Mutual Insurance Company

A privately-held insurance company that is 100% owned by its policyholders

What is a Mutual Insurance Company?

A mutual insurance company is a privately-held insurance company that is 100% owned by its policyholders. Mutual insurers are established with the sole purpose of providing its members with insurance coverage.

 

Mutual Insurance Company

 

Mutual insurance companies are unique because the policyholders select management, and any profits are either reinvested into the company or paid out to policyholders in the form of a dividend. Like other insurance companies, mutual insurance companies make investments to meet the cash flow demand from its policyholders.

 

History of Mutual Insurance Companies

The mutual insurance company concept originated from 17th century England when individuals sought coverage due to loss from fires. However, the mutual insurance industry officially began in the U.S. in 1752 when Benjamin Franklin founded the Philadelphia Contributionship for the Insurance of Houses from Loss by Fire.

Today, mutual insurance companies are in practically every country in the world.

 

Understanding Mutual Insurance Companies

Mutual insurers continued to grow since their creation, due to several factors, including:

 

1. Overall goal

Most insurance companies aim to maximize profits, but the overall goal of a mutual insurance company is to provide insurance coverage to policyholders at or near cost. When profits are generated, they either pay the policyholders a dividend or reinvest the profits into the company.

 

2. Investment strategy

Mutual insurance companies maintain a certain level of capital to meet the needs of policyholders, so they have a much longer investment view. As such, they usually invest in lower-yielding conservative investments. It is worth noting that because mutual insurance companies are privately held, it is usually difficult to determine the solvency of the company.

 

3. Income source

The main source of income for a mutual insurance company is the insurance premiums that policyholders pay for coverage. Due to the nature of the business, they are restricted in their ability to diversify income sources.

 

There is another critical mechanism that is built into a mutual insurance company if the company selects to go public – demutualization. Demutualization is the process in which policyholders become shareholders, and the company begins to trade on a public exchange.

When a mutual insurance company converts to a stock company, they enjoy greater flexibility and access to capital, which allows them to grow more rapidly.

 

Stock vs. Mutual Insurance Company

There is also something called a stock insurance company, which is a company that is solely owned by its shareholders. Both companies offer insurance, but there are some differences that make each very distinct from each other. They include:

 

1. Goal of the company

The main goal of a mutual insurance company is to maintain enough capital to meet the needs of its policyholders, while the goal of a stock insurance company is to maximize profits for shareholders.

 

2. Ownership of the company

Mutual insurance companies are solely owned by policyholders, while stock insurance companies are owned by shareholders. In a stock insurance company, policyholders have no control over the company’s management.

 

3. Earnings distribution

Both mutual and stock insurance companies usually provide some form of distribution; however, the distributions are structured somewhat differently.

In a mutual insurance company, distributions can either be used to pay policyholders so they can reduce future premiums or be reinvested into the company. In a stock insurance company, distributions can either be paid to shareholders, used to pay down debt, or be reinvested into the company.

 

4. Investments

Since the objectives of stock and mutual insurance companies are different, their approach to investment is slightly different. A stock insurance company is consistently under pressure to maximize profits for shareholders, so they tend to pay attention to short-term results. As such, they will usually invest in higher-yielding, riskier assets.

On the other hand, a mutual insurance company is more long-term focused, which usually leads them to invest in more conservative assets.

 

5. Risk tolerance

Stock insurance companies offer policyholders greater stability because more options are available to them to generate earnings. In contrast, a mutual insurance company heavily relies on policy premiums as their main source of income.

 

Examples (in Canada)

There are several mutual insurance companies in Canada, and the industry continues to thrive in such a financial environment. The three largest, by market share, include:

  1. Intact Group
  2. Aviva Group
  3. Desjardin Group

 

Globally, there are about 400 mutual insurance companies, including 62 in Canada.

 

Additional Resources

CFI offers the Certified Banking & Credit Analyst (CBCA)™ certification program for those looking to take their careers to the next level. To keep learning and advancing your career, the following resources will be helpful:

  • Affordable Care Act (ACA)
  • Insurance Deductible
  • Property and Casualty Insurers
  • Mortality Table

Financial Analyst Certification

Become a certified Financial Modeling and Valuation Analyst (FMVA)® by completing CFI’s online financial modeling classes and training program!