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.
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.