DEFINITION of Advance Premium Mutual

An advance premium mutual insurance company that assesses premiums in advance at an amount that does not change for a stated period of time. This is different from an assessment insurer which assesses policyholders their premiums based on actual loss and expense experience of the company.

BREAKING DOWN Advance Premium Mutual

Advance premium insurers and assessment insurers are specifically identified in various state laws and have different statutory requirements in the operation of their businesses. Mutual companies are also sometimes referred to as cooperatives. A mutual insurance company is owned by policyholders. The sole purpose of a mutual insurance company is to provide insurance coverage for its members and policyholders, and its members are given the right to select management. Federal law, rather than state law, determines whether an insurer can be classified as a mutual insurance company.

Operating Structures

This type of insurer is unlike an assessment mutual, which can charge higher premiums if claims and expenses are greater than projected. An assessment mutual is a rare structure for an insurer because additional premiums or levies may be hard to collect once the coverage as been provided. 

The more common structure is the advance premium mutual. In this case, higher premiums or levies aren't sought for policies already in force. Any higher than expected losses or expenses can be paid for out of its surplus, which is the difference between income and expenses. The insurer would review the premium for future renewals and make any increases at that time. Under this type of insurer, excess surpluses, if any, can be returned either as a payout to members or as a reduced premium. 

Other types of mutual insurers are called friendly societies and operate outside the U.S. A friendly society, also known as a mutual society, benevolent society, or fraternal organization is a mutual association set up for insurance, pensions, savings or cooperative banking. Like advance premium insurers, members make up any losses and share in dividends.

Fraternal mutuals are mutual insurance companies that provide life and accident and health insurance to people who are members of social or religious organizations. Some of these may operate under the umbrella of larger insurance companies.

Factory mutuals were originally established as commercial property insurers to insure factories and industrial sites. These mutuals came into being in certain industries where the cost of insurance is high and special expertise is needed to understand the business and its risks.