The concept of insurance is as old as our human existence, right from when hunters and gatherers operated in groups to spread the risk of unforeseen events.
The concept of mutuality has also been around for a long while. In fact, some of the earliest, more formalised insurance companies had a mutual basis. In medieval Europe, members of trade guilds paid fees into a pool to cover unforeseen property losses — in those days these losses were notably from fire.
Over the centuries the popularity of mutually owned and operated insurance companies worldwide especially, has continued. Mutuals are particularly common amongst defined socio-economic and professional groups. Some examples are mutuals representing farmers (like FMG), doctors, teachers, and the clergy.
Fast forward to the 21st century, and in 2017 worldwide there were some 5,000 mutual insurers with an overall market share of some 27%. There are several different names attributed to the mutual model including friendly society, provident society and other variously named self-help groups. What they all have in common is that they are owned from within, by the member policyholders, and there is no externally held capital. A mutual insurer’s main purpose is to provide dedicated cover to their members in exchange for affordable premiums. And this is the key distinction between a mutual and a stock, or investor owned insurer.
Investor or stock owned insurers came to rise in the in the 1600s, with ships sailing to the New World that secured multiple investors or underwriters to spread the risk of losses at sea. Any reward from the voyage, was of course distributed among those investors.
So, what else distinguishes mutuals from investor-owned insurers? The intent of a mutual is to be there in perpetuity for its members, and it achieves this by more than dollars driving decision making.
Here's what makes a mutual insurer unique:
Instead of being paid out to shareholders or other investors, profit is retained within a mutual to keep premium increases to a minimum, remain market competitive and develop the services available to members. The profit also goes to supporting the interests of members in their wider community, and importantly, as mutuals have no external capacity to draw on, to build on their own reserves.
A mutual’s member-ownership structure has an objective of profitability and financial stability over the longer term, as opposed to regular returns to shareholders. This allows a mutual insurer to have a strategic focus within the company that is more vested in its members rather than a traditional company that is more vested in the shareholder. It also allows a mutual insurer to ‘play a long game’ and ride the ups and downs of major disasters and heavy claim years.
A mutual insurer’s governance structure gives members a say in how the organisation is run, both through annual general meeting participation and voting for board directors.
Today, while the mutual insurance sector represents 30% - 40% of the overall market globally, in New Zealand mutual insurers make up less than 10% of the total sector. Like FMG, mutual insurers are in it for the long haul and this is particularly important for a New Zealand insurer that is increasingly exposed to the risk of storm activity and natural disasters. It’s important not only from the point of view of being able to pay claims as they arise, but equally to ensure that after a major event, members still have access to adequate insurance cover at an affordable price.