Chapter 1 — When Those Who Bear the Risk Govern the Promise
We increasingly buy insurance after completing a form and comparing a few prices on a screen. The transaction appears individual. Yet no contract stands alone. One person’s premium joins those paid by many other policyholders and contributes to a common capacity to pay. Behind every quotation lies a collective that the interface does not show.
Martine is looking for home insurance for the flat she has just bought. A comparison site asks for the address, floor area, storey, year of construction, value of the contents and the existence of a cellar or alarm. Some answers seem straightforward. Others do not. Does the study in her daughter’s former bedroom count as a main room? Must the cellar where she stores a few boxes be declared separately?
A few seconds after she submits the form, four prices appear. The first policy costs €112 a year. The others cost €168, €247 and €391. All mention fire, escape of water, theft and liability cover, which pays for damage caused to other people. The differences lie in the excess, meaning the part of a covered loss she must pay herself, the maximum payment, the situations excluded and the way property will be valued after a claim.
Martine opens the document attached to the cheapest offer. It runs to about thirty pages. She recognises the main terms, but cannot judge how much each clause matters. Will depreciation1 reduce the payment substantially? Is the garage covered as an outbuilding? How long will temporary accommodation be paid for?
She returns to the comparison table, looks at the prices, ratings and coloured boxes, then chooses.
She has not ignored the information. She has mainly read what the screen made easy to compare. The price was visible. The collective that would make payment possible was not. Nor could she see who owned the reserves, who would decide how any surplus was used or who might change the rules before the next renewal.
Martine has bought a contract from a company. If a fire destroys her home, however, the payment will not come from money kept in her name. It will come from premiums gathered in a portfolio, meaning the set of contracts and risks carried by the insurer. This collective is often called a pool. Those who do not suffer a loss will finance those who do. The relationship among policyholders remains largely invisible in the way the product is sold [1].
A family can rarely save enough to rebuild a home after a major fire. A large group can gather the necessary resources in advance because not every member will be affected at the same time. When losses remain sufficiently dispersed, their total cost becomes more predictable. This is the role of the law of large numbers. It does not make accidents disappear. It helps estimate what they will cost the group as a whole [2, 3].
The insurer must also pay operating expenses, establish technical provisions,2 retain capital that can absorb unexpected losses and purchase reinsurance when some claims could be too large to carry alone. Reinsurance is insurance bought by an insurer to share part of those losses with another company. Pooling does not remove the need for calculation or financial caution. It turns a loss that would be difficult for one household to bear into a collective expense that an institution can prepare for.
This operation gives power to whoever organises it. The insurer decides who may enter, which losses will be covered and which differences will alter the price. It also sets the conditions under which the common fund will be opened to a claimant. The issue is not only how money is gathered. It is who governs the promise.
Pooling is not confined to insurance companies. Some Amish communities share major medical expenses and the cost of rebuilding after a fire [4, 5]. In nineteenth-century Britain, friendly societies collected regular contributions and paid benefits during illness or after a death [6]. In southern Africa, burial societies finance funerals and may also organise meals, transport and support for the family [7].
These arrangements differ greatly. They nevertheless rely on the same basic elements. A group prepares resources before the loss, a rule determines when assistance is due and an institution keeps the fund together. Calculation is necessary. It is not enough. Someone must maintain the pool, oversee its use and answer for the decisions made in its name.
Who Builds and Owns the Pool?
From Wager to Provision
Insurance history is sometimes told as the almost natural application of probability to an old need for protection. Mathematicians learned to measure uncertainty, then insurers used their formulas. The transformation was less direct.
For a long time, insurance stood close to gambling in legal and moral thought. Putting money on a death, fire or shipwreck could look like a wager. Life insurance became legitimate only after protection for a family had been distinguished from speculation on the life of a stranger. The same financial technique could appear prudent when it secured a household and suspect when it allowed someone to profit from another person’s death [8, 9].
Insurance practice also preceded much of its present statistical machinery. Before 1840, French companies were already managing fire and life risks by limiting commitments, accumulating reserves, organising networks of agents and supervising their work [10]. They had neither climate models nor large digital databases. They still understood that a durable promise required selection, retained resources and the ability to survive bad years.
