint ownership of the entire community of insured persons to the funds of this fund. This determines the right of each insured to participate in the creation of insurance products (i.e. in the formation of an insurance fund, management and disposal of it) in conjunction with other policyholders. The existence of these rights stipulates that every insured has responsibility for the insurance obligations of the community, which he bears in solidarity with other insurants (members of the community). Thus, the principle of reciprocity is manifested through mutual rights to the funds of the insurance fund and mutual responsibility for obligations associated with the use of these funds.
The peculiarity of the method of mutual insurance is that the policyholder is both a buyer of the insurance service and a co-owner of an insurance fund created within the framework of a separate economic entity performing mutual insurance. This feature manifests itself, in particular, in the fact that the conditions of the relationship between the insurer and the insured can not be formalized in individual insurance contracts between the insurer and each of the insured, but in the charter of the insurer.
When using the method of mutual insurance, the management of the production of insurance products takes place on the basis of decisions taken at the general meeting of the insured or their representatives. Responsibility for the performance of obligations on insurance payments is borne primarily by the insurer in the person of a mutual insurance organization. However, if the funds of the already formed insurance fund are insufficient for the performance of insurance obligations, all members of such an organization (they are also insurers) jointly bear subsidiary responsibility for its obligations.
Mutual insurance is called non-commercial because insurants, being co-owners of the fund of money, participate in its creation not for the purpose of making a profit on invested capital, but for the purpose of creating an insurance product for themselves. However, if, as a result of the activity of a mutual insurance organization, there is an excess of income over expenditure, the direction of expenditure of such excess is determined by the general meeting of insurers-members of this organization. As a rule, such funds are spent on achieving the organization’s statutory goals.
Historical and modern foreign and domestic practice shows that the method of mutual insurance is the basis of the activities of mutual insurance organizations that have different organizational and legal forms. Unlike the self-insurance method, in case of mutual insurance, the insurance product is created not by one insurer for own use, but by the community of insurers for use by those members who will have the right to do so in accordance with the agreements reached beforehand. Accordingly, with mutual insurance, the insured is not at the same time an insurer. The insurer is a mutual insurance organization registered in a certain organizational and legal form.
In today’s insurance market, mutual insurance is an alternative to commercial insurance. On the one hand, mutual insurance narrows the financial and economic environment of commercial insurance. Therefore, mutual insurance for commercial insurance is a competitor. On the other hand, mutual insurance accelerates the development of insurance relations, contributes to the progress of the economy and expands the general insurance field, including for commercial insurance organizations. In addition, mutual insurance serves insurance interests, where the activities of commercial insurers are unprofitable or risky enough.
To ensure the competitiveness of their insurance products, commercial insurers reduce their prices, make insurance more honest. In addition, strengthening the role of the mutual insurance market encourages commercial insurers to expand the number of commercial products, improve insurance technologies, provide comprehensive insurance services, etc.