Comparing Mutual to Stock Insurers Is Like Comparing Marathoners to Sprinters

By Charles Chamness, NAMIC | October 15, 2015

A.M. Best’s recently released 2015 “Mutuals at a Glance” report is an interesting report on differences between mutual and stock companies in key areas of performance. In its pages is a depiction of a mutual insurance industry that is strong, stable, and continuing to successfully serve policyholders as mutual insurers have been doing in the U.S. since 1752. The report is encouraging and presents the mutual model, including apparent advantages as well as some purported challenges, based on differences due to “strategic scope” when compared to that of other organizational structures in insurance.

Among the more notable findings is the continued strong mutual segment performance based on Best’s own standard, the Best Capital Adequacy Ratio. Using the BCAR, the report notes that “mutual companies maintain a solid level of capitalization as reflected by over 75% of the rated companies that reported BCAR scores of 250 or higher, which is well in excess of published guidelines.”

The report acknowledges that mutual companies are highly rated “with 10% in the exceptional & superior category, 66% in excellent, 21% in good and only 3% falling into the fair & below category….”

Charles Chamness NAMIC

Charles Chamness
NAMIC

With regard to purported challenges, the Best report notes that mutual companies tend to have conservative investment portfolios with relatively little in equity investments, which could impede investment gains. But racking up outsized profits has never been a priority of the mutual insurance model.

Mutuals do not have shareholders and therefore operate without the motivation for short-term financial returns to maximize quarterly earnings. Since shareholder returns and short-term profits are not predominant goals, a mutual insurer can invest to seek solid returns while keeping the company portfolios less vulnerable to the whims of the stock market. Describing mutual insurance companies as underperforming in comparison to stock insurance companies in this and other areas can be like saying that marathon runners “underperform” sprinters. Just as the objectives for both are different, so are the attributes of performance and the definitions of success.

Historically, mutual companies have exhibited a financial stability that allows them to maintain their focus on policyholders. This singular focus has kept two-thirds of U.S. mutual insurers – a vast majority of whom are NAMIC members – in business for more than a century, helping them to outperform the rest of the industry where it matters most for mutuals – customer satisfaction and retention.

In short, the A.M. Best report does a very good job of identifying variations in mutual versus stock company performance in the industry. It also does a good job of rightly acknowledging the differences in strategy, scope, and management focus that often drive those differences.

Chamness is president and CEO of the National Association of Mutual Insurers (NAMIC).

Latest Comments

  • October 26, 2015 at 5:37 pm
    Agent says:
    Please explain what a Reciprocal Exchange is as was operated for many years by Farmers?
  • October 20, 2015 at 2:06 pm
    Bill Ford says:
    The article is totally misguided and out right wrong. Mutuals? What is a mutual? The Supreme Court of Ohio decided fifty years ago they could not tell. A mutual is supposed to... read more
  • October 16, 2015 at 9:10 am
    Joe Harrington says:
    Very well stated, Chuck. Mutual insurers take the long view, and our assessment of them should, too.
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