What Are the Cons of Mutual Insurance?

A mutual insurance company is not a publicly traded company—ownership of the company is shared by its policyholders, who purchase policies in exchange for the opportunity to vote for the board of directors. They also receive any dividends declared by the company. But there are some cons to mutual insurance.

Mutual insurance companies may only offer certain types of insurance, such as automobile, home or life, and may also modify their products based on their overall loss history.

Mutual insurance companies that need to raise money may demutualize in order to fund growth or to make acquisitions. When a mutual insurance company demutualizes, it reorganizes itself into a publicly traded or stock insurance company. Policyholders sometimes get shares in the new stock company—but not always.

Policyholders' power is limited. Though they have a say in the makeup of the board of trustees they do not have any other say in the company's operation.

A mutual insurance company may or may not declare a dividend at the end of the fiscal year. Unlike a stock insurance company, which can declare a dividend for each quarter, a mutual insurance company may only declare a dividend once a year—or not at all.

A mutual insurance company can elect at any time to become a stock insurance company through the process of demutualization. However, once a demutualization occurs the company is then responsible not only to policyholders but to their stockholders as well.