There are two different types of insurance companies: a mutual insurance company and a stock insurance company. Both types of companies can sell you an insurance policy and both are similar overall. However, there are significant differences between the two that separate them. The biggest difference is the ownership of each company. Mutual Insurance Companies are owned by policyholders and Stock Insurance Companies are owned by stockholders.
Stock Insurance Companies
A stock insurance company is an insurance company that is owned by private investors or shareholders that have purchased stock in the company. A stock insurance company may be a private insurance company or a publicly traded company that uses stockholder investments to raise the capital for the company.
The biggest advantage with this type of company is the access to capital. Because stock insurance companies allow for direct investment via stock purchases in the company, stock insurance companies have more access to needed capital for paying claims, to fund business growth and for other business purposes.
Disadvantages of Stock Insurance Companies
- Policyholders Have No Voting Rights – Because stock insurance companies are governed by a board of directors that answers to the shareholders of the company and not the company’s policyholders, customers that purchase policies have no say in the management of the company nor do they receive any voting rights for any company decisions.
- Subject to Mergers – Because profitability for shareholders is the primary objective of stock insurance companies, they are more susceptible to mergers or acquisition by another insurance company. Companies that merge or acquired usually end up making at least some changes to insurance products offered to policyholders. This might be viewed negatively by long time policyholders that chose the company based on previous policy structures offered by the old company.
Mutual Insurance Companies
A mutual insurance company is an insurance company that is owned by the policyholders rather than investors or shareholders. A mutual insurance company is almost always a private corporation or business entity and is not ever traded on the open market. They are usually subject to less regulatory business oversight when compared to stock insurance companies.
The biggest advantage is that policyholders have a voice within the company. Because the policyholders are actual part owners of a mutual insurance company, policyholders have a say when it comes time to voting on company management personnel and policy decisions. Also, mutual insurance companies are usually motivated to create attractive insurance products for their customers because the customers actually own the company and can remove key personnel and make wide spread policy changes when too many owners become displeased or unsatisfied.
The largest disadvantage is demutualization. Demutualization occurs when a mutual insurance company chooses to become a stock insurance company. This can occur when the mutual insurance company needs to raise capital for business growth or to cover higher than expected losses. In recent years, there have been many cases of demutualization that have led to many mutual insurance companies being acquired by larger companies after the company went public.