Mutual Insurance Company

A mutual company is a private firm that is owned by its customers or policyholders. A mutual insurance company is an insurance company owned entirely by its 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. 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. The distribution of profits is typically made in the form of dividends paid on a pro-rata basis, based on the amount of business each customer conducts with the mutual company.

Mutual insurance companies make investments in portfolios like a regular mutual fund, with any profits returned to members as dividends or a reduction in premiums. It is an insurance company owned by its members who make regular payments into a fund that will pay their costs if they have a loss, accident, etc. 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. Mutual insurance companies are not listed on stock exchanges, but if they eventually decide to be, they are “demutualized.”

Types of Mutual Insurance Companies

  • Assessment Mutuals

This type of mutual can charge higher premiums if claims and expenses turn out to be greater than projected. Very few mutual insurance companies are organized in this manner, as additional premiums or levies can be difficult to collect.

  • Advance Premium Mutuals

More commonly used is an advance premium mutual, where higher premiums or levies cannot be charged for policies already sold. Instead, the mutual pay any higher than expected losses out of its surplus. It then reviews the premium adequacy for future renewals and imposes premium increases at renewal as required.

The first insurance company in the U.S. was a mutual company, The Philadelphia Contributionship for the Insurance of Houses from Loss by Fire. It was founded in 1752 by none other than Benjamin Franklin. The goal of a mutual insurance company is to provide its members with insurance coverage at or near cost. When a mutual insurance company has profits, those profits are distributed to members via a dividend payment or a reduction in premiums. It is a system of insurance by which all policyholders become company members under contract to pay premiums into a common fund out of which claims are paid.