Mutual vs. Stock Insurance Companies: Understand the Key Differences

Comparing Mutual and Stock Insurance Companies

Although there are exceptions, insurance companies are usually organized as either a stock company or a mutual company. A mutual company’s policyholders are co-owners of the firm and enjoy dividend income based on corporate profits. With a stock company, outside shareholders are the co-owners of the firm and policyholders are not entitled to dividends.

Demutualization is the process whereby a mutual insurer becomes a stock company. This is done to gain access to capital in order to expand more rapidly and increase profitability.

 In the United States, stock insurance companies outnumber mutual insurers. However, worldwide, there are more mutual insurance companies.

When selecting an insurance company, be sure to ask these questions:

• Is the company stock or mutual?
• What are the company’s ratings from independent agencies such as Moody’s, A.M. Best, or Fitch?
• Is the company’s surplus growing, and does it have enough capital to be competitive?
• What is the company’s premium persistency? (This is a measure of how many policyholders renew their coverage, which is an indication of customer satisfaction with the company’s service and products.)

Read on to learn how stock and mutual insurance companies differ and which type to consider when purchasing a policy.

What Are Stock Insurance Companies?

A stock insurance company is a corporation owned by its stockholders or shareholders, and its objective is to make a profit for them. It can be a privately-held company or a public company. Policyholders do not share directly in the profits or losses of the company. 

Corporate Requirements

To operate as a stock corporation, an insurer must have a certain minimum of capital and surplus on hand before receiving approval from state regulators. Other requirements (such as an exchange’s listing requirements) must also be met if the company’s shares are to be publicly traded.

Should it need capital for growth purposes or in cases of financial difficulty, a stock insurance company can raise it in the equity markets by selling additional shares.

Some well-known American stock insurers are Allstate, MetLife, and Prudential.

Exploring Mutual Insurance Companies

The idea of mutual insurance dates back to the 1600s in England. The first successful mutual insurance company in the U.S.—the Philadelphia Contributionship for the Insurance of Houses from Loss by Fire—was founded in 1752 by Benjamin Franklin and is still in business today.

Mutual companies are often formed to meet an unfilled or unique need for insurance. They range in size from small local providers to national and international insurers.

Some mutual companies offer multiple lines of coverage including property and casualty, life, and health, while others focus on specialized markets. Five of the largest property and casualty insurers that make up about 25% of the U.S. market are mutual insurance companies.

Ownership by Policyholders

A mutual insurance company is a corporation owned exclusively by the policyholders who are “contractual creditors” with a right to vote on the board of directors. Generally, companies are managed and assets (insurance reserves, surplus, contingency funds, dividends) are held for the benefit and protection of the policyholders and their beneficiaries.

Management and the board of directors determine the amount of operating income that is paid out each year as a dividend to the policyholders. While not guaranteed, some companies have paid a dividend every year, even in difficult economic times.

Large mutual insurers in the U.S. include Northwestern Mutual, Guardian Life, Penn Mutual, and Mutual of Omaha.

Comparing Key Differences Between Stock and Mutual Insurers

Like stock companies, mutual companies have to abide by state insurance regulations and are covered by state guaranty funds in the event of insolvency. 

Mutual Insurers Serve Policyholders, Not Shareholders

However, many people feel mutual insurers are a better choice since the company’s priority is to serve the policyholders who own the company.

With a mutual insurance company, they feel there is no conflict between the short-term financial demands of investors and the long-term interests of policyholders. 

With a stock insurance company, shareholders can be prioritized over policyholders and short-term financial performance can become a focus.

Policyholder Voting Rights

While mutual insurance policyholders have the right to vote on the company’s management (while stock insurer policyholders do not), many don’t, and the average policyholder really doesn’t know what makes sense for the company. Mutual insurance company policyholders also have less influence than institutional investors, who can accumulate significant ownership in a company.

Sometimes pressure from investors can be a good thing, forcing management to justify expenses, make changes, and maintain a competitive position in the market.

The Boston Globe newspaper has run illuminating investigations questioning executive compensation and spending practices at Mass Mutual and Liberty Mutual. It has shown the excesses that occur at mutual companies.

Ways to Raise Capital

Once established, a mutual insurance company raises capital by issuing debt or borrowing from policyholders. The debt must be repaid from operating profits.

Operating profits are also needed to help finance future growth, maintain a reserve against future liabilities, offset rates or premiums, and maintain industry ratings, among other needs.

Stock companies have more flexibility and greater access to capital. They can raise money by selling debt and issuing additional shares of stock.

The Process and Implications of Demutualization

Many mutual insurers, including MetLife and Prudential, have demutualized over the years. Demutualization is the process by which policyholders became stockholders and the company’s shares begin trading on a public stock exchange.

By becoming a stock company, insurers are able to unlock value and access capital. As a result, they can achieve more rapid growth by expanding their domestic and international markets.

The Bottom Line

Where insurance companies are concerned, investors are focused on profits and dividends. Customers are focused on cost, service, and coverage. The perfect insurance company model would be one that met both sets of needs for buyers. Unfortunately, that company does not exist. They are organized either as a mutual company or a stock company. Policyholders co-own the former while shareholders own the latter.

Which fits your needs best? Start by deciding on the organization focus you desire most—you as company co-owner or simply as policyholder. Then consider the kind of insurance you are buying. Policies that renew annually, such as auto or homeowner’s insurance, are easy to switch between companies if you become unhappy, so a stock insurance company may make sense for such coverage.

For the longer-term coverage of life, disability, or long-term care insurance, you may want to select a more service-oriented company, which most likely would be a mutual insurance company.