Comparison between a Stock Insurance Company and a Mutual Insurance Company

Ownership

The main difference between a stock insurance company and a mutual insurance company is the form of ownership.

A stock insurance company is owned by shareholders. It can be privately owned or publicly traded, and it distributes its profits to shareholders in the form of dividends.

A mutual insurance company is owned by policyholders. Surpluses can be distributed to policyholders in the form of dividends or retained by the insurance company in exchange for future premium discounts.

Profits and Investments

Both stock insurance companies and mutual insurance companies generate income from collecting premiums from policyholders. If the premiums collected by the insurer exceed what they pay out in losses and expenses, the insurer achieves an underwriting profit. If losses and expenses exceed the collected premiums, the insurer incurs an underwriting loss.

Both stock insurance companies and mutual insurance companies also earn income from investments. However, their investment strategies differ significantly.

Stock insurance companies primarily focus on generating profits for shareholders. As they are scrutinized by investors, stock insurance companies tend to pay more attention to short-term results than mutual insurance companies.

Stock insurance companies also tend to invest in high-yield (and high-risk) assets, while mutual insurance companies typically invest in conservative, low-yield assets.

Management

Policyholders in a stock insurance company do not have the right to intervene in the management of the company unless they are also investors. In a mutual insurance company, policyholders are the owners of the company, so they elect the company’s board of directors. Policyholders may have some influence over the types of insurance products offered by the company. They also receive dividends from the company’s profits.

Financial Stability

One advantage of a stock insurance company for policyholders is stability. Since a stock insurance company has more options for raising capital, it may be better able to weather financial difficulties than a mutual insurance company.

One disadvantage of the mutual company structure is its reliance on premiums received from policyholders as a source of income.

If a mutual insurance company is unable to raise capital, it may have to shut down its operations or declare bankruptcy. If the company is sold, policyholders may receive a portion of the sale proceeds. A financially struggling mutual insurance company can become a public company through a process called mutual conversion.

Mutual Conversion

Mutual conversion is the process by which a mutual insurance company decides to become a stock insurance company.

A mutual insurance company can typically convert only with the approval of policyholders, the company’s board of directors, and the state insurance regulator.

Mutual insurance companies have three basic options for converting to a stock insurance company:

1. Full Conversion: This option involves a complete transformation from a mutual insurance company to a stock insurance company. Policyholders receive cash, policy credits, or shares in the newly formed company.

2. Demutualization: Policyholders receive no compensation other than the right to purchase stock in the new company. Shares that are not purchased by policyholders can be sold to investors in a stock offering.

3. Mutual Holding Company: This option is not available in all states. A mutual holding company is created alongside a publicly traded subsidiary owned by the mutual holding company in a majority stake. Policyholders receive an ownership interest in the mutual holding company and not the subsidiary. The subsidiary manages the insurance policies.

Source: https://www.thebalancemoney.com/stock-insurer-versus-mutual-insurer-462504