Have you ever given much thought to who owns your insurance company? You might be surprised to find out that you potentially have some ownership interest in the insurer regardless of where you live: El Paso, Jacksonville, Mesa, Tucson, Wichita. There is a common form of insurance company known as a “mutual,” in which it is owned by all of its policyholders. While it really is not too different than a stock insurance company in the eyes of the average policyholder, there are some fundamental differences that you might find interesting. Some of these differences may also have an effect on your policy and the premiums you are charged.
The most common form of insurance company is a “stock” company, in which shareholders own shares of the entity. This is no different than any other corporation in which there are shareholders. The company’s boards of directors and management team have an obligation to operate the company for the benefit of its shareholders. While it is in the business of providing insurance, its primary objective as a stock company is to protect and enhance the investment in the company by its shareholders.
A mutual insurance company is different than a stock company in that its primary obligation is to its policyholders, who are also its owners. While a stock company may raise premiums and restrict coverage to increase profit, a mutual insurer may not act on the same opportunity. In fact, mutual companies will sometimes return profits to their policyholders in the form of dividends. Certainly, this is a very simplistic view of the differences, but fundamentally, the ownership and guiding principles of the two different companies are summarized by the fact that one company is owned by its policyholders/customers and the other is owned by shareholders, who may not have any business relationship with it.
According to the National Association of Mutual Insurance Companies, the very first mutual insurance company in the U.S. was founded by Benjamin Franklin in 1752. The original mutual companies were often based on industries or trade groups banding together for the benefit of pooling their risk as insurance when it was otherwise unavailable through traditional insurance companies. Many large mutual insurance companies in business today still carry the name of their original mutual associations, which can give you an idea of the industries they once exclusively served.
While the idea of a mutual company that is owned by its policyholders may sound altruistic in contrast to large, faceless stock insurance companies, mutuals can sometimes also face a bit of difficulty in their operations. Unlike a stock company, a mutual cannot simply issue additional stock to raise capital when it’s needed for growth or to operate the business. As a result, mutual companies have had to find ways to modify their ownership structure to more closely mimic that of stock companies. Some mutuals have also even gone through a process known as “demutualization,” wherein they change into stock companies.
In spite of these difficulties, mutual insurance companies can and do continue to thrive. Their dedicated focus on operating for the direct benefit of their policyholders continues to ring true to customers.