1.1 Mutual Insurance | State Farm

Insurance mutuals run by and for policy holders, and not investors, are part of the very fabric of the founding of this country. In the United States, the first mutual insurance company was founded by Benjamin Franklin in 1752, the Philadelphia Contributionship for the Insurance of Houses from Loss by Fire. Mutuals have a track record of longevity and resilience, and represent a large portion of the insurance industry—as noted, the five largest mutuals serve 25% of the market.³⁶

Not just in the United States, but across the globe, mutual insurance has proven to be especially effective at mitigating financial risk, particularly in the labor market.³⁷ Many mutuals arose among guild members as a way to reduce information asymmetries, insofar as those sharing the same profession were exposed to similar risks but could use the mutuals to even out the probability of those risks harming them.³⁸

Mutual insurance has been growing across the globe. Since 2006, mutuals have been “the fastest growing part of the global insurance market, moving from a market share of 23.4% in 2007 to 27.3% in 2013.”³⁹ Three of the top 10 largest insurance companies in the world are mutuals: National Mutual Insurance Federation of Agricultural Co-operatives (Zenkyoren) in Japan, and State Farm and the Kaiser Foundation in the United States.⁴⁰

Membership in a mutual insurance company is typically based on holding a policy. Although that membership stake is not equivalent to an equity interest, since it cannot be freely sold or exchanged, it serves as the source of funding to operate the business. In effect, mutuals are funded either by the membership stake of current or prospective policyholders or by loans that are borrowed and paid off by operating profits.⁴¹ What is unique about the mutual insurance company, by contrast to capitalized insurance, is that the policyholder is “the sole focus” of a mutual insurance company.⁴²

State Farm, the largest auto insurance company in the United States, with 17% of the market, is a good illustration. Originally founded in 1922 as State Farm Mutual Automobile Insurance Company by George J. Mecherle, it began and grew as a way to capture a low-risk segment of the market. Mecherle was an Illinois farmer who became an insurance salesman and then decided to concentrate on selling automobile insurance to farmers at low rates.⁴³ Mecherle’s working assumption was that rural and small-town drivers had lower accident rates than city dwellers or the nation at large, and so together could save money through lower rates in a mutual insurance company.⁴⁴ The operation quickly surpassed $1 million in revenue by 1928, and it then opened an office in Berkeley. After auto insurance, State Farm went into life insurance in 1929 and fire insurance in 1935, reaching one million policies by 1944.⁴⁵

Today, approximately one out of every five cars in the United States is insured through State Farm, and there are over 16,000 agents across the country.⁴⁶ It is now one of the largest auto and home insurers in the country. As of its 2019 Annual Report, State Farm had over $178 billion in assets and a net income of $2.3 billion.⁴⁷

At State Farm, member policyholders are the stakeholders. They elect the board of directors at an annual meeting that all members may attend. The first-named insured has a right to vote by proxy or in person.⁴⁸ The board decides on the vision and operations without any outside investor influence. Given the group’s structure and principles, State Farm employees receive “ample group health, disability and dental plans” alongside traditional retirement plans and one-on-one financial planning; the company will provide $5,000 in assistance to any adoptions of children and a full workday off to help with schooling.⁴⁹

According to Crain’s Chicago Business, in a head-to-head comparison with a non-mutual like Allstate, the main difference in performance is due to coöperative ownership: “State Farm has more leeway to compete on price with the likes of Geico and Progressive, because its customer-owners benefit from any price cuts.”⁵⁰ By contrast, for an institution that is beholden to stockholders rather than policyholders, “every dime Allstate spends on claims or price cuts is one less dime for shareholders.”⁵¹ Since 2001, despite encroaching market entrants such as Geico and Progressive, “State Farm has an enviable position of being very over-capitalized and mutual status with no stockholder-earnings pressures.”⁵²