A mutual insurance company is an insurance company owned by its policyholders. If one were to buy an auto insurance policy from a mutual insurance company, that one would also become a shareholder or owner of that mutual insurance company. Profits of mutual insurance companies are returned to policyholders in the form of dividends.
Types of Mutual Insurance Companies
An assessment mutual can charge additional premiums if claims or losses were greater than projected.
An advanced premium mutual charges additional premiums up front to cover claims or losses. Surplus premiums are returned to the policyholders as dividends at the end of the policy period.
A factory mutual is a commercial property insurance company that only insures commercial businesses that meet its strict underwriting guidelines that are usually associated with construction types and safety measures. Because of these strict guidelines and the risk management services offered by factory mutuals, premiums are less expensive.
A fraternal mutual is a mutual insurance company that provides insurance to social and religious groups. Generally, these are life and health insurance companies.
Unlike with a stock insurance company, policyholders of a mutual insurance company have voting rights. This is due to the fact that policyholders are also owners of the company. With their voting rights, they have an influence on policy decisions and company personnel. Also, mutual insurance companies usually have the best interests of the policyholder in view, since their focus is not solely on profit. This results in better insurance products for the policyholder.
Mutual insurance companies have limited access to capital. Stock companies are able to sell shares of stock to raise capital. Mutual insurance companies are unable to do this due to the absence of shareholders. Therefore, funding new projects or endeavors becomes a challenge. Many insurance companies who were first formed as mutual insurers have converted to stock insurance companies, through a process called demutualization.
According to the Insurance Information Institute, demutualization is “the conversion of insurance companies from mutual companies owned by their policyholders into publicly traded stock companies.” Policyholders are generally given money or shares of stock in exchange for their rights as owners of the company. The value of these shares can increase dramatically. Once demutualization occurs, an IPO (Initial Public Offering) usually follows.
Mutual Insurance Companies in The United States
Nationwide Mutual, Amica Mutual, Boston Mutual Life Insurance, Liberty Mutual, Factory Mutual, Federated Insurance, Georgia Farm Bureau Mutual and Grange Mutual Casualty are a few of the mutual insurance companies based in the United States.