A theoretical note on the mutual insurance cooperatives: Is the mutual form out-dated?

During the past 25 years several mutual insurance cooperatives have been demutualized into joint-stock corporations, both in Sweden and in other countries. This process of demutulization raises a compelling question: Do mutual cooperatives have any future in the insurance industry? Aimed at providing some possible answers to this question, this paper presents a theoretical analysis of previous research on this issue. Taking as the point of departure a risk-sharing theory about mutuals’ formation is presented. The paper argues that mutual form can be a good risk-sharing instrument suitable for a less developed insurance market. Then we compare mutuals with stocks from two aspects: agency problem and capacity of dealing with event correlation. The comparison leads to a conclusion that mutuals have advantages on some special lines of insurance and on dealing with event correlation. Mutuals should further search for effective ways to ease the owner-manager conflicts in their management. Finally, the paper takes Chinese agricultural insurance market as a practical example to demonstrate the environment in which mutuals can be an efficient form in promoting the maturity of a market in a transitional period.

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