Many insurable risks are in fact difficult to insure. This is particularly true of the kind of risks emerging from today's economic and political uncertainties. For example, negligence has become a wholly abstract and uncertain concept. Judgement is frequently based on the insurance principle of ‘which can pay?'

As a result, in some cases and at certain times, conventional insurance is very restricted and may disappear completely at short notice. Conventional insurance for professional indemnity, in particular, is becoming increasingly expensive. However, the commercial insurance market is not to blame for this unsatisfactory situation. Fundamentally, any risk is insurable and at stable premiums, if it is static, clearly identified, precisely defined and quantified in terms of probability of incidence and severity of costs. There are other requirements, which enable the insurer to apply ‘the law of large numbers', namely that there must be a sufficient ‘spread' of risk, over which to make a ‘book'of underwriting probabilities, and thus secure the average and expected result. Apart from the unpredictability of many of today's risks, the insurance market is also faced with unpredictability of demand from their customers from year to year.

It becomes very difficult for an insurance underwriter to obtain the broad spread of risk he needs, both in terms of good and bad risks, as well as in terms of geographical spread, without some kind of group scheme to which members voluntarily commit themselves for a reasonable period of time. How can the insurance industry succeed in the quantification of probability and severity? Too much uncertainty produces volatility in terms of insurance and many of the risks that threaten the trade or the current insurance market are not catered for by professional association members. As soon as volatility enters the scene, insurability disappears in the eyes of the insurers.

Volatile risk comes to be equated with business risk, and insurance can therefore only perform with the greatest difficulty, as insurance premiums will always be volatile. Much of the volatility described can be controlled, if not entirely eliminated, by measures that recognize the problems encountered. Many trade and professional associations have attempted to reward their members for the cost of the administration and management. To a large extent, such schemes can help to establish the acceptance of uniformity and make the cost of risk reduction worthwhile. There is also the problem that commercial underwriters can never know as much about the risks of any given group of organizations as the people within those organizations.

Outside life assurance, insurance is a trading market and, in common with other commodity markets, is subject to trade cycles. The fluctuations in the insurance trade cycle are of a similar nature. Capital flows into the industry in times of profitability, pushing down insurance rates. This leads to some forms of insurance, particularly the more volatile risks, at any time becoming affordable or unavailable, or only available at inadequate levels of indemnity, as investors leave the market.

After a period of shortage, the rates rise, tempting capital back into the industry. This eventually leads to competition for market share, and the whole process repeats itself. Over recent years the fluctuations have become more acute. In the ten-year cycle leading to the turn of the twenty-first century, the downturn in the market was delayed by high interest rates, and in the previous cycle it was precipitated by a ‘bear'market , which depressed insurance funds. Thus, interaction with general economic developments may distort the insurance cycle further.

An example of how self-interest and self-help can operate in mutual trading in insurance is that of the lawyers'mutual for professional negligence risks. This is one of the most volatile of risks to insure against.

Often, and depending on the state of the insurance cycle, this form of cover is difficult or unavailable to buy and there are massive price fluctuations. Yet the members of this mutual have enjoyed consistent cover at reasonable premiums for many years. Furthermore, if one is paying for one's own claims, the essential elements of risk management are reinforced, through the principle of mutuality. There is a very strong incentive to make sure that claims are kept to a minimum.

There is also a systematic method of dealing with all circumstances that might lead to a claim. Once these are notified, a full-time lawyer retained for the purpose constantly monitors individual members'cla ims experience and suggests remedial action. In such situations, a return to the more primitive forms of mutual protection may not only be a better alternative to conventional insurance; it may be the only form of insurance available.

In the case of difficult risks, and when the commercial insurance market is not able to provide affordable protection, the ability of an adversely affected organization to manage its risks better is the key to regaining the advantages of protection by combination. A return to the original principle of sharing the risk, inherent in the mutual form, is the key to improved risk management.

At present, there are over 500 mutuals in the USA and their number is growing (American Insurance Association 1992). The members, certainly from the most successful operations, will find it beneficial to draw up their own ‘rules of the club', in the form of a members' agreement. The agreement spells out the terms of acceptance into, and continuing membership of, ‘the club'. The vital elements of self-interest and consequent insurability at affordable terms are restored via the incorporation of beneficial codes of conduct, risk management procedures, loss reduction (pre- and post-claim), disciplinary codes and the methods of transacting business, policy terms and rates, re-insurance procedures and requirements, method of cost, premium and surplus allocation.