What’s the Difference Between General Stock Insurance Companies and Mutual Insurance Companies?

There are two broad types of insurance companies, including general stock insurance companies and mutual insurance companies.

There are significant differences between these two types of insurance companies, and these differences affect policyholders.

Today, we’re explaining everything you need to know about the difference between a general stock insurance company and a mutual insurance company.

What's the Difference Between General Stock and Mutual Insurance Companies?

It’s All About Ownership

The main difference between a stock insurer and a mutual insurer is the ownership structure.

A general stock insurance company is owned by its shareholders. Some general stock insurance companies are privately held. Others are publicly traded. Stock insurance companies distribute profits to shareholders in the form of dividends. They may also use profits to pay off debt or reinvest them in the company.

A mutual insurance company is owned by its policyholders – including anyone who has a car insurance policy, home insurance policy, or any other type of insurance policy with that company. With mutual insurance companies, profits may be distributed to policyholders in the form of dividends. Or, the company might retain profits to get reductions on future premiums.

Income and Investments

General stock and mutual insurance companies also differ from each other in terms of how they earn money and invest it.

Both stock and mutual insurance companies earn income by collecting premiums from policyholders. You pay your insurance company every month, and the insurance company agrees to take on your risk.

The insurance company uses this income to cover policyholders’ losses and other expenses. Sometimes, the insurance company earns a profit: the premiums collected by the insurer have exceeded the money paid out for losses and expenses. In other cases, the insurance company takes a loss: the company has made more for losses and expenses than it earned in premiums. This is called an underwriting profit or an underwriting loss.

Both types of insurance companies also earn income from investments. Insurance companies will place their money into strategic investments with the goal of strengthening their financial position.

However, the insurance companies invest money in different ways.

A general stock company, for example, is built with the primary mission of earning profits for shareholders. Investors will scrutinize the company’s financial picture and push for maximum profits. That’s why general stock insurance companies are more likely to focus on short-term results than mutual insurance companies. General stock insurance companies also tend to invest in higher-risk, higher-reward assets than mutual companies.

A mutual insurance company, meanwhile, is built with the mission of maintaining enough capital to meet the needs of policyholders. Policyholders are generally less concerned about the financial performance of the insurance company compared to investors of stock companies. As a result, mutual insurance companies focus on long-term results and stability, preferring to invest in safer, low-yield assets.

General stock insurance companies also have a third source of income unavailable to mutual insurance companies: the proceeds of stock sales. When a general stock insurance company needs money, it can issue more shares of its stock.

Mutual insurance companies do not have this option because they are not owned by stockholders. When mutual insurance companies need money, they need to borrow it or increase premiums.

Management Structure

General stock and mutual insurance companies differ from one another in terms of management.

The policyholder of a stock company has no say in the company’s management (unless the policyholder also owns stock).

Policyholders of a mutual insurance company, meanwhile, are the owners of the company and do influence management decisions. Policyholders elect the board of directors. Policyholders might also have some say over which types of insurance products the company sells or other aspects of how the insurance company operates. And, as owners, policyholders are entitled to receive dividends from company profits.

Financial Stability

Financial stability is crucial for policyholders. Big insurance companies can and do fail. If your insurance company declares bankruptcy, then you will not be able to make a claim. This bankruptcy might occur at the worst possible time – say, after a disaster strikes a region.

With that in mind, stock insurance companies generally have better financial stability than mutual insurance companies because, as mentioned above, stock insurance companies have more options for raising funds. In times of financial difficulty, a stock insurance company can issue more stock.

When a mutual insurance company faces financial difficulty, it cannot simply sell stock. The insurance company might sell assets or borrow money, for example. If financial stability continues to be an issue, then the mutual insurance company will have to raise premiums.

If a mutual insurance company is sold, then policyholders may receive a portion of the proceeds from the sale. In some cases, mutual insurance companies can even become stock companies through a process called demutualization.

How Demutualization Works

Over the years, most major insurance companies in the United States have become stock companies. During the early days of insurance, mutual insurance was ideal: it allowed groups of people – like farmers in a specific state – to join together and become stronger together. Today, however, stock insurance companies are much more popular.

A mutual insurance company can demutualize only with the approval of policyholders, the board of directors, and the state insurance regulator. Once the decision is approved, there are three ways to convert from a mutual insurance company to a stock company:

Full Demutualization: The mutual insurer completely switches to a stock company, with policyholders receiving cash, policy credits, or shares in the new company.

Sponsored Demutualization: Policyholders do not receive any compensation but have the right to purchase stock in the new corporation. Any shares not bought by policyholders can be sold to investors in a stock offering.

Mutual Holding Company: This type of demutualization is illegal in certain states. Under this system, a mutual holding company is created along with a stock subsidiary that is majority-owned by the holding company, with policyholders receiving an ownership interest in the holding company but not the stock subsidiary, and the stock subsidiary taking control of insurance policies.

Final Word: Most Insurance Companies Are Stock Companies

Most of America’s largest insurance companies are stock companies. The National Association of Insurance Commissioners (NAIC) reports that stock insurance companies hold about 80% of all cash and invested assets maintained by US insurers, with only 20% maintained by mutual insurance companies.

Some of the largest mutual insurance companies in the United States include Northwestern Mutual, Guardian Life, Penn Mutual, and Mutual of Omaha.

The largest stock insurance companies in America, meanwhile, include State Farm, Berkshire Hathaway, Liberty Mutual, Allstate, and Progressive.

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