Understanding Mutuality

The Great Fire of London

The destruction by fire in 1666 of vast swathes of London property - estimated at over 13,000 houses and 87 churches - proved a spur to the foundation of insurance companies, and alongside the commercial operations the idea of mutuality also existed. Initially, not surprisingly, they provided fire cover but, before long, mutual life assurance began.

Soon afterwards, the ship-owners of the 19th century realised what many have come to recognise since: that the insurance market does not always provide the scope and prices desired by the customer. Especially as the market then consisted of a statutory cartel, established in 1720, which only allowed two companies to conduct this business - the Royal Exchange Assurance and the London Assurance - plus individuals operating in London from, for example, Lloyd's Coffee House.

So groups of owners got together to form mutual ‘hull clubs’ to cover the risks to ships on a non-profit basis.

The Nineteenth Century

After the removal in 1824 of the company monopoly, greater competition had a beneficial effect on the rates, terms of cover and service offered by the commercial market and by Lloyd's underwriters. The hull clubs became less necessary and went into decline.

For ship-owners in the 19th century, liability was unlimited until the Merchant Shipping Act 1854, but that only limited liability for the ship and freight. Ship-owners were still exposed to potentially large claims in respect of loss of life or injury as well as collision damage - claims which could bankrupt them. They had to find a way to protect themselves.

Eventually, in 1855, the first protection association was formed. This was the Ship-owners' Mutual Protection Society, the predecessor of the West of England Steamship Owners Association. It was intended to operate like a mutual hull club, but to cover liabilities for loss of life and personal injury and also the collision risks not included in the current marine policies. Other similar associations were formed.

So started the Protection & Indemnity Associations and these directly survive and flourish today as P&I clubs - the marine liability insurers who together insure 95 per cent of the world's ocean-going ships. It is they who handle and pay for the major casualties - and the thousands of less well publicised but hugely expensive accidents and claims that occur frequently in shipping.

This movement into mutual insurance is unsurprising as cooperative ideas had been growing gradually through the Agricultural and Industrial Revolutions of the 17th and 18th century and, spurred by thinkers like Robert Owen and later Samuel Smiles, the cooperative movement achieved major milestones with events like the creation of a friendly society by the Tolpuddle Martyrs in 1832 and the founding of the Rochdale Society of Equitable Pioneers in 1844.

Twenty three of today’s 26 members of the Association of Mutual Insurers were established before the First World War.

Mutuals in the Modern Age

Several are Friendly Societies offering investment products, often intended to provide income protection for working people - a service still continued until today. But the whole range of insurance is offered by such well-known names such as NFU Mutual, Royal London, Royal Liver, and Liverpool Victoria.

There is also an important, and growing, sector of mutual insurance reminiscent of the ‘hull clubs’ of 300 years ago. Industry and trading groups getting together to offer protection for each other - understanding their businesses better than the commercial insurance market.

One of the largest is Oil Insurance Limited which covers its members - over 50 of the world’s largest energy companies - from physical damage to oil rigs, pipelines and refineries.

But mutual insurance is not just for the large. There is the recently formed NFRN Mutual representing the interests of members of the National Federation of Retail Newsagents - thousands of corner shops across Britain.

And not just businesses either - the ancient livery companies of the City and even the London Borough Councils have formed their own mutuals, believing that they understand and can manage their own risks and protect themselves better than just buying a commercial policy.