Are Mutual Insurers the Best Value Car Insurance Companies?

Can one segment of the market be better than the others based on who backs them up or how they are structured financially? There are certainly plenty rumors and arguments for and against. But can ownership statues of insurers be indicative enough as to which types are the best value? This post will look at the topic and one particular study below.

Are Mutual Auto Insurance Companies Better & Cheaper?

Often we come across this notion. There are people who specially look for insurers in which they can have a share of ownership rather than publicly traded corporations. In other words, companies that are accountable to their shareholders vs. companies who have nobody to report to but their policyholders. When it is put like that it is easy to see why people expect these them do better. But is it really important who owns it and should you care?

It is difficult to generalize and say one type is always trumps. However, certain carriers may have stronger following just because of sense of ownership people have about them. The largest automobile insurance company in the United States is State Farm and it is mutually owned. It has nearly 19% of auto market and sells nearly twice more policies than the nearest rival Allstate which is a publicly listed with shareholders.

There are some experts claiming that this status results in better following by its policyholders. Arguments can be made for and against. Not having shareholders to report to and show profits for can be good for a firm. On the other hand, private investors can push the management team harder to remain popular and increase profits. GEICO is a good example to the latter as they have been increasing market share in recent years. This may push them to be more cost effective and again may make them greedier. This topic is really open to arguments from all angles.

Many people never even think about it. They are not buying the firm and just buying a 6 month car insurance policy. They may look at the price first and only get into this conundrum when the price and coverage is exactly the same. But it isn’t hard to understand the sentiment behind preferring the former.

How to Know Who Offer the Most Return for your Money?

Luckily, there are studies that looked into effects of financial backing. According to ValChoice study, there is a clear frontrunner. Nevertheless the study points out that people may not be aware of these things to base a decision on and therefore drivers cannot see how certain carriers can outperform others and miss out on savings.

“Consumers overpaid for car insurance coverage by a stunning $101 billion in the last five years. Roughly 90 percent of them could have gotten a better deal had they used a policyholder-owned insurer rather than one owned by shareholders.” says ValChoice

The findings of ValChoice study are pretty conclusive. The best value auto insurance companies are the mutuals that are owned by their policyholders and paying them dividends. Over a five-year period from 2011 through 2015, they paid out an average 72.6% of their premiums in claims and publicly held insurers with shareholders to satisfy paid 62.8% of their premiums in claims. The difference is nearly 10%!

When the interests of investors and customers conflict there is a high chance that investors will win because they are the ones who can vote on who will get the top job and what direction the firm should take. When a company doesn’t have such problems since the owner and the insured are the same they can be more generous when it comes to paying claims. All these are not hard to understand however, sparing ten percent more for paying off claims is a huge difference. This fact can certainly swing customer opinions and influence choices if they were aware of this correlation at the time.

Mutual vehicle insurance companies have around 50% market share and can be divided into two types; ones that pay regular dividends and the ones that don’t have regular dividend payment commitment. Above mentioned study concludes that the former offer better value than the latter. Here is a list of such insurers that offer regular dividends; State Farm, USAA, the Automobile Club of Southern California, Amica and NJM.

The size of dividend payments is hardly a reason to choose these firms as it is on average about 2 – 3% of total premiums collected according to last 10 years results. To clarify, the reason is the bigger claim payments.

Also, others like Nationwide and Liberty M. believe that they serve their owners better by offering cheaper policies than paying regular dividends. This is another way of looking at it and it may be a less gimmicky and more impactful way of looking after your customer.

How Does Mutual Insurers Offer the Best Value?

ValChoice used data collected by state ins. departments and analyzed claims payment histories of 312 car insurers (98.5 % of the market). It used a metric known as the “paid loss ratio” in comparing the premiums they took in with the amounts they paid out. Carriers with higher paid loss ratios dispense more of their premiums back to their policyholders as claim payments and therefore they offer incredible return. They simple put back large chuck of money they collected back to society helping motorists recover their losses.

The numbers tell the tale. Above dividend-paying insurers paid out in claims an average 72.6 percent of the premiums they earned. The ones that do not pay dividends paid an average 64.5 percent, while publicly traded ones paid the least in claims: 62.8 percent of premiums.

Mr Dan Karr, founder of ValChoice, says, “The paid loss ratio is such a direct measure of the actual value of an insurance policy. If I’m paying money coverage, it tells me how much is likely to come back to me if I have an accident.”

Mr Karr continues, “Consumers who buy from companies whose claims payments are lower are paying for lesser coverage. That loss can add up to billions of dollars.”


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