University of Wisconsin–Madison

Mutual Insurance

Overview


Mutual ownership has historically been an important model for insurance firms, particularly in life insurance and property casualty. They are often created in environments of market failure, by customers who cannot purchase insurance or are paying too much.

Mutually owned insurance firms can offer customers an opportunity to be rewarded for practices that lower their insurance claims. Many successful firms focus on a particular industry, where risk management practices are shared.

History


Many of the early property casualty firms were formed by farmers who could not obtain insurance from large companies. They created mutual insurance companies within their local areas and could offer reasonable rates. The life insurance industry was almost nonexistent before the advent of the mutual model. Mutual life insurance companies were the fastest growing model until 1859, when states began approving regulations that required all insurance companies to conform to better practices, and increased the viability of stockholder-owned firms.

The number of conversions from mutual to stock ownership increased steadily from 1960–1990. A significant number of mutual companies wanted to diversify their activities beyond insurance, and needed greater access to capital.

The insurance industry has continued to undergo significant structural changes. Passage of legislation in the 1990s that removed some of the barriers between insurance companies and banks . Some mutuals converted completely to stock ownership. Others formed mutual holding companies that are owned by the policyholders of a converted mutual insurance firm. Because the insurance industry is regulated, structural changes were made within a regulatory framework that requires at least advance disclosure and often regulatory approval. The pace of demutualizations increased in the 1990s.

Organizational Structure


Policy holders in a mutual insurance companies have ownership interests that end with termination of the policy. This contrasts with many cooperatives, where ownership derives from purchase of a share of stock, and can continue during periods of non-use of the cooperative.

The ownership interests of policy holders in mutual insurance companies ensures that decisions are not made at the expense of their long-term interests. In stock-owned insurance companies, owners can potentially gain from changing the firm’s dividend and financing policies after insurance contracts are sold. When policyholder and ownership interests are merged in mutually owned firms, this conflict is eliminated.

In a stockholder model, the benefits of better practices and lower claims would go to the owners. A mutually owned firm returns the benefits to the customers, through lower rates.

The holding companies own one or more stockholder-owned insurance firms, and have the opportunity to own banking subsidiaries. Because the insurance industry is regulated, structural changes were made within a regulatory framework that requires at least advance disclosure and often regulatory approval.