Mutual vs. Stock Insurance Companies

Insurance companies are classified as either stock or mutual. There are some exceptions, such as Blue Cross/Blue Shield and fraternal groups. Worldwide there are more mutual insurance companies, but in the U.S., stock insurance companies outnumber mutual insurers. Learn how stock and mutual insurance companies differ and which type you should consider when purchasing a policy.

When selecting an insurance company, you should consider several factors including:

• 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 policy holders renew their coverage, which is an indication of customer satisfaction with the company’s service and products.)

A stock insurance company is corporation owned by its stockholders or shareholders, and its objective is to make a profit for them. Policyholders do not directly share in the profits or losses of the company. To operate as a stock corporation, an insurer must have a minimum of capital and surplus on hand before receiving approval from state regulators. Other requirements must also be met if the company's shares are publicly traded.

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 fill an unfilled or unique need for insurance. They range in size from small local providers to national and international insurers. Some companies offer multiple lines of coverage including property and casualty, life, and health, while others focus on specialized markets. Mutual companies include five of the largest property and casualty insurers that make up about 25% of the U.S. market.

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 irectors. 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 what amount of operating income is paid out each year as a dividend to the policyholders. While not guaranteed, there are companies that have paid a dividend every year, even in difficult economic times.                                                             

Like stock companies, mutual companies have to abide by state insurance regulations and are covered by state guaranty funds in the event of insolvency. 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 company, they feel there is no conflict between the short-term financial demands of investors and the long-term interests of policyholders. 

While mutual insurance policyholders have the right to vote on the company’s management, many people don’t, and the average policyholder really doesn’t know what makes sense for the 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, showing excesses occur at mutual companies.

Once established, a mutual insurance company raises capital by issuing debt or borrowing from policyholders. 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.

Over the years many mutual insurers have demutualized, including two large insurers – MetLife and Prudential. 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, allowing for more rapid growth by expanding their domestic and international markets.

Investors are concerned with profits and dividends. Customers are concerned with cost, service and coverage. The perfect model would be an insurance company that could meet both needs. Unfortunately that company does not exist.

Some companies promote the benefits of owning a policy with a mutual insurer, and others focus on the cost of coverage and how you can save money. One possible way to deal with this dilemma is based on 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 these types of coverage. For longer term coverage such as life, disability or long-term care insurance, you may want to select a more service-oriented company, which would most likely be a mutual insurance company.