reciprocal company

What is a reciprocal company?

A mutual company is a private company owned by its clients or policyholders. The company’s customers are also its owners. Therefore, they are entitled to a share of the profits generated by the joint company.

Profit distributions are usually in the form of pro-rated dividends, based on the amount of business each client does with the common company. Alternatively, some mutual companies choose to use their profits to lower members’ premiums.

Mutual companies are sometimes called cooperatives.

How Mutual Companies Work

Mutual company structures are common in the insurance industry and sometimes in savings and loan associations. Many banking trusts and community banks in the United States, and credit unions in Canada, are also mutual companies.

The first mutual insurance company was established in England in the 17th century. The term “mutual” may be used to reflect the fact that the policyholder or customer is also the insurance company or part owner.

key takeaways

  • Mutual companies are owned by their clients, and clients share the profits.
  • They are usually insurance companies.
  • Each policyholder is entitled to a share of profits, paid as dividends or reduced premiums.

America’s first insurance company was a reciprocal company, Philadelphia Home Fire Insurance Contributions. It was founded in 1752 by Benjamin Franklin.

Most mutual corporation structures are private entities, not public companies. In recent decades, many mutual companies in the United States and Canada have opted to switch from a mutual to a joint-stock company structure, a process known as equitization. As part of this process, policyholders will receive a one-time share award in the newly formed joint-stock company.

There is little substantial difference between the two corporate structures. Joint-stock companies are generally seen as more focused on short-term profits, while mutual companies may prioritize strong cash reserves in case of unusual claims levels.

Mutual Company Advantages

A major selling point of mutual insurance companies is their shared ownership structure. Policyholders recover part of the premium cost in the form of dividends or a reduction in the premium price.

Many mutual companies have been converted to joint-stock company structures. This process is called demonetization.

For example, California-based Attorneys Mutual Insurance recently paid its shareholders a 10% dividend. It has paid dividends for 23 consecutive years.

As the company’s name suggests, mutual aid companies are usually specialized. They are made up of a group of professionals who often have common needs.

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