Probability later connected singular cases to collective regularities. It gave financial caution the form of a table, a premium or a provision [11]. It did not create the institution that assembled policyholders. It supplied a language through which that institution could calculate and justify its choices.
Every Insurer Pools, but Not Every Insurer Is a Mutual
Three related ideas must be distinguished. Pooling is the technique of gathering contributions to pay the losses of those who are affected. A company owned by shareholders, a mutual insurer, a public fund or a reinsurance arrangement can all organise a pool.
Mutuality is a form of ownership. In a mutual insurer, policyholders are also members of the organisation. They do not each own a freely tradable share in the manner of shareholders in a listed company. They own the institution collectively.
Mutualism adds a broader political ambition. It seeks to build through association a form of security that neither an ordinary market nor charity can guarantee on its own. Members need not know one another personally. François Ewald uses the idea of abstract mutualities for collectives connected by rules of contribution and protection rather than by close personal ties [12].
The difference between these forms does not lie in whether a pool exists. Every insurer needs one. It lies in who owns the resources, who appoints the leaders, where any surplus goes and whether policyholders can debate the rules.
Swiss natural hazards insurance shows that a common layer can be organised within a competitive market. Several natural perils are covered on broadly uniform terms. The premium for this part of the contract does not vary with regional exposure. A common mechanism also redistributes part of the claims burden among insurers and purchases reinsurance for the system as a whole [13].
Companies continue to compete over other parts of the contract. The choice is therefore not between a pure market and complete pooling. It concerns which part of the protection will remain common.
The mutualist tradition defended a move from assistance granted by others to a guarantee built among members. It treated mutual aid as a stable form of organisation rather than an exceptional act of kindness [14, 15]. Collective organisation does not remove rules, mandates or funds. It makes the location of power more important. Members must be able to know who decides and whether they can change the institution acting in their name [16].
Collective ownership alone does not guarantee democratic government. A large mutual can become a distant bureaucracy. Meetings may attract few members, information may be difficult to interpret and management may hold most of the practical power. Participation depends on procedures, countervailing powers and decisions over which members have a real influence [17–19].
Albert Hirschman’s distinction between exit and voice helps clarify the problem [20]. A dissatisfied customer may sometimes change insurer. A member should also be able to challenge an increase, exclusion or use of resources before leaving becomes the only possible response. Competition offers an exit to people who still have alternatives. It gives much less power to those who have nowhere else to go.
When Membership Becomes a Market Price
French distinguishes between prime, which suggests the price of a contract, and cotisation, which recalls membership in a fund or scheme. English does not draw the distinction as sharply, but premium and contribution still direct attention towards different relationships.
A premium invites the policyholder to compare what they pay with the service they expect to receive. A contribution recalls that several people finance an institution before knowing which of them will need the others. Both amounts must be calculated and both finance future payments. The difference lies in what becomes visible when insurance is described only as the purchase of a product.
From Assistance Granted to a Right to Claim
Confraternities, workers’ societies, occupational funds and fraternal organisations long provided part of the protection against illness, death and inability to work. They were often fragile, moralising and exclusionary. They nevertheless changed the position of the person receiving support. A member did not merely ask for charity. They could demand the application of a rule they had helped finance.
In the United States, fraternal societies provided protection to working people and immigrant communities that often struggled to obtain it from ordinary institutions [21]. For Black Americans, controlling a fund, bank or insurance company also meant controlling reserves, agents and the authority to recognise a loss in a market where Black policyholders frequently received more expensive or more limited protection [9, 22].
This autonomy had boundaries. A fund distinguished members from nonmembers, regular contributors from those who had fallen behind and accepted conduct from conduct it considered dangerous. In France, public authorities first tolerated, then supervised and eventually incorporated parts of working-class mutual aid into larger institutions [23, 24].
