Mutual Company - Explained
What is a Mutual Company?
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What is a Mutual Company?
A mutual company refers to a private firm that considers its policyholders or customers as its owners. The clients, being the ultimate owners of the company, earn profits based on the mutual company's performance. Generally, they receive profits as dividends based on a pro-rata approach, that is the amount of money that a client has invested with the mutual company.
How Does a Mutual Company Work?
Usually, the insurance industry, several banking trusts, credit unions in Canada, community banks based in the United States and savings and loans institutions follow the structure of the mutual company. In an insurance mutual company, the person who holds the policy is entitled as the insured party or client of the company, as well as the insurer or the part owner. Mostly, private organizations instead of public firms represent mutual companies. Lots of the U.S. and Canada-based mutual companies have been preferring a joint stock corporate form over a mutual structure for many decades. This process is referred to as demutualization. The Philadelphia Contributionship for the Insurance of Houses from Loss by Fire, founded by Benjamin Franklin, is the oldest insurance organization that commenced its operations in 1752.
Benefits of a Mutual Company
The ownership structure allocated to policyholders is one of the advantages that mutual insurance companies has to offer. Ultimately, they can receive the capital straight either by the way of dividends or premium amount. For instance, a North-Carolina based liability insurance firm has reimbursed its policyholders with capital of $6 million as dividends, and the firm has been following the practice since 2011. Also, since the year it came into existence, that is 1977, the firm had given back around $13 million to its policyholders as dividends. Mutual company also has an added advantage of offering specialization to its policyholders. There are lots of mutual insurance firms that are a result of associations or experts having a specific skill set, which lets them to emphasize on a single objective instead of focusing on many. A monolithic style of management enables mutual firms to stay away from fields that don't give them the benefit of core competence.
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