What is a Mutual Insurance Company?

MUTUAL INSURANCE COMPANY DEFINITION

A company that provides financial protection products and that is owned by its customers rather than by shareholders. Because a mutual insurance company is customer owned, policyholders receive a pro rata share of the company’s profits either as dividend payments or lower insurance premiums. Mutual insurance companies are similar to credit unions, which are also owned by their members and required to act in their members’ best interests. Mutual insurance companies are privately owned and often have “mutual” as part of their name. If they decide to become publicly owned, they must demutualize. Examples of mutual insurance companies include Dumfries, Trillium Mutual, Equitable Life and Gore Mutual Insurance Company.

EXAMPLE


Rebecca wants to purchase life insurance and must choose among several insurers. She has long used a credit union instead of a bank because she thinks credit unions put their customers first more so than banks, so the logical choice for Rebecca is to choose a mutual insurance company, since it operates similarly to a credit union. As a policyholder, she will be a part owner of the company. Each year when she receives her policy renewal notice, her premium is discounted by a dividend payment, which is her share of the company’s profits. She believes that her mutual insurance company provides better products and superior customer service since it isn’t focused on its stock price, like a publicly traded life insurance company might be.

FIRST FOUNDATION TIPS

An important similarity between mutual insurance companies and other insurance companies is that policyholders don’t have to worry about losing their ability get paid for a claim if their mutual insurance company has financial problems. While it’s always wise to choose an insurer that is highly rated, there are safeguards in place to protect consumers against a mutual insurer’s misfortune or bad management. To ensure they can pay up if a large number of claims are filed in a short period, such as after a natural disaster, mutual insurance companies rely on reinsurance (insurance for insurance companies) and guarantee funds (which use the surplus of the better-performing mutual insurance companies to bolster the claims-paying ability of poorer-performing mutual insurance companies).

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Last updated Oct 29, 2018