Co-op member ethics Co-op principles
self help honesty voluntary and open membership
self-responsibility openness democratic member control
democracy social responsibility member economic participation
equality caring for others autonomy and independence
equity education, training and information
solidarity co-operation among co-operatives
concern for the community
Source: ICA (1995a).
Co-operatives are voluntary organisations without gender, social, racial, political or religious discrimination. They are democratic organisations controlled by their members who actively participate in management decisions and policies. Members contribute to, and democratically control, the capital of the co-operative (one member is equal to one vote). Co-operatives most effectively serve their members by working together locally, nationally regionally and globally for the sustainable development of their communities (Birchall 1998). There are two main types of co-operatives, consumer co-operatives (housing, credit unions and insurance) and producer co-operatives (agricultural, fishing and some worker co-operatives) (Spear 2000b). Co-operative insurance companies are linked
with democratic, progressive movements including co-operatives in other sectors, these links mean that co-operative insurance is operating in and supporting wider social and economic goals. Formal co-operative insurance companies can be stock, mutual or any other form dictated by the laws of the country. The key difference from private companies is its adherence to the co-operative principles, in particular those of member control, non-profit operations and activities centred around preserving the interest of members (IDB 1977).
3.2.1. - Providing insurance using co-operative principles
The oldest documented accounts of a voluntary prepayment scheme for healthcare is the mutual help schemes organised in Greece during the fifth century B.C. by trade groups to protect their members from the financial consequences of death, illness or incapacity (Creese & Bennett 1997). Recently, in the informal sector a number of innovative schemes based around co-operative principles have emerged to enable access to savings and lending products for the poor. These schemes have become the natural foundation for providing insurance products to the poor.
Group-based lending mechanisms have proved to be the most effective and efficient in providing financial services to the poor at minimal transaction costs and risks, they are also a good forum for education, information sharing, change, and solidarity (Dunford 2001). Savings clubs such as Rotating Savings and Credit Associations (ROSCAs) and Accumulating Savings and Credit Associations (ASCAs) are common structures used to satisfy the saving needs of low-income households. Such savings clubs provide a degree of risk-protection on less uncertain costs through marriage and burial funds and in some cases against damage to property (Brown & Churchill 1999). These community based saving and lending systems are popular with low-income households due to the ability to access borrowing at short notice, small instalments, convenience, little bureaucracy and safeguarding assets from relatives (Matin et al 1999, Rutherford 1999b).
Self-help groups, mainly composed of women also incorporate the philosophy of community spirit and solidarity, these NGO promoted groups have a number of different objectives including women’s empowerment, information distribution and business development (Rutherford 1999b). The Village Banking movement is another example of user-owned, group based financial services working in low-income communities. The object is to become an independent, self-financed and self-managed village-level institution providing loans to small businesses that stimulate savings and increase capacity to provide larger loans (Rutherford 1999b). The credit co-operative or credit union (also known as thrift and credit, savings and loans or caisse populaire) is a community based financial institution, which facilitates the habit of saving and provides credit on the basis of trust and peer pressure. The credit union has special policies to reach the bottom line members of the community by providing loans to micro-enterprise start-ups and exclusive services for women (ACCU 2001). Mutual Health Organisations (MHOs) and Community-based Health insurance Schemes (CBHI) combine the concept of insurance and participation. They are participatory independent non-profit organisations created by the members and are based on solidarity and democratic management. They use member contributions to manage risks and finance health care, and encourage better quality and more equal access to medical services and treatment (STEP 1999). All of these co-operative based institutions have provided financial services to the poor including insurance as member benefit programs for a number of decades (Appendix Four).
3.3. - Advantages of a co-operative/mutual insurance company
Organisations in the social economy such as co-operatives, mutuals and voluntary associations may be formed because the state does not provide sufficient quality or quantity of a particular service such as health, care and education (Spear 2000b). Consumer co-operatives generally emerge when existing services either are not accessible or not available (Ullrich 1997). Consumer co-operatives, such as an insurance co-operative, are considered as an extension to the individual members’ household economy. They aim to improve the conditions for the consumer and the economy of the household (which includes time, knowledge, self-sufficiency and money). The consumer co-operative will assist the households to organise and solve their problems through education, dialogue and improved access to services and products available (Blomqvist & Böök 2000).
3.3.1. - Identifying the needs of the poor
Co-operative and mutual insurers are in a better position to identify the needs of their customers and community due to the closer links through trade unions, credit unions, agricultural and consumer co-operatives. The resulting increased awareness and understanding enables a more personalised, flexible and appropriate service. Co-operative insurance companies operate for the benefit of their members and provide affordable premiums, fast and efficient service and responsive product development. (Vogt 1999, ACME 2000, Brown & Churchill 2000, IDB 1977, Birkmaier 1999). They offer stability through a clear community-minded mission and facilitate member involvement in distribution, promotion and product development to the benefit of all consumers in the community (Blomqvist & Böök 2000).
