The Advantages of A Mutual Insurance Company

If you’ve heard me talk about Lawyers Mutual, you’ve likely heard me mention that I believe the mutual insurance company model is by far the best model for policyholders.  Since I make that statement quite often, I thought I’d write a short article explaining a little about the history of mutual insurance companies and providing the reasons that I believe the mutual model is the best.  That way, next time you hear me talk about the benefits of being a mutual insurance company, you’ll know exactly what’s behind this statement. 

The oldest existing insurance company in the United States is believed to be The Philadelphia Contributionship for the Insurance of Houses from Loss by Fire, a mutual insurance company, founded in 1752 by none other than Benjamin Franklin.  (Khalamayer, Anya and Hemenway, Chad.  “The Birth of Insurance.”  PropertyCasualty360.com. 19 April 2012.  Web 20 June 2016.)  The company is said to be the first insurance company founded as a mutual.  Its founding principle is “whereby every man might help another without any disservice to himself.”  While today the principle would likely be gender neutral, it continues to embody the essence of mutual insurance companies.        

As was the case with The Philadelphia Contributionship, the first mutuals were generally formed by associations or groups of professionals whose members could not find sufficient or affordable coverage.  Sound familiar?  That is exactly why Lawyers Mutual was founded nearly 40 years ago - an availability and affordability crisis in the legal malpractice insurance market.  In the late 1970s, the North Carolina Bar Association was faced with the realization that the lawyers’ professional liability insurance market was unstable, that premiums would likely continue to rise, and that the commercial insurance market for lawyers’ professional liability insurance was dominated by a few companies that had no commitment to this line of business or North Carolina. In January 1977, the Chairman of the North Carolina Bar Association's Insurance Committee and its Executive Director met with members of the North Carolina Insurance Commission to discuss the feasibility of organizing a mutual insurance company to serve the North Carolina Bar, the first company by and for lawyers in the country.  And the rest, as they say, is (almost 40 years of) history.     

A major benefit of mutual insurance companies is that ownership is shared among policyholders.  As a result, capital can be returned directly to them in the form of either policyholder dividends or premium credits.  For example, since 2011, Lawyers Mutual has given back $6 million in capital to policyholders in the form of dividends.  And since we were formed in 1977, we have returned a total of just under $13 million in dividends to policyholders.      

Stock companies, on the other hand, are owned by shareholders.  Stock company dividends go to shareholders.  The goal of stock companies is to maximize stockholder value, which may not always be consistent with policyholder interests.  Further, since stock company ownership is vested in stockholders, policyholders have no rights when it comes to voting regarding board members.  Whereas, for mutuals, the policyholders hold these voting rights.  And finally, this structure also often allows mutual companies to take a longer-term view on strategy, risk appetite and investment.  Mutual insurance companies are not concerned with managing stock price, and so generally have a higher percentage of invested assets in equities than their stock counterparts, which while historically more volatile than fixed income investments, have generated higher returns.

One final advantage that I wish to discuss is specialization.  As you may recall, I mentioned that many mutual insurance companies were formed by associations or groups of professionals.  This means that many of these companies focus on a single line of business.  And since these companies focus on a single line of business, they know it very well.  Many, like Lawyers Mutual, are also single state writers.  In our case, we know the North Carolina Bar, regulations, laws, case law and judicial and economic environments better than anyone else.  We believe that is also a major benefit to policyholders.    

I would not be completely honest if I did not acknowledge the one advantage stock companies have over mutuals - access to capital.  If a stock company needs more capital, it can issue more stock.  Mutuals do not have that ability, and for that reason tend to be better capitalized.  Perhaps that’s not an advantage after all.

Anyway, I’ve just about reached my word count limit, so better end this article.  I hope that next time you hear me talk about the mutual structure, you’ll have a much better appreciation of why I believe, hands down, it’s the best for policyholders.