Mutual Insurance Company
What Is a Mutual Insurance Company?
A mutual insurance company is an insurance company that is owned by policyholders. The sole purpose of a mutual insurance company is to give insurance coverage for its individuals and policyholders, and its individuals are given the right to choose management. Mutual insurance companies make investments in portfolios like a normal mutual fund, with any profits returned to individuals as dividends or a reduction in premiums. Federal law, as opposed to state law, determines whether an insurer can be classified as a mutual insurance company.
Understanding a Mutual Insurance Company
The goal of a mutual insurance company is to furnish its individuals with insurance coverage at or close to cost. At the point when a mutual insurance company has profits, those profits are distributed to individuals by means of a dividend payment or a reduction in premiums.
Mutual insurance companies are not traded on stock exchanges, accordingly their investment strategy stays away from the tension of arriving at short-term profit targets and can operate as best fit to its individuals with the goal of long-term benefits. Accordingly, they invest in more secure, low-yield assets. Nonetheless, in light of the fact that they are not publicly traded, it very well may be more hard for policyholders to determine how monetarily dissolvable a mutual insurance company is, or the way in which it calculates dividends it sends back to its individuals.
Large companies can form a mutual insurance company as a form of self-insurance, either by consolidating divisions with separate [budgets](/spending plan) or by collaborating with other comparative companies. For instance, a group of doctors might conclude that they can get better insurance coverage and lower premiums by pooling funds to cover their comparative risk types.
At the point when a mutual insurance company changes from part owned to being traded on the stock market, it is called "demutualization," and the mutual insurance company turns into a stock insurance company. This shift might bring about policyholders acquiring shares in the recently drifted company. Most frequently this is finished as a form of raising capital. Stock insurance companies can raise capital by distributing shares, while mutual insurance companies can collect capital by borrowing money or expanding rates.
History of Mutual Insurance Companies
Mutual insurance as a concept started in England in the late seventeenth century to cover losses due to fire. It started in the United States in 1752 when Benjamin Franklin laid out the Philadelphia Contributionship for the Insurance of Houses From Loss by Fire. Mutual insurance companies presently exist almost wherever around the world.
In the past 20 years, the insurance industry has gone through significant changes, especially after 1990s-time regulation eliminated a portion of the barriers between insurance companies and banks. In that capacity, the pace of demutualization increased as numerous mutual companies wanted to differentiate their activities past insurance, and to access more capital.
A few companies changed over totally to stock ownership, while others formed mutual holding companies that are owned by the policyholders of a changed over mutual insurance firm.
Features
- Mutual insurance companies are not listed on stock exchanges, but rather assuming they in the end choose to be, they are "demutualized."
- Federal law determines whether an insurer can be a mutual insurance company.
- Any profits from premiums and investments are distributed to its individuals through dividends or a reduction in premiums.
- A mutual insurance company gives insurance coverage to its individuals and policyholders at or close to cost.
- An insurance company owned by its policyholders is a mutual insurance company.