The history does not place pure solidarity from below against cold administration from above. Small associations could exclude and discipline. Larger schemes could broaden rights while moving decisions farther from those who depended on them. In both cases, the pool accumulated more than money. It gathered records, skills, paid positions and the authority to decide which misfortune would create a right to assistance.
In the late nineteenth century, large American companies sold small life insurance policies to working families, often to cover funeral expenses. The market was known as industrial life insurance. Agents visited homes each week to collect small payments [9].
This form of collection made protection available to households unable to pay a large amount at once. It was also expensive to administer. A substantial share of premiums financed agents and the management of thousands of small policies. More importantly, continued protection depended on regular payment. A loss of income could cause the policy to lapse3 after years of contributions.
Scandals in the life insurance industry led New York State to appoint an inquiry in 1905 under Senator William Armstrong. Its report, published the following year, documented concentrated managerial power, conflicts of interest and disputed uses of the funds entrusted to insurance companies. The inquiry led to tighter rules [25, 26].
For insured families, the problem did not consist only of spectacular misconduct. It also arose from the ordinary design of the product. A person could pay for years, lose a job, miss several instalments and discover that the protection intended for their family had disappeared. The contract had made insurance accessible, but its structure placed a large part of the risk on households whose income was already unstable.
This example shows why a small periodic payment is not enough to make protection fair. We must also ask what remains after an interruption, how much collection costs, whether cover can be restored and who controls the funds. Access to a contract does not ensure lasting membership in the collective.
The market form can hide this distinction. The policyholder sees a premium and a promised benefit. They see less clearly the rules governing resources between claims. Those rules determine whether a surplus strengthens protection, rewards capital, lowers contributions or finances prevention.
Solidarity, Surplus and Discipline
Who Owns the Surplus?
An insurance year does not end when the last visible claim has been paid. Money must remain available for claims that are still uncertain, files that have not been closed and years in which losses will be higher. After claims, expenses, provisions and reinsurance, however, a surplus may remain.
In a shareholder company, this surplus must be considered in relation to the capital supplied by its owners. It may be distributed to shareholders, retained or invested. In a mutual, policyholders are in principle the organisation’s residual beneficiaries. Resources left after its obligations have been met are retained or used on their behalf [27, 28].
Economic theory partly explains the presence of mutuals in insurance through this ownership structure. Policyholders find it difficult to observe the future quality of a contract or monitor how funds are used. Collective ownership can reduce the conflict between customers and outside owners [29, 30]. The solution remains imperfect. Managers may operate far from the members, while members may lack the time or information needed to oversee them.
The use of surplus matters especially when losses are rare but very large. A year without catastrophe can produce a strong result. That does not mean every remaining amount is free to distribute. Part of it supports a promise made for the exceptional year in which a fire, storm or flood affects many policyholders at once [2, 3].
Reserves therefore connect several generations of members. They were built by people who contributed during favourable years. They may be used for people who have not yet joined the institution. Distributing them too quickly can benefit present members while weakening those who remain when losses rise.
The opposite problem also exists. An organisation that accumulates resources without explaining their use becomes more distant from the people who finance it. Governing the surplus requires an account of what is retained for solvency,4 what stabilises contributions, what improves coverage and what reduces future risk.
Prevention makes the choice concrete. An insurer can wait for a fire and pay for reconstruction. It can also support detection systems, safer materials or work that limits the spread of flames. The immediate expense reduces a future loss that may never be directly observed. The benefit may also pass to another insurer when the member changes provider. These difficulties do not make prevention pointless. They show that it requires a longer horizon than the annual renewal.
A mutual may be better placed to connect this investment to the lasting interests of its members. It is not automatically led to do so. Current members may prefer an immediate reduction in contributions. Managers may favour growth or larger reserves. Collective ownership makes the choice open to discussion. It does not settle it.
Prevention and Control
Every pool must protect its resources. It must verify declarations, limit abuse and prevent conduct that endangers the promise made to other members. Mutuality is not an institution without discipline.
Contracts also change the behaviour they appear merely to cover. An excess may encourage maintenance or discourage the reporting of small losses. An inspection may reveal a hazard and lead to repairs. A prevention rule may reduce risk or become a condition that the policyholder cannot meet. The risk observed after the contract has been introduced already bears its imprint [31].
