Mutual Insurance Co. Liquidation Clarified

WASHINGTON (CN) - Insurance companies owned by their policyholders will be liquidated as if they were regular insurers owned by shareholders, under a new rule adopted by the Federal Deposit Insurance Corporation.

Mutual insurance companies began in England in 1696 as means to collateralize risk among the insured rather than stockholders. It spread to the United States in 1752 when the Philadelphia Contributionship for the Insurance of Houses from Loss By Fire was founded.

Many mutual insurance companies have evolved into a new structure known as a mutual insurance holding company, which is actually two entities, the original company owned by the policyholders and a subsidiary company whose shares are sold to the public, allowing the mutual company to raise money through the sale of stocks or bonds.

Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, bankrupt insurance companies are liquidated under state insurance law.

Until now, it was unclear if this would apply to mutual insurance holding companies which do not themselves issue insurance polices and this fall outside most state statutory definitions of "insurance companies."

The rule is effective May 30.

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