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About Mutual Insurance

The mutual insurance concept originated in England in 1696 with the establishment of the first mutual fire insurer. The idea migrated to America with the successful founding of the Philadelphia Contributionship for the Insurance of Houses From Loss by Fire, in 1752, by Benjamin Franklin.

Unlike stock insurance companies, which are owned by investors who may have no other connection with the company, mutual insurance companies are owned by their policyholders. Policyholders are entitled to vote for members of the company's board of directors, and may receive special dividends in the form of capital distributions or reductions of policy premiums. Unlike stock companies, mutual companies exist solely to serve the insurance needs of their policyholders, and not to provide investment profits to shareholders.

Mutual insurance companies range in size from small companies operated out of managers' homes - providing insurance to America's farmers to protect the dwellings, buildings and machinery that make farming possible - to some of the largest insurers of homes, automobiles and businesses in the world.

Policyholder-Owned Insurance Companies

Mutual insurance companies represent the most common form of policyholder ownership. As reflected in names like "Millers Mutual," "Jewelers Mutual," or "Florists' Mutual," many mutual insurance companies have been formed by people or businesses with a common need. Local farmers have founded a number of mutual insurance companies to provide property insurance on the farms in many counties around the United States.

A mutual insurance company sometimes obtains initial capital from would-be policyholders but usually obtains it by borrowing money from investors. If the company is successful, borrowed money is ultimately repaid from the insurer's operating profits. Additional operating profits may be retained to finance future growth and provide a cushion against future liabilities. Insurance company management can also decide to share profits with policyholders in the form of policyholder dividends.

Mutual insurance company policyholders generally are not responsible for losses that exceed the insurance company's resources. However, some mutual insurers, known as assessable mutuals, preserve the right to assess policyholders to obtain additional funds if that becomes necessary for the insurer to meet its obligations. Such assessments typically are limited to one additional annual premium payment.

A reciprocal insurance company closely resembles a mutual insurance company, but they have technical differences. For example, while a mutual insurance company is incorporated, a reciprocal is managed by a management company, referred to as an attorney-in-fact.

Some consider captive insurance companies a sophisticated form of self-insurance or retention, rather than classify them as insurance companies. They are mentioned here because captives are owned by the organizations they insure. A single-parent captive is an insurance company organized solely to provide insurance to its "parent" company. A group captive or an association captive provides insurance to a group of corporations that also own the captive. A risk retention group is a special type of group captive or association captive formed under the Risk Retention Act of 1986 to provide liability insurance and subject to limited state regulation.