Fire mutuals linked compensation and prevention early in their history. In the United States, the Factory Mutuals were created by factory owners who believed ordinary insurers did not sufficiently recognise their investment in safety. They combined insurance, technical inspection, engineering and prevention requirements [32–34].
This history shows that classification does not always serve only to increase a price or reject an application. Inspection can identify a weakness, propose a correction and check that the work has been completed. It can also prepare the exclusion of a member considered too costly. The difference lies in the means of action opened by the diagnosis.
Requiring a backflow valve, stronger roof or detection system may be reasonable when the institution explains the hazard, allows time and helps finance the work. The same requirement becomes a form of withdrawal when it imposes unaffordable work without assistance or another route to cover.
Control exercised in the name of a collective is not necessarily gentler than control by a private company. It may be intrusive, moralising or conservative. Its possible advantage lies elsewhere. People subject to the rule may know why it exists, discuss its cost and ask for it to be revised.
The Ambivalence of Mutual Protection
A mutual can defend solidarity among its members while selecting applicants severely. The two positions are not contradictory. Protecting a group always involves drawing a boundary around it. Benefit societies already distinguished admissible misfortune from conduct they considered blameworthy. Alcohol use, irregular payment, mobility or participation in a strike could sometimes end the right to assistance [23, 27].
Mutuality should therefore not be judged against an ideal image of community. It must be examined through its practices. Who may join? Which losses are recognised? How are managers chosen? Who can understand the accounts and challenge a decision?
A large organisation may retain the legal form of a mutual while giving its members little practical influence. Meetings can become ritual events. Documents may provide many figures without revealing the choices that matter. An annual report will usually state premiums, claims and reserves. It is less likely to show which groups faced the largest increases, how many policies were not renewed or what share of resources financed prevention [17, 18].
Challenge should not be reserved for people who still hold a policy. An institution that listens only to current members may treat as reasonable the rules that already pushed others away. Rejected applicants, former members and territories from which cover has retreated provide essential information about the boundary of the collective.
Competition makes this governance more difficult. A mutual that keeps more costly risks may have to raise contributions. Members with better offers elsewhere then leave first. The remaining portfolio becomes more fragile, and later increases accelerate the process. Legal form alone cannot preserve solidarity when competitors can attract the least costly groups [35].
Common rules may be needed to prevent selection from undoing the pool. They can restrict some rating variables, compensate insurers that cover more costly groups or create a common guarantee for the hardest risks. Swiss natural hazards insurance provides one example. Other arrangements will appear later in the book.
Voice must also come before the decision becomes irreversible. A new map, revised model or revived piece of old information can quickly move a member into a more expensive category. An institution governed by its members should explain the change, provide a transition and allow challenge before departure becomes the only option.
Starting from the Collective
A mutual offers no miraculous solution. Its history includes exclusion, discipline and forms of power that may be difficult to challenge. It nevertheless recalls something that an individual quotation almost entirely hides. A pool is not only a portfolio to balance. It is an institution financed by people who live under its rules and whose future depends on how the promise is governed.
Ownership does not by itself keep this collective alive. Even when policyholders own the organisation, why should those with lower exposure continue to contribute more? Why should they remain when a competitor offers a lower price? How can the pool be protected without turning every claim into suspicion?
These questions no longer concern only ownership. They concern the reasons that allow members to continue acting together. That is the problem of the next chapter.
References
& Avenir. 2012;57(7):195–209.
In property insurance, depreciation is the reduction in the value assigned to an item because of its age, use and condition.↩︎
Technical provisions are amounts recorded in an insurer’s accounts for payments it expects to owe policyholders. A claim reported today may lead to payments over several years.↩︎
A policy lapses when the conditions required to keep it in force, especially payment of the premium, are no longer met.↩︎
Solvency is an insurer’s ability to meet its obligations, including when losses exceed ordinary expectations. It depends in part on technical provisions, capital and reinsurance.↩︎