Models of Insurance

By Umar Farooq | ShariahCap Advisors

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

Ownership of the company

Owned by shareholders of the company who may or may not be policyholders.

Owned by the members/policyholders.


Management of the Organisation

Appointed by shareholders of the company.

Appointed by the policyholders of the organisation.


Seed Capital

Comes from the shareholders of the organization.

Comes from the policyholders. In certain cases, it may come from a donor or philanthropist.


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.


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.


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


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.


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


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.


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.


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


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.



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.



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.


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.


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.


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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