The mutual can take a long term, sustainable approach to management of the insurance scheme in the best interest of the member without needing to satisfy the short-term return requirements of shareholders, as the owners and members are the same. Stock companies are faced with a conflict of interest when the customer’s requirements do not provide sufficient profits or return on investments, which is one of the reasons why established insurers steer away from high-risk low-income communities and concentrate on the middle/high class customers demanding ‘off the shelf ’ products (Vogt 1999, Birkmaier 1999, Ali 2000). Co-operative insurers dedicate substantial resources to research, health promotion and loss prevention as the policyholders’ best interest is served by preventing losses (IDB 1977). There is an obligation to focus on all potential customers and not just the profitable ones, they have a duty to provide where there is a need, and the need for protection is the greatest by the poorest.
3.3.2. - Trust
In an environment where regulation is weak and corruption is high there is very little trust in any institution. This is more of a problem in the informal sector where the poor have no rights at all and are constantly manipulated. Co-operatives are more trustworthy, less likely to engage in opportunistic behaviour and exploit the consumer (Spear 2000a, Creese & Bennett 1997). The co-operative structure makes it easier to win the trust of the members, particular in the face of market failure and it is better placed to tap into member’s know-how, loyalty and ideas (Ledbeater & Christie 2000). The strong community relationship, good user networks, member involvement and democratic process encourage a growing feeling of trust and building of social capital to develop a better society. Trust is a major advantage of the co-operative and it encourages a greater number of transactions and commitment from the members to act in the best interest of their organisation and improve its economic efficiency (Spear 2000b).
3.3.3. - Morale hazard, adverse selection and fraud
Mutual insurance policies are participating policies, where policyholders share the profits or losses earned by the insurer. This reduces the risks borne by the insurer and decreases motivation for morale hazard and fraud by the policyholder. Peer pressure from within established social groups can encourage members to avoid morally hazardous behaviour, particularly in small groupings and communities. In community-based schemes, each
policyholder is an owner of the scheme and elects a group of policyholders to manage the operations, usually on a volunteer basis. This enables poor households to retain control and ownership (Brown & McCord 2000, Brown & Churchill 1999, Brown & Churchill 2000).
Due to lack of credible information in developing countries, particularly in the informal sector there is a need and reliance on local knowledge to underwrite policies correctly and verify claims (Roth 2001). Insurance provided through an established co-operative body means that risks are considerably reduced as each society has close knowledge and supervision of the member and his/her risks. This existing trusted relationships and solidarity with members provides the opportunity to build a stable policyholder base. This is important when incomes of participants grow at different rates and richer participants who find they are giving more tend to leave the group (Morduch 1999, Brown & Churchill 2000, IDB 1977). Membership-based organisation thrive when the members come from a specific loyalty or occupation as fear of future exclusion from the scheme and the accompanying social network keeps participation high (Ledbeater & Christie 2000, Brown & Churchill 1999).
Co-operative insurers are less likely to manipulate the poor and participate in underhand selling tactics such as over-pricing, misleading advertisements and excessive management costs. There is less likelihood of the manager taking advantage of asymmetric information and failing to enforce obligations as the policyholder is the owner and henceforth the employer of the manager (IDB 1977, Spear 2000b). The ownership of co-operatives by consumers, workers or suppliers mean that it is easier for them to monitor the performance of the company and its employees on a regular basis. Co-operatives involve their members not only in corporate governance but also in the day to day running of the scheme (Ledbeater & Christie 2000).
3.3.4. - Education
Co-operatives and mutuals have a long-standing affiliation with the poor and have the expertise and means of communicating the needs and benefits of insurance (Vogt 1999). The nature of insurance is based on the concept of mutuality, risks is shared by the many to protect the few, the poor are used to this concept as they are familiar with traditional mutual self-help mechanisms (Creese & Bennett 1997, ACME 2000). As members are owners of the scheme and ultimate beneficiaries of its success they have a strong incentive to educate themselves and learn about their own business (IDB 1977).
3.3.5. - Empowerment
Co-operatives empower individuals by providing them with the opportunity to participate in decisions that impact their livelihoods. It gives the poor a voice, gives them a choice, and a chance to find solutions to their specific social and economic needs (ICA 1995b, IDB 1977). Policyholders have representations on special advisory committees dealing with company performance, products and claims, enabling members to take direct control over decision making and on the quality, type and delivery of service. The co-operative structure allows the poor to have more bargaining power, benefit from economies of scale and negotiate better deals for themselves (IDB 1977, Ullrich 1997). Success of the insurance scheme would enable the co-operative to reduce the inequality and disadvantage of members, staff and the wider community (Spear 2000b, IDB 1977).
3.3.6. - Costs and price
Co-operatives do not operate under a profit motive, surpluses are reinvested or paid back to members, keeping costs and premiums down (IDB 1977, ICA 1995b). Community involvement reduces the costs of labour and resources needed for information collecting, educating, marketing and monitoring policyholders (World Bank 2000). The Co-operative structure enables lower costs by offering insurance to large affiliated groups, many farmers in developing countries belong to at least one co-operative society that provides them with credit, marketing, equipment or farming methods. These societies are a natural and cost-effective distribution channel for insurance particularly in remote areas and lower income groups in towns and cities (IDB 1977, Birkmaier 1999). Co-operatives make more effective use of the resources of their members and the economic-efficiency of the organisation as surpluses are returned to the members in the form of dividends, lower premiums, loss prevention activities or additional coverage (Spear 2000a, Birkmaier 1999).