The Relevance of the Mutual Insurance System Today In an age of demutualization in which many companies are attempting to reorganize to position themselves for greater access to capital and increased viability as businesses, it becomes ever more important to examine the particular advantages that the mutual insurance system continues to offer to policyholders. $P One of the chief advantages a mutual insurance company has over its publicly-traded counterparts is that the mutual company can be organized and incorporated on a smaller scale. For example, one can look at the case of the PEI Mutual Insurance Company, which serves a market of about 130,000 people. It would be difficult to imagine a large multinational corporation dedicating even one employee to service such a market, but PEI Mutual’s 20,000 policyholders can leverage the resources of the entire organization. What’s more is that these smaller companies can use the same “back-office” systems and processes that are standard throughout the industry. Naturally, they can also purchase reinsurance as they see fit, so they have the ability to write small or large policies, all the while retaining the access and accountability of a local company. $P There are also sound economic reasons for doing business locally. Most people want their money to stay within their own communities so it can be used for the betterment of the local economy and enhancement of local services. Moreover, from an insurance perspective, policyholders in a relatively quiet jurisdiction won’t want to bear the costs of the fires, floods, and havoc going on elsewhere (say, through increased premiums). Doing business with a local mutual insurance company helps ensure that both the risks and the rewards remain local. $P As important as it is in terms of the policyholder’s self-interest to be investing locally, the benefits of operating on a local scale are more than just parochial - it makes good insurance sense. For instance, the policies which a farm mutual company offers should be tailored to local conditions. The insurance requirements of a 300-acre farm in PEI would be different from the requirements of a multi-township farm in Alberta. Even from an actuarial science standpoint, the individual variables that go into the risk assessment are going to be different, and therefore the premiums calculated on different assets will vary. $P Mutuals of all kinds exist for the members to benefit from the services they provide. Since the “shareholder” and “policyholder” are one and the same, a mutual insurance company has only one constituency to serve, thus eliminating any perceived conflict of interest. In a publicly-traded insurance company, the shareholders demand the highest possible return on their investment, which could (theoretically) mean charging the highest premiums the market could bear and consolidating business processes to minimize costs. This may mean no more “kitchen table” chats between claimants and adjusters. In a mutual environment, the member’s concern is that of managing his or her exposure to risk, an interest shared by every other member-stakeholder. Among other details, the mutual company isn’t expected to pay dividends to shareholders, and they have the option of investing in the company for security, investing locally, or even passing premium savings along to their customers. Companies have been known to offer “Mutual Rebates,” should they have had a particularly good year, be it from a reduction in claims, an increase in policyholders, or both. $P Mutual insurance companies of all sizes are in the unique situation in which the policyholders literally protect one another. This reflects the community spirit of places such as PEI. Many such companies, including PEI Mutual, were founded in response to high premiums having to be paid out of province. To this day, mutual companies continue to provide competitive premiums and industry-leading service. Few stock insurance companies can boast kitchen table visits where an adjuster can see for him or herself the basis for the claim, as well as take the opportunity to review the various policies with the claimant. $P One more advantage of a mutual insurance company is that ownership comes with decision-making rights. For instance, the Board of Directors is elected by the community of policyholders: one member, one vote. While not every policyholder takes an active role in the process, the accountability is there to ensure that the company underwrites effectively and balances its duties to the community and to its policyholders. $P In the final analysis, the mutual insurance system is not only relevant today, it seems ideally suited for an age where prompt and personal service, accountability, and accessibility are in higher demand than ever before. Given careful management, the mutual model has proven performance and sustainability. Assuming that service and security remain of value to the human family, it’s easy to imagine this system flourishing into the twenty-second century. $P ~ William Matheson
Wasn’t that exciting? Let’s hope the Farm Mutual Foundation likes it. In case you didn’t know, my father is a Director with PEI Mutual, and he let me know about the scholarship opportunity. My essay isn’t particularly original, but I feel I’ve done my best, and they only asked for a “brief essay” anyway.
So that’s how I’ve spent my day, taking too-frequent breaks for food, Skittles, and any distraction under the sun. Speaking of, we did get out for a bit to photograph the sunset:
Sunset at Souris River, August 12th, 2006
I’ve also caved and bought a Flickr pro account, with the idea that I’ll do my Ukraine stuff on willmatheson.com (because there’s so much backlog) and get the Summer 2006 stuff online now. I think that’s the best way to go ahead. (You’re probably wondering why I didn’t put the 6 pictures I uploaded tonight in there. Well, I’m not quite ready to open up that can of worms yet, but I will do so this coming week.)