The Mutual Insurance Concept
Mutual insurance companies were often formed by a group of individuals or businesses that faced a shared – sometimes unique – but often unmet need for insurance. Mutual insurers range in size from small market companies operating in a single county to large, national carriers operating throughout the country and internationally. Most mutual insurers sell various lines of coverage including those for autos and homes, farms and businesses while others specialize in niche markets such as churches, pharmacists, jewelers, and lumber dealers.
The median age of a mutual insurance company in the United States is 120 years. Among the country’s 10 largest property/casualty insurance companies, five are mutual companies serving 25 percent of the market. The five largest non-mutual insurance companies serve 21 percent of the market.
Capital for a mutual insurance company is sometimes raised from current or prospective policyholders, but usually is obtained by borrowing money. Borrowed money is repaid from the company’s operating profits. Operating profits in a mutual company are often retained, in whole or in part, to finance future growth, provide a cushion against future liabilities, adjust rates or premiums, and bolster industry ratings among other needs.
Mutual insurance policyholders generally are not responsible for losses that exceed the insurance company's resources. However, some mutual insurers, known as assessable mutuals, have the right to assess policyholders to obtain additional funds if that becomes necessary for the insurer to meet its obligations. Such assessments typically are limited to not more than one additional annual premium payment.
Ultimately, mutual companies are unique because they were established to serve the insurance needs of policyholders without also having to meet the investment needs of stockholders. The policyholder – often referred to as a “member” – is the sole focus of a mutual insurance company. As a result mutual insurance company members have all the same advantages as policyholders of non-mutual insurance companies in the form of policy rights (depending on coverage clauses), protections afforded by state regulation, and access to state guaranty funds in the event of insolvency.
Membership in a mutual insurance company exists as long as the individual or business is a policyholder. Membership is not equivalent to ownership of an equity interest in the mutual insurance company. The mutual member cannot freely sell or pledge as security the mutual insurance policy or his/her rights in it.
Because property/casualty insurance is regulated at the state level, the regulations that apply to mutual companies respecting members, boards of directors, and by-laws of the company vary from state to state. Directors of mutual insurance companies are generally permitted to develop governance practices appropriate to the regulatory requirements of the states in which they are domiciled, consistent with their company charter and by-laws, their business environment, and their member needs. Therefore, variations in corporate governance practices exist within the mutual insurance industry (as they do in other industries), but are within the parameters established by applicable regulatory requirements. State insurance departments collect key financial data and other company information from mutual insurance companies, with the type and extent of information often based on the size of the company and will, upon a consumer request, make available non-proprietary information.