Close Cousins of Cooperatives: An Overview of Fraternal Benefit Societies

Abstract

Fraternal benefit societies (hereafter called fraternals), a type of mutual insurance company, were founded on the basis of a “common bond”, a characteristic that members shared —geographic area, ethnicity, religion, profession, or gender. In many ways, they resemble cooperatives more than traditional mutual insurance organizations. Hansmann (2000) notes that mutual insurance firms grew in market share in the late 19th and early 20th centuries as a result of market failure, but more importantly, they grew correspondingly with the growth in agricultural cooperatives with members wanting a member-owned form of insurance. Furthermore, among the common bonds of the fraternals, the strongest were religion, ethnicity and geography, and these were the common bonds most understood by members of cooperatives. Within the life insurance industry, organizational forms are used to achieve different objectives. Firms organized as for-profit, stock corporations are assumed by neoclassical economic theory to maximize profits. Mutual insurance companies seek to align the incentives of policyholders and management by making the policyholders the owners, with the intent that they will make decisions in managing the company that would be in their best interests as both policyholders and owners (Hansmann 2000). Mutual insurance firms have not been widely studied in the literature although some studies have looked at cost efficiencies (Grace and Timme 1992; Yuengert 1993; Greene and Segal 2004). White and Boland (2014) looked at survivorship in township mutual insurance companies in Minnesota and note that they are still a strong insurance provider in rural areas in the Midwestern United States. Fraternal benefit societies were established in much the same way as farm organizations established the farm supply and grain/ oilseed marketing cooperatives which were formed by Farmers Union, Farm Bureau, and similar organizations. Namely, a group of people organized themselves to solve a problem they could not solve individually. In this manner, fraternals provided an early, private form of social safety net. Fraternals also have chapters at the local level which help strengthen the common bond around which they were organized. As a result of historical and economic forces, the industry has gone through a significant period of decline with regard to market share, but fraternals still exist today in the United States. The primary objective of this paper is to update the literature with an analysis of this industry, which was last done in 1953. Fraternal benefit societies have not been extensively studied since the early 1950s and yet remain a strong competitor in the insurance industry. A second objective of this study is to compare such institutions against traditional agricultural cooperatives. In the original formation of farm supply and grain/oilseed marketing cooperatives, a common bond existed built around the farm organizations that helped create them. Similar common bonds underlie fraternals. The fraternal movement resembles that of agricultural cooperative memberships.