Are mutuals an endangered species?

No. 4/1999

Since 1992, dozens of leading mutual insurers throughout the world, with assets in excess of a trillion dollars, have either demutualized or plan to in the near future. Industry analysts, noting this activity, question the long-term viability of the mutual form of ownership. Does the current wave of mutual conversions mark a permanent change, or is it merely an effort to cash in on the current bull market?

This Swiss Re sigma study, "Are mutual insurers an endangered species?," argues that recent demutualization activity masks the underlying health of many mutuals. Mutual insurers have attained a significant market share throughout the world because of their efficiency of operations and certain fundamental advantages they derive from their mutual ownership structure. In coming years, intensified competition and industry consolidation will pose major challenges for mutuals. Some will prove unable to meet these challenges. Many other mutuals, however, are well positioned to remain important players in insurance markets.

The study first quantifies the worldwide presence of mutual insurers and finds:

21 of the world's 50 largest insurers, as measured by assets, are mutuals
Among this group, the mutuals hold more than 40% of all assets
Among the five largest insurance markets, the market share of mutuals ranges from 16% (France) to 72% (Japan)
Mutual insurers wrote an estimated two-fifths of worldwide premiums in 1997

Reviewing the record of the past decade, the study's authors find that the market share of property/casualty mutuals has held steady at about a quarter, while the market share of life/health mutuals has declined sharply, from 57% to 52%. This decline, which has occurred in each of the five largest insurance markets, has been especially pronounced in the UK. Underlying this decline is a wave of demutualizations that has occurred, or is occurring, in several countries including the US, UK, Australia, Canada, and South Africa.

The Swiss Re study argues that two forces underlie the current wave of life/health demutualizations: competition and industry consolidation. Changes in consumer tastes and new technologies have intensified competition among insurers. High equity prices, financial deregulation, and the introduction of the Euro have accelerated the trend toward industry consolidation. Converting from mutual to stock ownership makes it easier for an insurer to participate in mergers and acquisitions.

Over the next several years, ongoing demutualization activity will continue and might spread to other countries including Japan. Most of this activity will be among life/health companies; there is little on the horizon for property/casualty mutuals.

The authors note that despite all the mutual conversions that have occurred, mutual ownership still plays a prominent role in the insurance industry that is unmatched in other industries. One reason is that mutuality merges the functions of customer and owner, eliminating the need for stockholders, whose priorities sometimes conflict with those of policyholders. In property/casualty lines of insurance, many mutuals have succeeded through a superior knowledge of risks and policyholders. Finally, the study's comparison of operating expenses by line of business suggests that mutuals are, on average, more efficient than stock companies.

The study concludes that any of several occurrences, such as a decline in equity prices or a high profile demutualization that goes awry, might slow or halt the movement towards demutualization. History teaches that market conditions change continuously in ways that sometimes favor stock ownership, but sometimes favor mutuality. Indeed, many of the large mutuals that are now converting to stock ownership did just the reverse earlier this century. Today's mutuals will have to decide and keep deciding whether to convert to stock ownership. A well-run mutual that remains responsive to the needs of its members may do better by sitting this trend out.

This publication can be downloaded in English, German, French, Spanish and Italian.

Download "Are mutuals an endangered species?"
Download "Versicherungsvereine bzw. Versicherungsgenossenschaften: Leben Totgesagte länger?"
Download "Les sociétés d'assurance mutuelle: fausse 'chronique d'une mort annoncée'?"
Download "Las mutuas de seguros: ¿una especie en peligro de extinción?"
Download "Mutue assicuratrici - una specie in via di estinzione?"

For further questions and copies of Chinese or Japanese versions, please contact sigma@swissre.com.