Stock or Mutual Insurance Company?

There are many different options when it comes to selecting an insurance policy. In addition to determining what kind of insurance you need (home, auto, life, etc.) there are also things like out-of-pocket costs, rates, coverage limits, terms, and more to consider. Researching potential insurance plans and familiarizing yourself with their policies and conditions can help you find the right coverage. But while most policyholders know how to compare their basic insurance options, one factor that sometimes gets overlooked is the type of insurance company they’re buying from.

Specifically, are you working with a mutual insurance company or a stock insurer?

Here, we take a closer look at mutual insurance and stock insurance — what they are, who owns them, and which option can better serve your needs.

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Mutual Insurance vs. Stock Insurance

Insurance as a concept exists to help individuals and groups reduce financial uncertainty and allow them to manage the accidental loss. If, for example, you were to hold a life insurance or disability insurance policy, that coverage would pay out funds to help protect and support your beneficiaries if you were to die or otherwise become disabled from earning an income.

Financial security against unexpected life events is the main selling point for essentially every form of insurance. Still, not every type of insurance company has the same goals — or the same priorities.

Mutual insurance companies and stock insurance companies may seem very similar, and in terms of day-to-day functionality, it can be difficult to tell them apart. That said, understanding their differences can help you make a more informed decision as you shop for an insurance provider.

The primary points of comparison between mutual and stock insurers are:

Ownership

A major differentiator between mutual insurance and stock insurance companies is ownership. Who owns the company, and who has a voice in its management?

A stock insurer is an insurance company that is owned by investors who have purchased stock in the business. Holding shares in a stock insurance company allows the investor certain voting rights, giving them the liberty to determine how the company operates and what its focus should be. In these cases, the policyholders (AKA the customers) do not have any direct control over the management of the company unless they are also shareholders. This kind of company can be either publicly traded or privately held.

Mutual insurance companies have different structures of ownership. With mutual insurance, the policyholders (i.e. you) are the ones who ‘own’ the company. These policyholders are designated as “contractual creditors,” and gain the right to vote on the board of directors and contribute to policy decisions to ensure that their needs are being met.

Earnings

Whatever way you look at it, insurance companies are businesses — they’re designed to generate profit. A stock insurance company will first and foremost focus on paying shareholders or investing surplus profit back into the company. Conversely, mutual insurers redistribute profits into the hands of their policyholders, typically in the form of dividends or discounts. This is recognized by the IRS, which classifies dividends from mutual companies as a “return of premium,” and are therefore not subject to income taxes, up to the amount of money paid into the policy.

In cases where a stock-held insurance company started life as a mutual insurance company before going through ‘demutualization’ to become a publicly or privately stock-traded business, they may continue to pay dividends to some of their policyholders.

Stability

Stock insurance companies operate with a safety net in the form of their shareholders. Instead of relying solely on policy premiums to generate earnings, these companies can sell debt, issue additional stock shares, or take other steps to access more capital.

When faced with financial difficulties, stock insurance companies have more options available to bolster their profits. On the other hand, mutual insurance companies experiencing financial problems may find themselves either forced out of business or needing to demutualize to become a stock company.

Goals

Bringing all of the previous points together, the main differences between mutual insurance and stock insurance companies are their goals.

Because stock-held companies’ shareholders provide financial support and have a greater voice in leadership and direction, the goal of any stock insurer is to maximize shareholder profits. This can lead to financial decisions that prioritize short-term financial gains over serving the long-term interests of policyholders. While stock insurers may have a larger focus on profits, this does not mean the consumers are placed at unusually greater risk by using these companies. There are regulations placed, such as the FINRA rule that prevent stock insurers from investing too aggressively and harming their policyholders. The changes and policies may be profit motivated, but this does not necessarily come at the cost of the policyholder.

Which Type of Insurance Company Is Best for Me?

The factors listed above are more than just differentiators; they play key roles in determining an insurer’s policies, underwriting capabilities, direction, and priorities. And while both types of insurance companies have their own advantages and disadvantages, when it comes time to choose between insurers, you should consider the following points:

Stock insurers prioritize their shareholders over their policyholders. And although most stock insurance companies need to remain competitive in terms of coverage and premiums, at the end of the day they will always be more focused on the shareholders rather than their policyholders

Mutual insurers are not obligated to shareholders; they work to generate and maintain capital for the primary purpose of meeting customer insurance needs.

Stock insurers don’t allow policyholders to play a part in company management unless they are also investors. Any decisions or policy changes in stock-held insurance companies are made without the expressed consent or input of their customers.

Mutual insurance companies instead put the ownership of the business in the hands of the policyholders, so they can be sure that their interests are being addressed.
Stock insurers often prioritize bold, short-term investments in high-yield assets to generate more profit for their shareholders. And although there are regulations in place to prevent insurance companies from investing too aggressively, this focus on chasing shareholder profits can put their ability to serve their policyholders at risk.

Mutual insurers are inclined to forgo extremely risky investments in favor of long-term, low-risk options — protecting their policyholders while addressing their needs.

Taking these points into account, it’s not difficult to see which kind of insurance company is more dedicated to helping you achieve your long-term goals and protect your financial stability. Mutual insurance providers are dedicated to serving you.

Of course, there are still risks associated with choosing a mutual insurer. Ensure that your insurance company is one you can depend on; select a mutual insurer that has a proven track record of meeting customer needs and paying dividends, and you’ll have found a reliable partner dedicated to helping you and your beneficiaries through even the toughest of times.

Want more direction in choosing the right insurance? Our financial experts are available to assist. McFie Insurance provides expertise and insight to help you take control of your finances. Contact us today to get quotes or schedule a strategy session, and get ready to create financial success on your terms.

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Resource:

Here’s the link to order Winning Your Financial GAME – Book and Study Guide