What is a mutual insurance company?

Overview: A mutual insurance company is an insurer that has members, not external shareholders. A mutual company is structured to operate for the benefit of its member policyholders, who often have governance rights set forth in their insurance policy contract. Because profits aren’t paid to outside investors, a mutual company typically prioritizes long-term financial strength and keeping pricing sustainable. If financial results are favorable and the board approves it, one option available is for the company to issue dividends or credits to policyholders.

Imagine you’ve just signed the papers to purchase your first car. Then comes an inevitable adulting task: buying insurance. As you compare different insurance companies, you may notice some insurance companies talk about shareholders, while others, like State Farm Mutual Automobile Insurance Company (“State Farm Mutual”), use terms like “members” and “mutual.”

It turns out, the type of company you choose determines whether you’re simply a customer or one where you’re also part of the company as a member.

Member policyholders, not outside shareholders

In a mutual insurance company, policyholders are considered members. At its core, this means the company operates for the benefit of its policyholders. A traditional stock insurer is owned by shareholders who buy stock in the company with the expectation of a return on their investment. This means the stock insurer sells insurance for the purpose of generating a return (i.e., profit) for its shareholders. A mutual insurance company has no shareholders.

Company structure, pricing strategy, and long-term view of risk can vary between mutual insurance companies and stock insurance companies. Here are three key differences commonly seen when comparing the two:

• Structure
  • Mutual insurance company: Not publicly traded and has no shareholders. Customers are members and they have specific rights under the insurance policy contract, which differ from shareholder rights in a stock company (whether private or publicly traded). The company prioritizes providing insurance and financial services products to those members.
  • Stock insurance company: Owned by shareholders, including investors who may not be policyholders or customers. Ownership may shift as shares are traded.
• Pricing strategy
  • Mutual insurance company: The goal of many mutual insurance companies is typically to earn enough profit to remain financially sound and support future growth — not to maximize profits. In addition to allowing for different profit targets, this helps keep the focus on providing value to customers.
  • Stock insurance company: Pricing and business decisions may be shaped by profit goals and shareholder expectations. The focus can be to maximize profits and returns for shareholders.
• Time horizon
  • Mutual insurance company: Can manage short-term swings from volatile events like catastrophes or stock market risk because of the long-term view and financial strength, without the distraction of short-term share price targets and maximizing return for shareholders.
  • Stock insurance company: Aims to increase earnings for the benefit of shareholders and may face pressure from investors to meet quarterly revenue and earnings targets, which can lead to short-term bias in decision-making and volatility.

How does a mutual insurance company work?

Mutual insurance companies collect premiums from policyholders and manage their assets to help pay covered claims, cover operating expenses, maintain reserves to handle future losses, and maintain a surplus — the amount of assets over liabilities that provides a financial cushion to help endure volatility and support growth. They may also implement a balanced investment strategy to help support long-term financial strength and grow the business.

When you buy a policy from a mutual insurer like State Farm Mutual, you aren’t just a customer; you’re a member of the company. This benefit gives you certain member rights and differences that customers of stock insurers don't have, depending on the company and policy.

Sharing success with policyholders (dividends)

In a mutual insurance company, positive earnings may be kept as policyholder surplus. If the company exceeds its projected performance, (e.g., meaning fewer collisions or costly claims than statistically predicted) profits are not shared with shareholders. Instead, the board of directors considers whether and how to return value to policyholders. This may result in a variety of actions, including a decision to lower rates or the board of directors may choose to return earnings to policyholders in the form of a dividend, which can be issued in a variety of ways, including as a check or a premium credit, in some cases.

Why choose a mutual insurance company?

When you’re building momentum — starting a career, moving out, buying a car, renting a place — insurance can feel like just another bill. But the real value of insurance is what happens after something goes wrong.

A mutual insurer can be a good fit if you value long-term stability and a customer-centered experience.

Here are some common questions about mutual insurance companies:

• Do mutual insurers always pay dividends? No. Some mutual insurers may pay policyholders dividends in certain years, but dividends are not guaranteed. A mutual company’s goal is to accurately match the price of its product to the risk, guided by a long-term view on serving customers. Whether a dividend is paid depends on a variety of factors considered by a company’s board of directors, including but not limited to the company’s financial performance, financial strength, strategic objectives, pricing strategy, and broader economic factors. Some policies may not be eligible for dividends.
• Are mutual insurers always cheaper? No. Price depends on many factors, including your location, coverage limits, deductibles, driving or claims history, vehicle details and the insurer’s cost and pricing approach in your state. A mutual structure does not guarantee lower premiums, nor is a stock insurer automatically more expensive. Consider matching coverages and then comparing quotes, or vice-versa.

When you’re shopping for auto insurance, choosing a mutual model means joining a system built for the benefit of policyholders. You’re stepping into a tradition of neighbors helping neighbors and that tradition continues today in every policy issued.