"Unlike stock insurance companies, a mutual insurance company is owned by its members as opposed to shareholders. Consequently, the principal priority of a mutual is to serve the interests of its members without the pressure of taking risks to boost short-term profits. Without any shareholders to pay, profits can be returned to members as reduced premiums or through enhanced insurance coverage."
Whereas many large mutuals exist in the world today offering their services and products to customers and competing with conventional insurers, the benefits of mutuality are best demonstrated when there is a common bond between a mutual's members.
Often this can be a shared trade or profession, thereby creating a sense of belonging to an organization that is properly managed and responsive to its member’s needs. A mutual that specializes in a particular trade or affinity group will also more easily understand its member’s unique needs and be better placed to make changes to its policies as its member’s needs change.
Not being controlled by outside investors also means that a mutual can also make discretionary payments to members if it deems it appropriate as opposed to strictly abiding by the small print of a commercial insurance contract. Mutuals often donate funds to charitable organizations which have connections with their own member’s activities.
Self-insuring employee benefits allows an employer to design a health insurance policy for its employees with its own plan of benefits which can be tailored to suit the employer’s specific requirements. A third party administrator is usually appointed to process claims and to monitor the program.
Funds required to pay for the costs of the plan are set aside into a trust arrangement where income can accrue as funds are built-up in a tax efficient manner. Specific and Aggregate stop-loss is normally purchased to protect the trust.
In the event of surplus profits, after paying and reserving for claims and establishing a reserve, mutual insurance companies can elect either to return funds to members or alternatively to reduce future premiums, or a combination of both.
As with any new venture, market research is key to starting a mutual insurance company. Questions to consider are the type of insurance is to be offered and whether there a need for the mutual’s services as a result of any gap in the commercial insurance market. Alternatively, the project may be based on the fact that members who have an affiliation to the mutual, either by way of membership of an organisation or by way of an occupation, will be prepared to support the new venture as opposed to the commercial marketplace.
Reinsurance contracts today are either categorised as excess of loss or proportional (quota share) cover. Excess of loss reduces the exposure to a captive from an individual loss or single event to a specific amount. By contrast, quota share reinsurance pays an agreed percentage of any individual loss in return for the same percentage of gross premium, after the deduction of administration and marketing costs.