Advance Premium Mutual Details

The goal of Advance Premium Mutual companies is to provide insurance at cost as opposed to other companies operating to maximize profit. These types of companies rely only (or primarily) on the premiums they collect and don't diversify their portfolios to minimize the risk of losing capital.

As the meaning of mutual implies, its customers or shareholders own the company and elect its management. Advance Premium Mutual is a company that works in the best interest of its owners because it promises that it won‘t be charging the insured with higher premiums when it issues a policy.

The Advance Premium Mutual Insurance company pays any losses and expenses higher than expected out of its surplus (the difference between income and expenses). After the insurers have covered the loss and the organization's expenses, they review the premium for future renewals and adjust it as needed. Here, companies return excess surpluses either as a dividend payout to members or as a reduced premium.

Real-World Example of Advance Premium Mutual

Many times insurance companies that have a long history reorganize to become Advance Premium Mutuals. Insurers that have been servicing society's needs for a long time reiterate their reputation regularly. By changing their structure to Advance Premium Mutual or by promising to charge the initially estimated premium for the duration of the contract, they manage to give their policyholders security and peace of mind.

One example is Wayne Mutual Insurance Company, located in Ohio. It was reorganized from an Assessment Mutual into an Advance Premium Mutual in 1963. The company mentions that it has changed its name to Wayne Mutual Insurance Company around the same time. According to Community Mutual, the company's sole purpose is to maintain a long-term relationship with the policyholders.

Assessment Mutual Vs. Advance Premium Mutual

Assessment Mutual is an insurance company that provides an insurance policy in exchange for the premium it receives but saves the right to charge higher premiums if the sum of claims and expenses turns out to be greater than what they initially projected. These insurance companies don't collect funds for premiums in advance, and when a loss occurs, it's divided between the members, so each one pays part of the total.

Section 7306 of NY Law Chapter 11 outlines the conversion of Advance Premium or Assessment Corporations into mutual insurance companies. However, companies tend to avoid this type of organization because additional premiums or levies can be hard to collect. In addition, some states prohibit Assessment Mutual companies.

Types of Mutual Insurance Companies

There are three main types of mutual insurance companies:

  1. Friendly Societies: Mutual organizations that appeared in the 17th century and are still available in developing countries. Friendly societies originally were meant to gather individuals and form a club, which would provide insurance to secure pensions, individual savings, and others.
  2. Factory Mutuals: Expert insurers of industrial sites that visit the factories to assess risks and advise on ways to control losses.
  3. Fraternal Mutuals: Not-for-profit insurers that provide life, health, and accident insurance to members of social and religious organizations like immigrant societies, self-help associations, or groups of coworkers.