A mutual is an entity which collectively pools its members’ risks, as opposed to transferring the risk to an insurer. The entity collects the premiums from its members and pays out the claims itself. Therefore, in principle funds are retained and redistributed within the group. Members will donate funds (premium or contributions) into a pool held by the Mutual.
These funds are used to finance claims made by members, the funding of provisions and the various operating costs. In a Mutual, profits are either to be paid out to shareholders as dividends, or the surplus is reinvested back or both.
However, if the financial results of the Mutual show a deficit the members may – in accordance with the provisions of the product design or the articles of association can be asked to make either supplementary payments or reduce the entitlement to loss compensation to meet the available budget.