Mutual Insurance Company

A privately-owned insurance firm that is fully owned by its policyholders.

What is a Mutual Insurance Company?

A mutual insurance company is a privately held insurance company in which policyholders own 100% of the company. Mutual insurers are established with the sole purpose of providing insurance coverage to their members.

Mutual Insurance Company

Mutual insurance companies require cash flow from their policyholders in order to meet investment needs. The profits, in the form of a dividend, can either be reinvested back into the company or distributed to the policyholders, depending on the management’s decision. This feature makes mutual insurance companies distinctive, as it involves the active participation of the policyholders in the company.

History of Mutual Insurance Companies

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

Nowadays, mutual insurance companies can be found in almost every country around the globe.

Understanding Mutual Insurance Companies

Mutual insurance companies have continued to expand since their establishment, thanks to various factors, which include:

1. Overall goal

The primary objective of a mutual insurance company is to offer insurance coverage to policyholders at or close to cost, whereas most insurance companies strive to maximize their earnings. The generated profits are either distributed to policyholders as dividends or reinvested back into the company.

2. Investment strategy

Determining the financial stability of the company is often challenging due to the fact that mutual insurance firms are privately owned. Typically, they allocate their funds towards more conservative investments that yield lower returns. Consequently, they adopt a longer-term perspective on investment and maintain a specific amount of capital to meet the requirements of policyholders. These types of insurance companies are mutual in nature.

3. Income source

Policyholders contribute insurance premiums to a mutual insurance company as the primary revenue stream, ensuring coverage. However, the limited nature of the business restricts the company’s ability to diversify its income sources.

Another critical mechanism is incorporated into a mutual insurance company if the company chooses to go public – demutualization. Demutualization is the procedure in which policyholders become shareholders, and the company starts trading on a public exchange.

When a mutual insurance company converts to a company stock, it allows them to enjoy greater flexibility and access to capital, which leads to rapid growth.

Stock vs. Mutual Insurance Company

There are certain differences that make each insurance company distinct from each other, but they both offer insurance and are solely owned by shareholders. This type of insurance company is also known as a stock insurance company.

1. Goal of the company

The primary objective of a stock insurance company is to maximize profits for its shareholders, whereas a mutual insurance company aims to ensure sufficient capital to cater to the requirements of its policyholders.

2. Ownership of the company

Policyholders lack authority in the management of a stock insurance corporation. Shareholders possess ownership in stock insurance corporations, whereas policyholders have exclusive ownership in mutual insurance corporations.

3. Earnings distribution

Both cooperative and publicly traded insurance companies typically offer some type of distribution; however, the distributions are organized in slightly different ways.

In a mutual insurance company, distributions can be reinvested into the company, utilized to compensate policyholders in order to decrease future premiums, or employed to pay down debt. In a stock insurance company, distributions can be reinvested into the company, utilized to pay down debt, or distributed to shareholders.

4. Investments

Given that the objectives of stock and mutual insurance companies vary, their investment approaches also differ. While stock insurance companies focus on maximizing profits for shareholders and therefore invest in higher-yielding and riskier assets for short-term results, mutual insurance companies have a different approach.

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

Mutual insurance companies heavily depend on policy premiums as their primary income source. Conversely, stock insurance companies provide policyholders with enhanced stability since they have more opportunities to generate earnings.

Examples (in Canada)

There are several mutual insurance companies that continue to thrive in the Canadian financial environment, including the three most dominant ones based on market share.

  • Intact Group.
  • Aviva Group.
  • Desjardin Group.
  • Internationally, there are approximately 400 mutual insurance companies, with 62 of them located in Canada.

    Additional Resources

    CFI offers the Credit & Banking Commercial Analyst (CBCA)™ certification program for those looking to advance their careers and keep learning, providing helpful resources to take their careers to the next level.

  • The Affordable Care Act (ACA).
  • Insurance Deductible.
  • Insurers specializing in Property and Casualty.
  • Mortality Table.
  • Explore a wide range of wealth management resources.