“Many a small thing has been made large by the right kind of advertising.” – Mark Twain
I believe farm mutuals are the essence of what an insurance company is meant to be. While many large insurance companies view themselves as a tool to amass capital to be efficiently invested, farm mutuals are intent on providing asset protection as economically as possible.
We Might Be Confused by Advertising
Advertising is the most fun you can have with your clothes on. Or, so said Jerry Della Femina, a Madison Avenue executive who many think served as inspiration for Don Draper on the TV’s “Madmen.”
Sometimes it appears ads are just “funnin’ ” with us. Take, for example, the catch phrase used by Nationwide Mutual Insurance Company, “We put members first, because we don’t have shareholders.”
Since I first heard this I’ve wondered what percentage of the public even understand the message they’re trying to convey. Is it possible that more than a small number of people understand that a mutual insurance company is owned by its shareholders — and not by a group of stockholders?
They seem to want to convey the message that the user experience for a policyholder of a mutual insurance company is far superior to that of a stock insurance company. The implied message seems to be that the rights of shareholders exceed the rights of the policyholders.
I have several reactions to that:
- Have regulators heard this message? The insurance commissioners I’ve known would have problems with that assertion. Insurance companies are held to a standard of operating in good faith. They’re subject to market conduct studies at the hands of the regulators.
- Insurance is a highly competitive arena. The other day I noticed a Google pay per click rate of $237.30 for an insurance-related term (what is an auto insurance premium). Rates for non-insurance terms seem to trend in the $5 to $10 range. Is it realistic to believe that the esoteric difference between a mutual company and a stock company would allow a company to establish service standards that erode their competitive position?
- People in the insurance industry move from company to company. I know top executives for both mutual and stock companies. They respond to market pressures for the day-to-day decision-making. Their personal career goals provide their primary motivations. The decisions made at mutual companies, as a whole, are nearly identical to those made at stock companies, when taken as a group. The executives of mutual companies might be slightly more inclined to plan beyond the next quarterly report, but they face pressures from their board that are quite similar to the pressures from Wall Street. Beyond board pressures, the economic reality of the need to survive in a rough and tumble business is behind most business choices.
Here are the top ten property and casualty insurance companies (by premium) in the United States in 2013.
- State Farm
- Berkshire Hathaway
Which of these do you think are mutuals? Although some have a foot in both camps, with subsidiary companies that are both stock companies and mutual companies, we’ll go with what the company is primarily defined as by A.M. Best for their group. Of these, seven are stock companies, one is a reciprocal, and two are mutuals: State Farm and Nationwide. Liberty Mutual is defined by Best’s as a stock company.
There is much more difference between the day-to-day operation of a large mutual company and a farm mutual than there is between a “mutual” and a “stock” company. However, there are those with much more knowledge than me of the inner workings of mutuals who feel there is a distinct moral imperative difference between all mutuals and stock companies. Those people believe a mutual is clearly run with the interest of the policyholder at the forefront.
What is a farm mutual, and why are they different from other mutual insurance companies
For years, a mutual was defined as an insurance company whose, 1.) assets are owned by the policyholders, and 2.) whose policies were accessible.
Some smaller mutual have accessible policies, but most are non-accessible.
I learned first hand that asset ownership is more than a legal nicety when Principal demutualized. I received over $62,000 of Principle stock because I had been a large policyholder for many years.
I’ve been a shareholder of many insurance company over the years, and have been as frustrated as many others are by the industry’s failure to provide a robust ROI.
I’ve been a policyholder of many stock companies and mutuals. I’ve represented many mutual companies as an agent and many stock companies. I’ve worked for a number of stock companies and mutuals. In the mid-1980’s I lobbied for farm mutuals. When I created one of the largest self-insurance pools in the nation, I used the framework of a county mutual. I have my opinions, but wanted to make sure my information was current.
How Many Farm Mutuals Are There?
I spoke to Mike Happe, a friend who served as Vice President of the National Association of Mutual Insurance Companies (NAMIC). “Most farm mutuals belong to NAMIC. I believe about 1,200 of the 1,400 insurance companies who are members are farm mutual.” He went on to speculate that about 95% of all farm mutual belong to NAMIC. “The numbers seemed to be in decline with mergers and virtually no start-ups”
Farm mutuals are usually defined in state statute. They are also termed township mutual or county mutuals. Most of them operate in a limited number of counties.
And that is where things are divided, as far as I’m concerned. I believe that insurance companies are run on accountability. Stock company executives certainly are accountable to Wall Street analyst. However, if they run their company in strict accordance with the Street’s desires, they will be short-sighted and quickly run afoul of common sense. Their ultimate accountability is to the consumer, who must be satisfied.
Large mutual company executives are isolated from the policyholders. They may have the best intentions in the world of serving their need, but are not rubbing elbows every day like the secretary of a county mutual. Good large mutual executives realize that satisfying their customer is satisfying their owner.
Stock companies are scrutinized every day in the financial magazines. While mutual giants have less scrutiny you can bet their board of directors compare results with those posted by the large stocks.
The performance of a county mutual is discussed at the local coffee shop. When the claim your adjusting is for your daughter’s soccer coach, things take on a different perspective.
County mutuals are very protective of the company’s assets because they know their neighbors are watching. They’re proud of what they do because they can see concrete results every day, while their big company counterparts often must live in the abstract.
In a recent conversation, I admitted that many large mutual and stock companies have great management. When “best insurance companies” are discussed, Auto-Owners and Erie often are mentioned. One is a mutual, and one is a stock company. They’re both large companies.
Yet, when I talk to agencies who represent small mutuals, large mutuals, and county mutual, agents often praise their local county mutual as being the best alternative for their home and farm insurance customers.
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