Mutual insurance companies are owned by policyholders and were first created in 17th century England to protect homeowners from fire losses. They pool premiums to pay claims and expenses, and some have expanded beyond fire and accident insurance. Some companies have chosen to “demutualize” to raise funds beyond premiums.
A mutual insurance company is an insurance company owned by its policyholders, not shareholders. Company decisions are made by policyholders, usually through an elected board of policyholders. With their roots in 17th century England, they were formed to help homeowners protect themselves against fire losses by sharing the financial risk. In this model, policyholders of a mutual insurance company would pay premiums in a pool 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 closed a few years after a fire destroyed more than 300 homes. Benjamin Franklin founded another American mutual insurance company in Philadelphia in 1752, and it still operates as a mutual insurance company today.
When mutual fire insurance companies started in England, they not only provided financial protection but also formed firefighting brigades to fight fires on members’ property, which was identified by a unique ‘fire mark’ affixed to property, often the door frame. These fiery marks were often images of hands clasping each other, symbolizing mutual support and cooperation. When Franklin addressed the problem of fire loss in Philadelphia, he did not combine the firefighting and financial components that characterized mutual insurance companies in England. Instead, he first formed a volunteer fire brigade to protect the property of all residents, 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 Contribution to Home Insurance for Loss by Fire. Although a brand of fire was unnecessary, the company adopted a symbol of four folded hands, forming a “Jacob’s Chair” as its logo.
More than 400 companies around the world operate as mutual insurance companies. Their basic method of operation is essentially the same as the concept first introduced in England in the early 17th century, with the exception that fire brigades no longer operate to protect members’ property. The types of insurance offered go far beyond simple fire and accident insurance, but premiums are still pooled to pay claims and expenses, with excess funds distributed periodically among policyholders. The management of a mutual insurance company is carried out by the insureds chosen for their positions by the other insureds.
Some mutual insurers, such as John Hancock and Metropolitan Life, both in the United States, Japan’s Yamato Life Insurer, and United Kingdom’s Friends’ Providence, have opted to “demutualize”. Demutualization is the process of converting the ownership structure of a mutual company to a different form, such as a corporation, where the ownership is owned by the shareholders. One of the main reasons for demutualization is the company’s improved ability to raise funds beyond the premiums paid by its policyholders, giving them greater flexibility to undertake new projects and respond to changing market conditions.
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