What Are Friendly Societies?
Friendly societies are a unique category of financial institutions structured as mutual organizations. Unlike companies owned by external shareholders, friendly societies are owned by and run for the benefit of their members. These organizations typically offer a range of financial products, including insurance, pensions, and savings schemes. Any surpluses generated by a friendly society are generally reinvested for the benefit of the membership or distributed to members, rather than paid out as dividends to external investors.
History and Origin
The origins of friendly societies can be traced back to ancient Greek and Roman burial societies, and later to medieval guilds in Europe, which provided mutual assistance to their members.17 The concept evolved significantly, and friendly societies became particularly prevalent in the 17th and 18th centuries, reaching their peak in the 19th century in the United Kingdom.16 During the Industrial Revolution, with limited state provision for the poor and no comprehensive social welfare systems, these mutual aid organizations emerged to support families facing hardship due to illness or death.15
Early friendly societies often started as small, local groups where members made regular contributions to a common fund. This fund would then provide financial assistance, such as a lump sum for funeral costs, regular sickness payments, or even rudimentary old-age pensions.14 The British government began to acknowledge their role, encouraging their development through legislation. For example, the Friendly Societies Act 1875 sought to consolidate and amend laws relating to friendly societies, encouraging registration in exchange for legal rights, and requiring financial returns to ensure solvency. A further significant development occurred with the National Insurance Act of 1911, which led to a substantial increase in membership as friendly societies were instrumental in administering state health benefits.13 However, the establishment of the comprehensive welfare state in the UK, particularly the National Health Service in 1948, significantly altered the landscape for friendly societies, as state provisions began to supersede many of the services they traditionally offered.12
Key Takeaways
- Friendly societies are member-owned mutual organizations that prioritize member benefits over external shareholder profits.
- They historically provided essential financial and social services like sickness benefits, funeral cover, and savings, especially before modern welfare states and widespread commercial insurance.
- Today, friendly societies continue to offer various financial services, including life insurance, savings plans, and income protection.
- They are regulated financial institutions, often subject to specific legislation to protect the interests of their members.
- Their focus remains on social and financial purposes, with surpluses typically reinvested or returned to members.
Interpreting Friendly Societies
Interpreting the role and function of a friendly society involves understanding its core principle: mutuality. Unlike a publicly traded corporation where decisions are driven by the aim of maximizing shareholder value, a friendly society operates with the collective interests of its members at its heart. This means that financial decisions, product development, and overall governance are geared towards providing benefits and services to the membership. Their structure can foster a strong sense of community and shared purpose among members, distinguishing them from traditional commercial entities. Their financial strength, or capital base, is built from member contributions and retained surpluses, which directly supports the long-term provision of promised benefits.
Hypothetical Example
Consider a small community in which a group of individuals decides to establish a friendly society to provide mutual support for unexpected health issues. Each member agrees to contribute a fixed amount, say $50, into a common fund each month. This pooled fund acts as a form of self-help insurance.
If a member falls ill and is unable to work, the friendly society's rules dictate that they receive a weekly benefit from the fund for a specified period. This benefit helps the individual cover living expenses during their incapacity. The society’s management, often comprising elected members, would oversee the collection of contributions, the payment of benefits, and the overall risk management of the fund to ensure its solvency. For instance, if unexpected claims deplete the fund, the society might adjust future contributions or benefits to maintain financial stability, always with the members' collective well-being in mind.
Practical Applications
Today, friendly societies continue to operate, predominantly in the United Kingdom and other Commonwealth countries, although their market share is smaller than in their historical heyday. They offer specialized financial products such as tax-efficient savings plans, investment bonds, and income protection insurance. T11heir mutual status can appeal to individuals seeking financial products from organizations that prioritize policyholders over external shareholders.
Friendly societies are subject to prudential regulation to safeguard the financial interests of their members and ensure the security of promised benefits. In the UK, friendly societies that provide contractual benefits are authorized and regulated by the Prudential Regulation Authority and the Financial Conduct Authority, which acts as the conduct regulator and registering authority. I10n Australia, for example, friendly societies are regulated under the Life Insurance Act 1995. These entities play a role in fostering financial inclusion by providing access to savings and protection products, sometimes catering to niches that larger commercial insurers might overlook. Many also emphasize a long-term approach to financial planning and community engagement.
Limitations and Criticisms
Despite their historical importance and current niche, friendly societies face several limitations. Historically, some societies encountered financial difficulties, with some even going bankrupt due to inadequate financial management or insufficient underwriting practices. O9thers were criticized for lacking actuarial soundness, leading to promises they could not sustain. T7, 8he rise of commercial insurance companies also posed significant competition, as these entities often had greater scale and marketing reach.
5, 6The most significant shift came with the establishment of comprehensive state welfare systems, which diminished the primary need for friendly societies' traditional benefits. T4his led to a substantial decline in membership and the role friendly societies played in broader society. M3odern friendly societies, while regulated, often operate within a smaller market segment, potentially lacking the diversification and scale of larger, shareholder-owned insurers. The Guardian noted in 2003 that regulatory changes could also impact how friendly society products are distributed, affecting their reach to potential members. M2anaging longevity financial risk for long-term benefits has also historically been a challenge for these organizations.
1## Friendly Societies vs. Cooperative Societies
While both friendly societies and cooperative societies share the fundamental characteristic of being member-owned and operated on mutual principles, their primary focus and scope differ.
Friendly societies traditionally concentrate on providing specific financial services such as insurance, pensions, and savings products. Their historical role was largely centered on offering a safety net against life's uncertainties, like illness, old age, or death, to their members. They are essentially a form of mutual financial institution.
Cooperative societies, on the other hand, encompass a much broader range of economic activities. These can include consumer cooperatives (like retail stores), worker cooperatives, housing cooperatives, or agricultural cooperatives. While they also aim to benefit their members through shared services or economic participation, their activities are not exclusively financial protection or savings. The confusion often arises because both types of organizations operate without external shareholders and aim to serve the collective interests of their membership rather than generate profits for outside investors.
FAQs
What services do friendly societies offer?
Friendly societies primarily offer financial services such as life insurance, income protection, funeral plans, savings plans, and retirement products. Their specific offerings can vary by society.
How are friendly societies regulated?
Friendly societies are regulated financial institutions. In the UK, for instance, they fall under the purview of the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA), ensuring they meet capital requirements and protect member benefits.
Are friendly societies still relevant today?
Yes, friendly societies remain relevant, particularly in niches where their mutual structure and member-focused approach provide distinct advantages. They often serve specific communities or provide specialized products, contrasting with the broader market offerings of larger commercial insurers.