Ever notice that some insurance companies have ‘Mutual’ in their name and wonder what that means?
There are two basic types of insurance companies: Mutual companies (like Madison Mutual) and stock companies. A stock company is owned by its shareholders (oftentimes outside investors) whereas a mutual company is owned by its own policyholders. While stock companies have the financial objective of generating wealth for their shareholders, mutual insurers are free to make decisions solely in the long-term best interest of their policyholder-owners.
Profits generated by a mutual insurer increase the company’s net worth, which is referred to as its “policyholders’ surplus.” This surplus is safeguarded for the express purpose of strengthening the company’s ability to pay the potential future claims of its policyholder-owners. At a stock insurance company, net worth is referred to as “shareholders equity” and profits may be returned to shareholders in the form of stock dividends rather than secured for the benefit of the company’s policyholders.
In essence, mutual insurers are cooperative organizations. In fact, Madison Mutual’s corporate structure is that of an “assessment cooperative” property/casualty insurance company.
