February 1, 2018, Bloomberg
Writing an op-ed for Bloomberg, Justin Fox notes that when Amazon, Berkshire Hathaway, and JPMorgan Chase announced their new joint health-care venture last week, they emphasized that the company they are forming would be “free from profit-making incentives and constraints.”
As Fox observes, “Around the world, health, life and property insurance, as well as various other financial services, have long been provided by nonprofit organizations, mostly in the form of customer-owned mutuals.” Drawing on a 2011 study from the European Parliament, Fox notes that mutual insurance companies formed in the Netherlands and UK as customer-owned co-ops in the 17th century. In colonial America, Benjamin Franklin helped start a similar mutual in 1752. Fox adds that, “The 1800s saw an explosion of mutual activity, with fraternal organizations, trade associations, labor unions, social reformers and philanthropists starting co-operative lenders, healthcare providers, pension funds, groceries, farming enterprises and even factories.”
Of course, nonprofits, co-ops and mutuals still “play major roles in insurance, money management, healthcare and other fields.” One example, Fox points out, is outdoor gear, where the Recreational Equipment Inc. (REI) co-op plays an outsized role. The co-op today has grown to have an astonishing 16 million member-owners. More broadly, the National Cooperative Bank reports that the nation’s 100 largest co-ops generated $208 billion in revenue in 2017.
However, for the four decades from the 1960s until the Great Recession, the tendency had been toward demutualization—that is, the conversion of cooperatives and nonprofits into “shareholder-owned for-profit corporations.” This has changed though, since the Great Recession, because, as Fox gently puts it, “the idea that corporations out to maximize shareholder returns might not always be the best at managing financial and other risks has undergone something of a revival.”
One area where demutualization was most pronounced was with mutual funds—called “mutual” because they were once consumer-owned. Now, nearly all, except Vanguard, are for-profits. In insurance, some of the biggest names in the field—such as MetLife, Prudential and John Hancock—were once consumer-owned, but became stock companies in the 1990s. In health insurance, all Blue Cross insurers were nonprofit until their national association agreed to allow conversions to for-profits in 1994. As for life insurance, between 1995 and 2005, the percentage of US life insurance controlled by mutuals fell from 39 percent of the market to 16 percent. A summary of demutualizations that occurred before the Great Recession can be found here.
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At one time, the wave was so strong that “Mutual of Omaha,” famed sponsor of Wild Kingdom, considered converting. At the time, consultant Glenn Daily sardonically noted that they “would like to continue to be called ‘Mutual of Omaha’ even if it is no longer a mutual company. (“Stock of Omaha” just doesn’t have the same ring to it.).” The firm ultimately remained a mutual.
Demutualization certainly helped executives raise their salaries, but it has often been costly for the public. Fox wryly comments that, “It’s not entirely coincidental that the mass demutualization of the savings and loan industry in the 1980s was followed by an industrywide meltdown that cost taxpayers more than $100 billion. Fox also notes that Northern Rock, the British institution that was an early harbinger of the financial crisis in 2007, had demutualized but a decade before.
Some true mutuals remain. Fox notes that US mutual auto insurers such as Amica Mutual and USAA “pay out a higher percentage of their premiums in claims than for-profits” and perennially top for-profits in customer satisfaction rankings. Nationwide and State Farm are also prominent mutuals. In banking, credit unions also typically top banks in customer satisfaction too, although in 2017, the margin was the slimmest since measurement began in 2008.
The Great Recession has given mutuals a boost as for-profits faltered. Globally, the share of the insurance market covered by mutuals climbed from 23.6 percent in 2007 to 27.8 percent in 2013, according to the International Cooperative and Mutual Insurance Federation. That share has since sagged backed to 26.8 percent, though.
The effort by Amazon, Chase, and Berkshire Hathaway to create a nonprofit health insurance collaborative, notes Fox, possibly could boost mutuals further. “There are precedents,” Fox notes. TIAA, which operated as a nonprofit for nearly 80 years until its 1997 demutualization, was founded by steel magnate Andrew Carnegie; the mostly nonprofit Kaiser Permanente health-care system was the doing of another industrialist, Henry J. Kaiser. It will be interesting to see if Jeff Bezos, Warren Buffett, and Jamie Dimon now follow in Carnegie’s and Kaiser’s footsteps.—Steve Dubb