GIM9020 - Mutual insurance: what is mutual insurance?

Mutual insurance is quite common. There is a mutual element to all insurance, in that most of the funds contributed by policyholders are returned to them, as a class, as claims payments. A fairly pure form of mutual insurance is found in the P & I Clubs (Protection and Indemnity Clubs), which originated as groups of ship owners. The concept now applies more widely, for instance among health professionals. Each year the members of the club contribute (in proportion to likely liability) whatever amount is needed to meet the losses insured by the club. This is usually in the form of an initial contribution followed by later ‘calls’ if needed to maintain the common fund.

More familiar is the mutual insurance company, the members of which are its policyholders. If a mutual insurance company generates profits then it is the policyholders who are entitled to share in those profits. In practice this entitlement is unlikely to produce any distributable benefit, as accumulated profits tend to be re-invested in the business, there normally being no other source of capital. Such companies are nevertheless mutuals. It is the entitlement to share in profits and to assets on a winding up that is significant. On the other hand, the mere fact that a company has no shareholders (and may be referred to as ‘a mutual’) does not necessarily mean that it operates its business activities on a mutual basis.

The question of mutuality does not depend on the size of the insurance company or the number of its policyholders. Some very large insurance companies carry on their business on a mutual basis, though numbers have been declining. Friendly societies are mutuals, and can write certain general insurance business, for example accident, short term sickness and miscellaneous financial loss classes.

Policyholders may be denied a right to participate in surplus until they have been members of the company for a qualifying period. Provided that such a provision does not operate to confine the benefits of membership to a continuing minority of members this is consistent with Lord Wilberforce’s reasonable relationship requirement (GIM9010).

A mutual concern need not trade only with its members. Lord Macmillan’s description (also at GIM9010) makes no reference to membership. However, where business is conducted through a body corporate, membership is significant. Unless the contributors to the fund control the company that operates it as voting members, it is unlikely that the company will carry on a mutual business. It follows that the members as a class must be identical with the contributors/participators as a class. As policyholders, the contributors’ rights will be governed solely by their contract (or policy) with the company, while any surplus will belong in the first instance to the company, and will be distributable in accordance with its constitution at the will of the voting members to members entitled under the constitution. In the case of an insurance company aiming to carry on mutual business policyholders will generally need to become voting members in order to secure their entitlement to participate in surplus.