Mutual insurance is taken out to enable policyholders to have certain “ownership” rights into an organization. A mutual insurance company is owned by its policyholders, rather than stockholders, who form an association for the purpose of insuring one another against the possibility of loss. Each policyholder pays a premium for their own insurance policy.
If, at the end of the fiscal year, the mutual insurance company declares a profit, the profit is shared amongst all the policyholders. If the company declares a loss, there is a provision for the policyholders to be assessed a levy to make up for the shortfall. The main feature of a mutual insurance company is that no capital stock is available for purchases in the Stock Exchange.
Membership Rights
The membership rights are taken from the insurance contract, the corporation’s bylaws and charter or articles of incorporation and state laws. These rights include :
- The right to contractual benefits, including dividends declared by the Board of Directors.
- The right to participate in corporate governance, usually by electing directors to oversee the workings of the company.
- In case of liquidation or demutualization of the company, policyholders receive any remaining value.
- Policyholders expect that the corporation will be run for their benefit and they have the right to take legal action against the directors and officers who violate their duties.
These rights are enjoyed collectively and individuals cannot sell them to someone else. These rights terminate at the death of a member or when he cancels his membership of the mutual insurance company. A mutual insurance company has no conflicts of interest between shareholders and policyholders because there are no shareholders. The is not organization non-profit, instead it is a mutual insurance company that keeps a lower profit margin because it does not have to satisfy outside investors. It makes profits with the view of sustaining growth and to enhance the financial strength of the company.
Core Values
Most mutual insurance companies provide better value to policyholders because one of the core values of their corporate culture is to treat policyholders equitably. However, mutual insurance companies have limited flexibility to raise capital or to merge or acquire other companies because they cannot issue stock. All the transactions are recorded so financial reporting is also less flexible.
A mutual company's identification as an insurance company may hinder efforts to provide comprehensive financial services. As there are no outside investors, management performance is given less thought than in stock companies. Policyholders have to rely on rating agencies to place constraints on management actions. Due to the inflexibility in acquiring capital, many mutual insurance companies are being de-mutualized and the workings of both are a cause of a lot of heated debate.
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