Insurance: A Thoughtful Perspective on Emerging Alternatives

It is always reassuring when someone genuinely cares for our well-being and helps alleviate our concerns for our loved ones in our absence. Many insurance providers present themselves as trustworthy companions, offering promises such as "Rest Assured with Us" and "Your Welfare is Our Responsibility." Their messages suggest security and reliability, giving policyholders the confidence to face the future without worry.

However, insurance agreements often come with terms and conditions that are not always clearly communicated. These details, often in fine print, are crafted with legal precision, making them difficult for the average policyholder to interpret. The professionals behind these contracts are adept at structuring policies in ways that ultimately benefit the insurance companies, sometimes at the expense of policyholders.

In the financial year 2013-14, Indian insurance companies collected approximately INR 3 lakh crore in premiums. Depending on the insurer and policy type, claim approvals ranged between 30% and 70% of the total premium pool. The terms within insurance contracts are carefully designed to manage claim payouts, ensuring that the percentage of approved claims aligns with business targets.

During 2023-24, the life insurance industry in India recorded a premium income of Rs 8.30 lakh crore. Additionally, the industry paid total benefits amounting to Rs 5.77 lakh crore, reflecting a substantial 30% margin. This significant growth underscores the expanding role of insurance in financial security and highlights the need for models that prioritize ethical financing and equitable distribution of benefits.

Health insurance policies, for instance, often come with intricate conditions. A policyholder with coverage worth INR 10 lakh might find that a medical bill of INR 1 lakh results in an approved reimbursement of only INR 30,000. In urgent situations, the policyholder is left to arrange the remaining amount. Similarly, maternity coverage is frequently capped at INR 50,000, with hospitals structuring their charges accordingly, leaving patients to cover any excess costs. If a policyholder does not make a claim, they receive a courteous message of appreciation while the insurance company retains the premium as profit.

Non-life insurance policies often offer returns comparable to savings deposits, making them a less favorable choice for financial security. The core expectation from insurance—a reliable safety net during difficult times—is sometimes compromised by business priorities. Large-scale financial institutions often influence policy decisions at the governmental level, ensuring that the interests of the insurance industry are safeguarded. Meanwhile, marketing efforts target consumers’ insecurities, encouraging them to invest in policies that may not fully meet their needs.

The Historical Foundations of Insurance

Insurance, in its earliest form, dates back to ancient times when communities collectively safeguarded themselves against unforeseen events. Early societies practiced mutual aid, where individuals contributed resources to support those in distress. Traders adopted similar practices to mitigate the risks associated with long-distance commerce, pooling funds to cover potential losses.

Over time, this evolved into a structured financial system, with a portion of collective funds reserved for claims and the remainder invested in businesses. Profits from these investments were returned to the contributing members, creating a sustainable cycle of mutual benefit. This cooperative model balanced financial security with economic growth, ensuring that both claimants and contributors benefited.

Insurance was originally conceived as a system based on cooperation, social responsibility, and financial security. However, as the industry evolved into a commercial enterprise, the primary focus shifted towards maximizing shareholder value. The fundamental purpose of insurance—to provide support in times of need—was overshadowed by the drive for profitability.

Rethinking the Insurance Model: A Return to Cooperation

Traditional insurance companies operate with a primary goal of enhancing shareholder value. Policyholders pay premiums to transfer financial risks, while insurers utilize statistical models to structure policies that optimize profitability. In monopolistic markets, policyholders may face limited choices, increasing their vulnerability to restrictive terms and conditions.

In response to these challenges, cooperative insurance models are gaining traction worldwide. These models prioritize policyholder benefits, ensuring that the majority of surplus funds are redistributed among participants rather than retained as corporate profits.

Principles of Cooperative Insurance

• Mutual Benefit: Policyholders participate in a cooperative structure that prioritizes their collective well-being.
• Community Support: A portion of premiums is allocated to assist those in need.
• Risk Sharing: Losses are distributed equitably among members through a community pooling system.
• Transparency and Fairness: Policies are designed to eliminate uncertainties in subscriptions and claims.
• Ethical Commitment: The model operates with integrity, ensuring that no participant is disadvantaged for another’s gain.

Fund Management in Cooperative Insurance

The Policyholders’ Fund

Comprises:

• Covers expenses related to claims, reinsurance, technical reserves, and administration (excluding investment management costs).
• Any remaining balance at the end of the fiscal period is treated as a surplus and may be redistributed among policyholders.
• If the policyholders’ fund faces a shortfall, it is supplemented by the shareholders’ fund.

The Shareholders’ Fund

Consists of:

• Investment-related administrative expenses are deducted from this fund.
• Any remaining profits are distributed among shareholders.

Ethical Financing in Cooperative Insurance

Cooperative insurance aligns with the principles of ethical financing by emphasizing transparency, fairness, and equitable distribution of profits. Ethical financing advocates responsible financial management, ensuring that financial institutions operate with accountability and integrity. Unlike conventional insurance models, where profits primarily benefit shareholders, cooperative insurance ensures that policyholders actively share in the surplus. This fosters trust, enhances financial security, and strengthens the sense of mutual support within the insured community.

Comparing Cooperative and Conventional Insurance

Risk Management:

• Conventional Insurance: Transfers risk to the insurer
• Cooperative Insurance: Shares risk among members

Fund Utilization:

• Conventional Insurance: Maximizes shareholder profits
• Cooperative Insurance: Ensures transparency and equitable distribution

Policyholder Role:

• Conventional Insurance: Limited influence in decision-making
• Cooperative Insurance: Policyholders participate as stakeholders

Profit Allocation:

• Conventional Insurance: Primarily benefits shareholders
• Cooperative Insurance: Redistributed among policyholders

By integrating ethical financing principles, cooperative insurance promotes financial inclusion, social responsibility, and economic equity. This model offers a sustainable alternative to traditional insurance, reinforcing the original intent of insurance as a tool for collective welfare rather than corporate gain.