With
each passing day, managing risk is becoming increasingly critical. One of the
most important and widely used tools of managing risk is insurance. Hence,
today we see availability of insurance for almost everything from life, health,
home, automobile, climate mitigation, electronic gadgets, data, travel, among
host of other everyday things. While the most widely used insurance products
are based on the principles of risk transfer to a third party or an underwriter
for a premium, the oldest form of insurance is based on redistribution or risk
sharing. It is known as Mutual or Cooperative insurance where a group of people
come together to support one another through a mutual contribution.
In
case of insurance through a joint stock company, the insurer charges a premium
to provide a risk coverage to the insured for a pre-defined event. In case of
the occurrence of that event, the insurer pays the sum assured. If the said
event doesn’t occur, the insurer gets to retain the premium. In a mutual
insurance, the group of individuals together pool a sum and in case of the
event happening, pay the predefined sum assured. In case the event doesn’t
occur, the pool is retained as reserve for the benefit of the participants in future.
A
detailed comparison of the two models of insurance across various parameters is
as follows:
Sr.
No. |
Parameter |
Joint-Stock
Company |
Mutual
Organization |
1 |
Ownership of the company |
Owned by shareholders of the company who
may or may not be policyholders. |
Owned by the members/policyholders. |
2 |
Management of the Organisation |
Appointed by shareholders of the
company. |
Appointed by the policyholders of the
organisation. |
3 |
Seed Capital |
Comes from the shareholders of the
organization. |
Comes from the policyholders. In certain cases, it may come from a
donor or philanthropist. |
4 |
Surplus / Profit |
At the discretion of the shareholders.
It can be retained as reserves and/or distributed as dividends to the shareholders. |
Surplus or profit is mostly transferred to
reserve account for future use. A good reserve is used to increase the ambit
of the services to members The organization can also choose to reduce
subsequent premiums. |
5 |
Deficiency / Loss |
In case of deficiency or a loss, the
shareholders are required to contribute additional funds to make good the
deficit. |
In case of deficiency, the organization relies
on its accumulated reserves. In case there is not enough reserve then
members take a prorate cut in their claims. In rare case mutuals can borrow to pay
from their future reserve and surplus. |
6 |
Financial Stability |
The organisations are governed by the
regulatory policies of a country/region and hence comply with the minimum
capital adequacy requirements and other financial considerations. |
In regions where they are regulated, the
financial stability is defined by the regulatory requirements. Places where they are self-regulated, a
contingency / emergency fund is created to meet the requirements. In
addition, the size of the mutual can affect its financial position. For e.g.:
if it’s too small, then it is vulnerable. |
7 |
Incentive Design for Management Team |
Since the stock company is for-profit,
the financial performance is an important parameter in the design of the incentive
structure. The incentive is often linked to the financial health of the
organization. |
If non-policyholders / external team
manage the mutual, then the honorarium is generally fee based which can be
fixed or a percentage of the premium collected. The financial performance of
the mutual may not affect the incentive structure. |
8 |
Claim Settlement |
The process of claim settlement depends
on whether the policy is cashless or on reimbursements basis. If it’s
cashless, the processing is fast to meet the requirement but reimbursements
may take a longer duration depending on why the claim was raised to various
heads of expenses within the claim. |
Depending on its size and financial
capacity, a mutual organization may choose to offer claim settlement either
through cashless or on reimbursements basis. However, mutuals in India often
prefer to work on the reimbursements basis so as to avoid moral hazards. The
reimbursements for pre-approved conditions are prompt, ranging from 24-72
hours, unless in exceptional cases. |
9 |
Conflict of Interest |
The financial performance of the
organization depends a lot on reducing the number of claims; this often
results in delay and many times outright denial of the claim. Policyholders
being aware of these facts don’t shy of embellishing their claim amounts. Organizations have to spend a substantial
amount on investigation and fraud detection. Litigation also is not uncommon. Increased premium often results in lack
of affordability. |
Prime objective being protection and not
the profit Mutuals are less exposed to moral hazard issues. Mutuals focus on long term sustainability
and therefore look at overall wellbeing of their members by investing in
their wellness resulting in long-term lower claim and fraud ratio. |
10 |
Restrictions on the Age of Policy
Holders |
Primary aim being profit, generally,
insurance policy is not offered to segment where mortality rates or
healthcare costs are higher such as toddlers and senior citizens. In case if
the policy is offered, the premium is very steep. |
There are no such restrictions on the
age of a policyholder from becoming a member of the organization. |
11 |
Designed on Inclusion or Exclusion |
A joint-stock company is for-profit,
there is often incentive in denying a claim. Hence, the design is always
exclusionary in nature so as to avoid/reduce the risks arising out of likely
or higher claims. Often, policies are not sold to people on the basis of age
or pre-existing conditions to reduce the financial strain on the business. |
The primary aim of a mutual is to serve
the members/policyholders, and hence the policies are inclusive in nature to
support the members financially in their times of need. Restrictions on the
basis of age or pre-existing medical conditions are often limited. |
12 |
Transfer / Retention of Risk |
Once an individual/group buys an
insurance policy, the risk is transferred to the insurance company. |
The policyholders, who are also the
owners, retain the risk. The risk is shared amongst the
members/policyholders. |
13 |
Diversification |
The policyholders can be a diverse set
of people spread across different geographies and may belong to varied
professions and lifestyles. Hence, the risk of concentration in the portfolio
is lower. |
As most mutuals start with a set people
who belong to the same region / profession, the portfolio carries a risk of
concentration. Occurrence of an event specific to the community/region or
profession can cause a financial setback to a mutual. |
14 |
Frauds |
The prevalence of fraud in a stock
company is high. The frauds happen both at the level of the policyholders as
well as the service provides/hospitals to extract higher sums. |
Since the policyholders are often known
to each other, the chances of a fraud go down substantially as the members’
risk being eliminated from the group. |
15 |
Policy Design |
While the need and requirement for a
policy originates from the people, the policy design is generally top to
bottom. In addition, the standardization of policy for economies of scale,
eliminates / reduces the flexibility to modify it to suit the requirements of
different people. |
As mutuals are incorporated to meet the
specific needs and requirements of the people of a particular region or
profession, the design of the policy is always bottom to top. This provides a
lot of flexibility in designing the policy to meet the needs of the
policyholders. |
16 |
Voting Rights |
Voting rights are directly proportional
to the shareholding in the company. One vote for each share held.
Policyholders can have a representative body to vote on issuance of
governance. |
Each member has only one vote. |
Observations
While
the underlying aim of both forms of institutions is risk protection, their
approaches vary. Both the forms of insurance have a critical role in an economy
and they continue to flourish together, especially in North America and Europe.
Presently in India, insurance is available through joint stock companies, but
the first insurance company (Bombay Mutual Life Assurance Society) formed in
1870 was a Mutual/Cooperative Organisation. There are a few small social
organisations, which are offering insurance on the principles of mutuality.
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