Medical professional liability (or malpractice) insurers are sometimes described as being “mutual” – but what does that mean? In the simplest terms, it means the policyholders mutually own the company. When you purchase a policy from a mutual medical professional liability insurance company, you receive an ownership stake in that company, just as you do when you buy stock or invest in a mutual fund.
Physicians who purchase their own malpractice insurance will typically have a choice between either policyholder-owned mutual companies or stock companies, which are owned by their shareholders. Mutual insurers are focused on long-term ways to satisfy their policyholders, who can influence the company’s direction and product offerings, whereas stock companies focus on short-term ways to satisfy the stock market and make a profit for their investors. Both types of companies earn income from policy premiums and investments, but stock companies can also raise funds through the sale of stocks.
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Mutual insurance companies tend to be more service-oriented because of their ownership structure. Additionally, since they cannot sell stocks to generate income, they may maintain stricter underwriting discipline or adopt a more conservative approach to investments in order to protect the shared assets of the policyholders.
The Purpose of Mutual Insurance Companies
The concept of mutually owned insurance companies dates back as far as the 17th century in England, with the first one formed in the United States by Benjamin Franklin in the mid-18th century. Most mutual insurance companies are established to fill a gap or cover a specific need in the marketplace. In the case of the medical professional liability insurance industry, the need typically arises when an increase in malpractice claims severity and/or frequency causes poorly managed companies to go out of business and larger carriers to stop offering medical malpractice coverage because of reduced profit potential (this is known as a “hard market”).
The first significant hard market for the medical malpractice industry started in the mid-1970s and resulted in many of the main insurers at the time – most of which were shareholder-owned companies – ceasing to offer medical malpractice insurance. Groups and associations of physicians responded by forming their own mutually owned insurance companies in order to give themselves affordable, reliable coverage. Like most mutual companies, they specialized in a particular market segment – in this case, healthcare – and typically operated solely within one state or geographic region.
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The creation of these mutual medical professional liability insurers changed the market. While malpractice insurance was once only available through stock companies, today many of the country’s largest carriers are mutual.
The Benefits of Mutual Insurance Companies
While there may be specific reasons to choose one medical professional liability insurance carrier over another that have nothing to do with the company’s structure, mutual insurers do offer their policyholders some notable advantages.
- Dividends. The first, and perhaps most significant, is the opportunity to receive greater financial rewards. As a mutual owner of the company, you will share in its success. If the company meets or exceeds its financial goals for the year, it will often return a portion of its profits back to its policyholders in the form of dividends, similar to how a stock company pays dividends to its shareholders. You might receive your dividend as a credit against your premium payment, effectively reducing the amount you pay, or as cash back in the form of a check.
- Input. Another reason to choose a mutual insurer is that, as an owner of the company, you have a voice in how it is run. Mutual insurance companies are governed by a board of directors, which is elected by, and sometimes even comprised of, its policyholders. The board members represent the policyholders and work to ensure the company is operating in their best interests. In contrast, the board of a stock insurance company is chosen by and committed to meeting the financial goals of outside investors, whose interests may or may not align with those of the policyholders.
- Outcomes. One more unique advantage offered by mutual insurers is that having an ownership stake in the company can incentivize better performance among the policyholders. Guided by their policyholder-led board of directors, mutual companies may have stronger risk management programs or stricter underwriting requirements, or both, to help reduce the likelihood of claims. The fewer claims the company has to pay out, the higher the potential profits and the greater the potential dividend. Instead of the success of your insurer being an abstract concept, it can have a concrete impact on your bottom line.
- Focus. Finally, as noted previously, mutual companies are typically established by an association or group of people with a common interest. As a result, the company will have a more focused approach to its product offerings. In the case of medical professional liability insurance, that means the carrier specifically serves the healthcare market. By limiting their area of concentration, mutuals can offer more in-depth experience, highly targeted resources and skilled support than stock companies, which often have a larger customer base and broader coverage offerings.
MagMutual is one of the country’s largest mutual medical professional liability insurers, offering comprehensive insurance solutions for the practice, business and regulation of medicine. Visit MagMutual.com or call 800-282-4882 to learn more.
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