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Wednesday, July 11, 2007

Insurance as a mutual arrangement to pool risk

Many people think of insurance as a legal contract. You enter into a contract with an insurance company. You pay a premium under the contract. The insurance company promises to pay you the specified payments under certain defined conditions. As the contract wordings are usually not clear, a dispute could arise quite often.

In the "old days", insurance was usually operated as a mutual arrangement. A large number of people join the pool. They agree to contribute towards the pool to compensate the members who suffered the defined losses. Usually, all the members are covered under the same benefits, which are generally understood through practice over the years.

The mutual arrangement is usually run as a non-profit. There are many advantages of the mutual arrangement (rather than a commercial contract) to take care of pooling of risks.

In some countries, the mutual arrangement is still strong. In most other countries, insurance are now being operated as "for profit" organisations.

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