Focus On The Future Options For The Mutual Insurance Company

Focus On The Future: Options For The Mutual Insurance Company

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The Rights and Obligations of Policyholders, Board of Directors, and Management

Board of Directors

A mutual insurance company is governed by a board of directors elected by the policyholders. The role of the board of directors is to develop company goals and implement corporate strategy to deliver quality products while assuring the financial solvency of the company. In order to accomplish these objectives, the board of a mutual insurance company must maintain effective control of management and operations, accurately measure company performance, and constantly review the solvency of the company. Meaningful participation by all directors is required to ensure the company's success.

Composition of the Board

Inside and Outside Directors

Directors of mutual insurance companies are typically classified as either "inside" or "outside" directors. Inside directors are employees who hold management positions in the company. Because of their dual role as director and manager, inside directors are potentially subject to influence or control by the company, and are not considered "independent." Outside directors are not employed by the company, and usually have no other financial relationship to the company other than, perhaps, as a policyholder. Outside directors are considered "independent" or disinterested directors.

Terms of Board Members

The term of service of each director is determined by the articles of incorporation or bylaws of the mutual insurance company. The board of directors of a mutual insurance company may be staggered or fixed. A staggered board is one in which the board is divided into at least two groups of directors, with each group having a different term of service, and thus a different service expiration date. A fixed board is one in which all director's terms expire simultaneously. The staggered structure is preferred by many companies because it provides a higher level of continuity since only part of the board will be subject to replacement at any particular election. By limiting the number of directors exposed to replacement at a given time, staggered terms can make it more difficult for dissident members to accomplish a change in control of the board of directors.

Term Limits

Mutual insurance companies may adopt bylaws limiting the number of terms that directors may serve. Term limits ensure that the board remains dynamic and that, over time, no single director dominates the board's activities. However, term limits can also prove harmful to the company if they result in loss of historical knowledge and valuable skills.

Director Compensation

As a rule, a mutual insurance company's director compensation should adhere to industry standards. Unlike many stock companies, mutual insurers cannot offer company stock to their board members. However, if the mutual company has stock subsidiaries, directors may be offered stock ownership in one or more of those subsidiaries.


Regular evaluations of performance of the board's individual members are important. While companies vary in the methods used to measure director performance, review is necessary and prudent.

Individual directors should be evaluated on their level of attendance and participation at board meetings, on their knowledge and understanding of the company's vision and strategy, and on the quality of their performance. Some companies limit director review to situations where questions have been raised about a specific director's performance.

Qualifications of Directors

The board of directors of a mutual insurance company typically includes some members who have experience in the insurance industry. The board may also consist of members who do not have particular expertise in insurance matters, but whose experience and knowledge in other fields of business or professions are considered valuable. Regardless of the mix, the board must exercise a well-balanced approach to policy decisions. There are certain qualities and attributes which all board members should possess.

Individual Qualities of Directors

All board members should possess a high level of professional and personal integrity. Directors should be highly motivated persons who possess a demonstrated ability to work cooperatively with others. They should demonstrate strong problem-solving skills, and be capable of developing, offering, entertaining, and evaluating ideas to determine which one will result in the greatest benefit to the company and its policyholders. Directors must also be able to accept constructive criticism without retaliation. Because directors steer the company's future, they should be skilled at setting goals and implementing strategies which will accomplish those objectives.

Individual Director Competencies

Individual board members of a mutual insurance company are typically persons who have achieved a high level of success in their particular field or profession. Consequently, directors tend to be individuals with good business judgment who are competent in subjects and areas beneficial to an insurance company. It is important that each director has at least a basic understanding of management concepts and financial principles in order to assimilate information contained in reports produced by management, consultants and others. Directors must be capable of selecting and motivating high-level officers of the company and must understand the importance of succession planning and management development to retain quality company personnel. Directors who possess loyalty and enthusiasm for the company can prove to be a valuable resource for creating and maintaining positive public relations with the community.

Collective Board Competencies

The board should exhibit certain collective competencies which are vital to its effective performance. Required skills include business leadership, strategic planning and business judgment. Directors should also possess a good understanding of the insurance industry and the market the company serves, as well as general business economics, accounting and finance. Directors must be able to follow management trends and to immediately respond to unexpected crisis events with rational and reasoned solutions.

Board Organization


Leadership of the board of directors of a mutual insurance company may be provided in a variety of ways. In some companies, the Chief Executive Officer (CEO) will also serve as Chairman of the Board. These companies may also have established the position of "lead director" to provide leadership in certain situations where it is neither possible nor appropriate for the CEO to take the lead. The Chairman of the Board provides leadership to the board, but enjoys no greater voting power than any other director.


A board of directors may assign or delegate certain responsibilities to smaller groups of directors called committees. Most companies have an executive committee with authority to act for the full board, particularly between board meetings.

Mutual insurance company boards commonly form an audit committee, a personnel/compensation committee, and a nominating/governance committee. In order to avoid the potential for conflicts of interest, a majority of the members of committees are usually outside directors. The audit committee deals with both internal and independent outside auditors, reviews audit reports and financial statements before they are finalized, and reports to the full board on these and other topics. The personnel/compensation committee oversees the company's compensation system and recommends changes to the compensation of executive level employees, including the CEO. Due to the employment relationship of inside directors, the personnel/compensation committee is typically made up exclusively of outside directors. For mutual insurers who are members of an insurance holding company, the mutual insurance holding company must require that the audit, nomination and compensation committees exclusively consist of outside directors. Lastly, the nominating/governance committee reviews and recommends potential candidates for board membership, handles ethical questions involving board members and conducts evaluations of the board and its members.