What Is a Mutual Insurance Company?
Let me explain what a mutual insurance company is. It's an insurance provider owned by its policyholders, and its main purpose is to offer coverage to those members at or near cost. As a policyholder, you get to select the management, and the company invests in portfolios similar to a mutual fund. Any profits go back to you as dividends or reduced premiums. Remember, federal law, not state law, decides if an insurer qualifies as mutual.
Key Takeaways
- An insurance company owned by its policyholders is a mutual insurance company.
- A mutual insurance company provides insurance coverage to its members and policyholders at or near cost.
- Any profits from premiums and investments are distributed to its members via dividends or a reduction in premiums.
- Mutual insurance companies are not listed on stock exchanges, but if they eventually decide to be, they are 'demutualized.'
- Federal law determines whether an insurer can be a mutual insurance company.
Understanding a Mutual Insurance Company
The core goal here is straightforward: provide insurance to members at or near cost. If there's profit, it comes back to you through dividends or lower premiums. These companies aren't on stock exchanges, so they don't face pressure for short-term profits. That means they can focus on what's best for you long-term, investing in safer, low-yield assets.
However, since they're not publicly traded, it might be harder for you as a policyholder to check their financial health or how they figure out those dividends. Large companies sometimes create mutual insurers for self-insurance, pooling resources from divisions or similar firms. For instance, doctors might band together for better coverage and rates on their specific risks.
If a mutual company decides to go public on the stock market, that's demutualization—it turns into a stock insurance company. You might get shares in the new setup. This is usually to raise capital, as stock companies can sell shares, while mutuals are limited to borrowing or hiking rates.
History of Mutual Insurance Companies
Mutual insurance started in late 17th-century England for fire losses. In the US, Benjamin Franklin kicked it off in 1752 with the Philadelphia Contributionship for insuring houses against fire. Today, you'll find them worldwide.
Over the last 20 years, the industry has shifted, especially after 1990s laws broke down barriers between insurers and banks. This led to more demutualizations as companies sought to expand beyond insurance and tap into more capital. Some went fully to stock ownership, others set up mutual holding companies owned by policyholders of the converted firm.
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