What is a Mutual Insurance Company?

A mutual insurance company is an insurance company owned by its policyholders, not by stockholders. Company decisions are made by the policyholders, usually through an elected board comprised of policyholders. With their roots in 17th-century England, they were formed to help property owners protect against losses due to fire by sharing the financial risk. In this model, the policyholders of a mutual insurance company would pay premiums into a pool out of which claims and expenses were paid. The first mutual insurance company in the American colonies is believed to have been formed in Charleston, South Carolina, but went out of business a few years later after a fire destroyed more than 300 houses. Another early American mutual insurance company was founded by Benjamin Franklin in Philadelphia in 1752, and still operates as a mutual insurance company today.

When the mutual fire insurance companies started in England, they not only provided financial protection, they also formed firefighting brigades to fight fires on members' property, which was identified by a unique “fire mark” placed on the property, often the door frame. These fire marks often were pictures of hands clasping each other, symbolizing mutual support and cooperation. When Franklin addressed the problem of loss due to fire in Philadelphia, he didn't combine the firefighting and financial components that characterized the mutual insurance companies in England. Instead, he first formed a volunteer firefighting brigade to protect all residents' property, called the Union Fire Company. It was only after he concluded, years later, that fires and the losses associated with them were inevitable, that he formed the Philadelphia Contributionship for the Insurance of Houses from Loss by Fire. Even though a fire mark was unnecessary, the company adopted a symbol of four clasped hands, forming a “Jacob's Chair” as its logo.

More than 400 companies worldwide operate as mutual insurance companies. Their basic method of operation is essentially unchanged from the concept first introduced in England in the early 1600s, with the exception that they no longer operate fire brigades to protect members' property. The types of insurance offered range far beyond simple fire and casualty insurance, but premiums are still pooled to pay claims and expenses, with surplus funds periodically distributed among policyholders. The management of a mutual insurance company is carried out by policyholders elected to their positions by the other policyholders.

Some mutual insurance companies, such as John Hancock and Metropolitan Life, both in the United States, Japan's Yamato Life Insurance Company, and the United Kingdon's Friends' Provident, have elected to “demutualize.” Demutualization is the process of converting the ownership structure from a mutual company to a different form, such as a stock company, where ownership is held by stockholders. One of the primary reasons for demutualization is the enhanced ability of the company to raise funds beyond the premiums paid by its policyholders, giving them greater flexibility to undertake new projects and respond to changing market conditions.