What is ‘Mutual Insurance Company’
A mutual insurance company is owned by policyholders. The sole purpose of a mutual insurance company is to provide insurance coverage for its members and policyholders, and its members are given the right to select management. Federal law, rather than state law, determines whether an insurer can be classified as a mutual insurance company.
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BREAKING DOWN ‘Mutual Insurance Company’
Mutual insurance companies exist to ensure that the benefits promised to policyholders can be paid over the long term. Because they are not traded on stock exchanges, mutual insurance companies can avoid the pressure of reaching short-term profit targets. Members of a mutual insurance company have the right to excess premiums, meaning that if losses and expenses are less than the amount of premiums paid into the company, the members would receive either a dividend payment or a reduction in premiums. In general, the goal of the mutual insurance company is to provide its members insurance coverage at or near cost, since any dividends paid back to members represent excess premium payments.
Large companies can form a mutual insurance company as a form of self-insurance, either by teaming divisions with separate budgets or by teaming up with other similar companies. For example, a group of physicians may decide that they can get better insurance coverage and lower premiums by pooling funds to cover their similar risk type.
Mutual insurance companies derive a large portion of their funding from member premiums, which can make it difficult to raise funds in order to acquire companies if the need to expand rises. When a mutual insurance company switches from member-owned to being traded on the stock market, this is called “demutualization.” This shift may result in policyholders gaining shares in the newly floated company. Because they are not publicly traded it can be more difficult for policyholders to determine how financially solvent a mutual insurance company is, or how it calculates dividends it sends back to its members.
History of Mutual Insurance Companies
Mutual insurance as a concept began in England in the late 17th century to cover losses due to fire. It began in the United States in 1752 when Benjamin Franklin established the Philadelphia Contributionship for the Insurance of Houses From Loss by Fire. Mutual insurance companies now exist nearly everywhere around the world.
In the past 20 years, the insurance industry has gone through major changes, particularly after 1990s-era legislation removed some of the barriers between insurance companies and banks. As such, the rate of demutualization increased as many mutual companies wanted to diversify their operations beyond insurance and access more capital. Some companies converted completely to stock ownership, while others formed mutual holding companies that are owned by the policyholders of a converted mutual insurance firm. Holding companies also gain the opportunity to own banking subsidiaries.
A mutual insurance company is an insurance company owned entirely by its policyholders. Any profits earned by a mutual insurance company are either retained within the company or rebated to policyholders in the form of dividend distributions or reduced future premiums. In contrast, a stock insurance company is owned by investors who have purchased company stock; any profits generated by a stock insurance company are distributed to the investors without necessarily benefiting the policyholders.
The concept of mutual insurance originated in England in the late 17th century to cover losses due to fire. The mutual/casualty insurance industry began in the United States in 1752 when Benjamin Franklin established the Philadelphia Contributionship for the Insurance of Houses From Loss by Fire. Mutual property/casualty insurance companies exist now in nearly every country around the globe.
The global trade association for the industry, the International Cooperative and Mutual Insurance Federation, claims 216 members in 74 countries, in turn representing over 400 insurers. In North America the National Association of Mutual Insurance Companies (NAMIC), founded in 1895, is the sole representative of U.S. and Canadian mutual insurance companies in the areas of advocacy and education.
Recent developments in the U.S.
The «mutual holding company» structure was first introduced in Iowa in 1995, and has spread since then. There have been concerns that the mutual holding company conversion is disadvantageous for the owners of the company, the policyholders. The major disadvantage of mutual insurance companies is the difficulty of raising capital.
In the 111th Congress, Carolyn Maloney sponsored a bill that she claimed would have protected mutual holding company owners. The measure, H.R. 3291, died in committee.
Mutual holding companies are one way to undergo privatization, also called demutualization.
About Mutual Insurance
The mutual insurance concept dates to the late 17th century in England with the establishment of the first mutual fire insurer in 1696. In America the first successful mutual insurance company was founded in 1752 by Benjamin Franklin. It was called the Philadelphia Contributionship for the Insurance of Houses From Loss by Fire, and it remains in business today.
Mutual insurance companies were often formed by a group of individuals or businesses that faced a shared – sometimes unique – but often unmet need for insurance. Mutual insurers range in size from small market companies operating in a single county to large, national carriers operating throughout the country and internationally. Most mutual insurers sell various lines of coverage including those for autos and homes, farms and businesses while others specialize in niche markets such as churches, pharmacists, jewelers, and lumber dealers.
The median age of a mutual insurance company in the United States is 120 years. Among the country’s 10 largest property/casualty insurance companies, five are mutual companies serving 25 percent of the market. The five largest non-mutual insurance companies serve 21 percent of the market.
Capital for a mutual insurance company is sometimes raised from current or prospective policyholders, but usually is obtained by borrowing money. Borrowed money is repaid from the company’s operating profits. Operating profits in a mutual company are often retained, in whole or in part, to finance future growth, provide a cushion against future liabilities, adjust rates or premiums, and bolster industry ratings among other needs.
Mutual insurance policyholders generally are not responsible for losses that exceed the insurance company’s resources. However, some mutual insurers, known as assessable mutuals, have the right to assess policyholders to obtain additional funds if that becomes necessary for the insurer to meet its obligations. Such assessments typically are limited to not more than one additional annual premium payment.
Ultimately, mutual companies are unique because they were established to serve the insurance needs of policyholders without also having to meet the investment needs of stockholders. The policyholder – often referred to as a “member” – is the sole focus of a mutual insurance company. As a result mutual insurance company members have all the same advantages as policyholders of non-mutual insurance companies in the form of policy rights (depending on coverage clauses), protections afforded by state regulation, and access to state guaranty funds in the event of insolvency.
Membership in a mutual insurance company exists as long as the individual or business is a policyholder. Membership is not equivalent to ownership of an equity interest in the mutual insurance company. The mutual member cannot freely sell or pledge as security the mutual insurance policy or his/her rights in it.
Because property/casualty insurance is regulated at the state level, the regulations that apply to mutual companies respecting members, boards of directors, and by-laws of the company vary from state to state. Directors of mutual insurance companies are generally permitted to develop governance practices appropriate to the regulatory requirements of the states in which they are domiciled, consistent with their company charter and by-laws, their business environment, and their member needs. Therefore, variations in corporate governance practices exist within the mutual insurance industry (as they do in other industries), but are within the parameters established by applicable regulatory requirements. State insurance departments collect key financial data and other company information from mutual insurance companies, with the type and extent of information often based on the size of the company and will, upon a consumer request, make available non-proprietary information.