Mutual insurance is a form of insurance protection in which participants join together and create their own fund to cover each other’s losses. In Russia it is governed by Article 968 of the Civil Code and Federal Law No. 286-FZ of 29 November 2007 “On Mutual Insurance”. Let us look at how it works and who may find it of interest.

What a mutual insurance society is

A mutual insurance society (OVS in Russian) is a non-profit organisation that insures the property interests of its members. Its key feature is that policyholders are also members of the society. You cannot buy a mutual policy without joining. Under Article 968 of the Civil Code, members are insured directly on the basis of membership, unless the founding documents provide for concluding insurance contracts.

Differences from an ordinary insurer:

  • Purpose. An insurance company is a commercial organisation aiming for profit. A mutual society is set up to protect its members’ interests.
  • Clients. A mutual society insures only its members.
  • Governance. The supreme body is the general meeting of members; participants themselves influence the rules, rates and use of funds.
  • Use of surplus. Funds remaining after payouts and reserve building are used in the members’ interests rather than distributed as dividends to shareholders.

Legal framework

  • Article 968 of the Civil Code — general provisions: individuals and legal entities may insure their property and other property interests on a mutual basis by pooling funds in a mutual insurance society.
  • Federal Law No. 286-FZ — the legal status of mutual societies, how they are created, membership, governing bodies, specifics of insurance.
  • Law No. 4015-1 — general requirements for insurance market participants, licensing and supervision.

A mutual insurance society is an insurance market participant. It operates under a Bank of Russia licence and is subject to requirements for financial stability, insurance reserves and reporting.

What can be insured

The types of insurance a society may offer are determined by law and by its charter and insurance rules; most often these are property and liability insurance for members. A mutual society may carry out compulsory insurance only in cases expressly provided for by law (paragraph 4 of Article 968 of the Civil Code).

How funds are formed

Members pay insurance and other contributions, the amount and procedure of which are set by the charter and insurance rules. These funds form the insurance reserves and funds from which payouts are made. If funds are insufficient, the charter may provide for additional contributions from members. This is an important difference from an ordinary policy, where the price of insurance is fixed in the contract.

Who mutual insurance suits

  • groups of homogeneous participants with similar risks — farmers, carriers, shipowners, homeowners’ associations;
  • industries where commercial insurers offer expensive or narrow cover;
  • participants willing to get involved in governance and risk control.

Internationally, mutual societies are widespread in shipowners’ liability insurance (P&I clubs), agricultural insurance and life insurance. In Russia, the mutual insurance market is still small compared with commercial insurance companies.

Pros and cons

Advantages

  • insurance “at cost” — without paying for shareholders’ profit;
  • the ability to tailor terms to participants’ needs;
  • members’ control over claims settlement and spending.

Limitations

  • limited capital compared with large insurers;
  • concentration of homogeneous risks: a single event may affect many members at once;
  • the possibility of additional contributions if funds run short;
  • the need to organise governance, accounting and reinsurance independently.

How to check a mutual society before joining

  1. Find the society in the Bank of Russia’s directory of financial market participants and check its licence.
  2. Study the charter and insurance rules: types of insurance, contribution procedure, conditions for additional contributions, payout procedure.
  3. Review its financial statements and general meeting decisions.
  4. Find out how reinsurance of large risks is arranged.

If a predictable price and large capital matter more for you, consider conventional business insurance or agricultural insurance programmes. Overviews of key insurance laws are collected in the “Laws” section.