I’ve noticed some insurance companies, like Nationwide Insurance, have been emphasizing their ownership by their policyholders, not investors, as a selling point in their TV ads. One of the more popular ways to organize an insurance company is as a mutual company, like Nationwide, where the policyholders are the owners of the company, instead of the typical ownership of companies in other industries, where the companies are owned privately, or by stockholders. But some insurance companies are organized as stock companies, owned by stockholders. Some examples of major mutual companies are State Farm, Amica, American Family, Northwestern Mutual Life, Mass Mutual, Guardian Life, & Nationwide. Some examples of major stock companies are Geico, Progressive, Allstate, Prudential, Travelers, & Metlife. Are mutual companies better for the customer than stock companies? Do mutual insurance companies have lower rates, since they don’t need to provide a profit to investors? Do mutual companies provide better service, because the companies operate for the benefit of their policyholders? I’ll answer these & other questions in this blog post, and explain why I think, whether an insurance company is a mutual company or a stock company, its type of ownership should not sway your opinion when buying auto, property, or life insurance, except in certain situations. In fact, in spite of the appeal of policyholder ownership, where an insurance company works for its customers, instead of investors, I’ll tell you how some mutual insurance companies can cost you money.
If a mutual insurance company is owned by its policyholders, and it doesn’t have to seek increasing profits each quarter to please investors, shouldn’t mutual companies have lower rates?
A stock insurance company having higher rates than a mutual company would seem to be a common sense assumption, particularly if the stock company pays a quarterly dividend to its stockholders, like Allstate Insurance. However, I have sold insurance for Allstate, so I know for some customers, they have very competitive rates (As well as extremely uncompetitive rates for other customers). I worked for a mutual company in the 1990s, and they considered it acceptable to have annual claims costs & expenses slightly less than the annual premiums they charged. When I worked for Allstate, there was more of an emphasis on having a wider margin between costs and premium collected. However, in the 1990s, many insurance companies made most of their money from investment income. For most of 21st century (so far, but with no change in sight), we have been in a low interest rate environment, causing mutual & stock insurance companies to try to earn more of an underwriting profit from their insurance operations, instead of relying on investment income. However, just because a mutual company does not have to create large profits for investors, it does not mean it is not driven by profit, or has lower expenses than a stock company. All insurance companies will tell you they have competitive rates, but few companies actually make an effort to compete on price for a large segment of the insurance-buying public. In fact, a lot of companies do not want to have the lowest price for all customers, thinking low rates might attract high risk customers the insurance company will fail to properly disqualify.
For example, with auto insurance, I get mailers advertising new customer savings from many companies. But if these companies were saving most drivers a lot of money, their market share should increase over time. Most of these companies are not increasing their market share, and some of these companies have been losing market share. Over the last two decades, Progressive & GEICO have had a steady increase in auto insurance market share, and I believe they accomplished it by a combination of having competitive rates for most types of drivers, and a lot of advertising.
Whether you are looking for life or home or auto insurance, shop for the best rates and coverage, and don’t worry about whether a company is a mutual insurance company, stock insurance company, or something else, like an insurance exchange.
Do mutual insurance companies pay dividends to their customers?
Most mutual insurance companies selling home, auto or term life insurance do not pay a dividend on these policies. Dividends are a return of profits to the owners, and many mutual companies prefer to use excess profits to have better rates or larger reserves, rather than the additional expense of processing dividend checks. However, some mutual companies pay dividends. I remember contacting Amica Mutual Insurance Company for an auto insurance quote, and they had a policy without a dividend, and two policies with two different dividends. None of these policies had a competitive rate for me, even when considering the dividend. Don’t let this deter you from contacting Amica for an auto insurance quote, because for some people, in some areas of the country, Amica has very good rates, and a great reputation for service.
What if you get an insurance quote, and when you consider the dividend, the mutual company has the best price for you? Remember, the company does not guarantee they will pay the dividend, or pay the expected amount. A big storm, fire, or other catastrophes in your state, or poor company financial performance, or a market crash, can result in expenses that eliminate your dividend.
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If mutual insurance companies are owned by their policyholders, do they provide better service, by focusing on taking care of their policyholder/owners, rather than trying to maximize profit for investors?
Mutual insurance companies would love it for people to believe this is true, but I would not put any value on whether a company is a mutual or stock company, when trying to evaluate their customer service. I think most insurance companies are mediocre in meeting customer expectations, and you can have a terrible experience with any company. Mutual insurance companies are not more generous in paying claims or applying their rules than other companies. You can insure your home with the same mutual company for the last 20 years, but if the company sees you have moss on your roof, or your dog bites someone, the mutual company will be just as quick to non-renew your homeowners insurance as a stock company. Both a stock and a mutual company will non-renew an insurance policy if there are signs of higher than average risk. The stock company does it to preserve profits. The mutual company does it because it acts in the interest of all its policyholders, to manage risk prudently & control claims costs. As a policyholder of a mutual company, you are an owner, but this ownership does not give you any special consideration by the company.
Some mutual insurance companies can cost you money, and make you pay an assessment, to cover the insurance company’s financial obligations.
If you choose to insure with a mutual insurance company, you want to make sure it is a non-assessable mutual company. A mutual company can pay its policyholders a dividend with excess profits, but as owners, the policyholders could have to pay for company losses, unless the mutual is non-assessable. Most mutual companies are non-assessable, but not all of them. If you have any doubts, have your mutual insurance company or agent point out in your insurance paperwork where it says it is non-assessable.
Is there ever an advantage to choosing a mutual insurance company because its a mutual insurance company?
Yes! If you are one of the small group of people where permanent life insurance is a good choice to build cash value, I think one of the participating whole life insurance policies from one of the major mutual life insurance companies, such as Northwestern Mutual Life, Guardian Life, New York Life, and others, should be considered. Many of these companies have a long history of paying large dividends, and they are one of the best choices to build a predictable amount of cash value without having to risk the crapshoot of stock market performance. My opinion is these types of policies make sense only for people with a very good income and a lot of financial discipline, so most people should not buy permanent life insurance for its cash value.
Conclusion
Don’t worry (or care) if your term life, home, or auto insurance company is with a mutual or stock insurance company. Don’t believe the hype about insurance companies owned by their policyholders. Use my website insurance company reviews and shopping tips to find the auto, home, & life insurance companies with the best combination of coverage, price, and service for you. Lots of people pay too much for their insurance because they never shop for better rates, or if they do shop, they don’t check the rates of enough companies. For a lot of people, the best insurance company is the one with the lowest rates.
Is your auto, home or life insurance company owned by its policyholders? Does it matter to you? Tell me about it. Comment on my facebook page. If you have questions and would like my help, you can reach me at help@smartshopyourcarinsurance.com. Follow me on Twitter for important insurance consumer news & new blog entries at CarInsWatch.