What is mutual insurance
Mutual insurance is insurance in which the participants pool their own funds to cover each other's losses. Article 968 of the Civil Code of the Russian Federation allows individuals and legal entities to insure their property and other property interests on a mutual basis by pooling the necessary funds in a mutual insurance society (OVS in Russian).
Detailed rules are set out in Federal Law No. 286-FZ of 29 November 2007 "On Mutual Insurance", in force since 1 January 2008.
Key provisions of the law
Legal status of a mutual society
- A mutual insurance society is a non-profit organisation. Its purpose is not profit but insurance protection for its members.
- Members of the society are at the same time its policyholders: a mutual society can insure only the interests of its members.
- Mutual societies are insurance business entities (Article 4.1 of Law No. 4015-1) and may operate only under a Bank of Russia licence for mutual insurance.
- The law limits the number of members, so a mutual society is a closed community rather than a mass-market insurer.
Insurance under the charter and under contracts
A mutual society can insure its members in two ways:
- directly under the charter — the insurance rules then form part of the charter, and the society conducts only one type of insurance;
- under insurance contracts — if the charter provides for this and the conditions of the law are met.
Compulsory insurance
A mutual society may conduct compulsory insurance only where this is expressly permitted by the federal law on the relevant type of compulsory insurance.
Contributions and reinsurance
Members pay the contributions provided for by the charter. The charter may provide for additional contributions to cover the society's losses. The society may cede part of the risk to a reinsurer holding the appropriate licence.
How a mutual society differs from an insurance company
| Parameter | Insurance company | Mutual insurance society |
|---|---|---|
| Purpose | Commercial activity | Insurance protection for members |
| Clients | Any policyholders | Members only |
| Financial result | Profit for shareholders | Stays in the society and serves its members |
| Risk of insufficient funds | Borne by the insurer | May require additional contributions from members |
Who mutual insurance suits
The model works well for participants in one industry with similar risks who find it hard to get suitable cover on the market: agricultural producers, carriers, shipowners, members of professional associations. Internationally, shipowners' mutual insurance clubs, for example, have long operated on a mutual basis.
Advantages: rates close to the participants' actual loss experience and the ability to set the rules themselves. Disadvantages: the limited size of the society, the need to take part in its management and the risk of additional contributions in a bad year.
Practical tips
- Before joining, check that the society holds a licence in the directory of financial market participants on the Bank of Russia website.
- Study the charter: types of insurance, the procedure for additional contributions, conditions for leaving and getting funds back.
- Find out to whom the risk is ceded in reinsurance.
- Compare the society's terms with offers from insurance companies — sometimes a conventional policy turns out to be simpler and cheaper.
If you need protection for business risks, see the sections insurance for business, agricultural insurance and reinsurance. Other law overviews are in the Laws section.