With Mutual Corporations, the People Are the Corporation

In a profits and loss sense, a mutual insurance company is a fiction. That’s because the policyholders are the company. Which is a crucial distinction, one that recalls a famous motto.

“We put people before profits.” Readers are familiar with it, and it’s one that reasonable people can make wise arguments for and against.

It’s no doubt true that corporations exist at the pleasure of shareholders, which is why a sound case can be made that the best corporations reverse the order of the quoted motto. Conversely, those who embrace it can easily make a case that corporations who put the people inside their walls (and customers outside them) first, are ultimately the most profitable through generation of goodwill with both that rewards shareholders most handsomely over the long term.

People before profits becomes most interesting with mutual insurance companies. That’s because the policyholders of mutual insurance companies quite literally are the corporation. When profits are achieved, what’s not retained for stability of the entity flows back to policyholders in the form of a dividend.

It’s worth thinking about in consideration of occasional demonization of insurers and their profits. Too often glossed over is that as opposed to corporations putting people before profits or vice versa, mutual insurance company profits are once again owned by their policyholders.

Which is a long way of saying that when people understandably wince at times about the cost of insurance premiums, the insurance company itself is frequently the wrong target for disdain. See above. Without policyholders, there are no mutual insurance companies, at which point they have every incentive to write as many policies as possible on varied risks.

It’s a long way of saying that with mutual insurance companies, the incentives are aligned. They’re in the business of helping individuals mitigate risk, the more people insured the better.

Just the same, what’s been written so far isn’t meant to suggest that prices of policies are always ideal. Some will note that each state has a different insurance commissioner, with different regulations from each. The regulations are a cost, not to mention potentially less price-compressing competition born of 50 different markets.

From there, consider the National Association of Insurance Commissioners (NAIC). Though states have divergent regulations, according to a recent letter-to-the-editor composed by Pinpoint Policy Institute executive director Eric Ventimiglia, the NAIC drafts “model laws and accounting standards that insurers in every state must follow.” Forget that every state, not to mention that every city and neighborhood presents different risks, the NAIC foists one-size-fits-all rules and accounting standards on insurers.

A basic truth of economics is that there are no free goods, which means the people who comprise mutual insurance companies pay for these rules. And they pay again. Per Ventimiglia, “94 percent of the NAIC’s revenue comes from fees that insurance companies pay to file with it and from selling access to its data.”

That these costs are paid for by policyholders is a statement of the obvious. Which arguably calls for more regulation of those imposing regulations. Specifically, state legislators should be voting on the costs imposed on insurers from outside their states.

While incentives among policyholders/mutual insurance company owners are certainly aligned, it’s hard to make a similar case for an unelected bureaucracy outside U.S. states. This being true, the elected could help insurers and the insured by more aggressively policing those in the business of imposing costs on them.

Originally published on Real Clear Markets.