Is your insurance company working primarily for you as a policyholder, or does it answer first and foremost to its investors? The answer to that question can have important ramifications, affecting everything from what an insurer invests in and how it manages risk to how it treats its customers, employees, and the surrounding community.
When it comes to making financial decisions, you may want to consider factors outside strict financial parameters such as a company's structure, values, and community impact. If you’re buying insurance, that means understanding whether the company underwriting your policy is stock-owned or mutual. It can make a big difference.
Here are five key factors that differentiate stock from mutual insurance companies and what they may mean for you and your financial situation.
Mutual insurance companies have been around since the 17th century and have deep roots in the American economy. In 1752, Benjamin Franklin and fellow firefighters founded The Philadelphia Contributionship for the Insurance of Houses from Loss by Fire, which continues to operate successfully to this day.1
Mutual insurance companies allow policy owners who are members of a mutual association to participate in receiving dividends when they are declared.2 You become a participating policy owner the day you buy a policy. As a policyowner, you have the right to vote on key issues including who will manage the company. The CEO, the board chairman, and the senior executive team all technically work for you.
Mutual fund companies are accountable primarily to policyholders. They don’t have to please investors by achieving targeted rates of growth or by issuing dividends to shareholders.
Stock-owned insurance companies have been in operation almost as long as mutual companies. The first one, Insurance Company of North America, was established in Philadelphia in 1792.1
Stock-ownership companies are owned by shareholders who purchase their publicly traded stock. Shareholders can benefit from their investments by receiving dividend income as well as from appreciation in the stocks’ value. Non-invested policyowners typically have no say in the company's management or decision-making processes.
Mutual companies pursue two objectives: meeting policyholder needs and growing the business. However, their primary goal is to provide insurance protection and financial security to policyowners. Ideally, business growth becomes an extension of better service and more competitive pricing.
Stock-owned companies, in contrast, seek to maximize shareholder profits. Some of these companies engage in corporate social responsibility, but this is nearly always a secondary objective since profits and returns to shareholders come first. The pressure to improve financial performance continually can make it difficult for stock-owned companies to pursue socially responsible objectives like managing environmental impact and giving back to their communities.
When mutual insurance companies earn a profit, they return these funds to policyholders by issuing dividends or using them to offset premium costs. Policyowners share in the financial success of the company, giving a sense of ownership and alignment of interests.
Stock-owned companies operate much differently. Profits are distributed in the form of dividends to shareholders. These profits do not directly benefit customers or policyowners.
Mutual companies operate by electing policyowners to serve on a board of directors, and all members have the opportunity to vote on important company issues. As a result, policyowners have a say in how the company is managed. The company is required to keep them informed about its performance, strategy, and any problems it faces. The company works solely for policyholders, and, as a result, aligns its own interests with those of its customers.
For stock-owned companies, the board of directors is made up of larger shareholders responsible for making corporate decisions. These directors are also often accountable to other shareholders, which may not always reflect the interests of policyowners or customers.
Stock-owned insurance companies have one major advantage over mutual insurance companies. They can raise capital by selling shares to the public. Mutual insurance companies can only seek financing by issuing debt or borrowing from policyholders. The debt is then repaid from operating profits.
Because of this difference, insurance companies that need additional capital sometimes choose to demutualize or convert from a mutual ownership structure to a stock-owned structure. This gives access to additional capital to help the company grow and expand, helping them compete more effectively in the market and attract investors who seek a financial return on their investment.
Company structure is just one factor you should consider in selecting an insurance provider. You will also need to think about company stability, the breadth and relevance of the products they offer, and overall costs.
Understanding the difference between mutual and stock-owned insurance companies remains important. Generally speaking, a mutual company prioritizes policyowner interests over all other considerations while a stock-owned company’s access to capital may enable innovation and more robust product and service development. Whatever you decide, think carefully about company structure and how the company you select fits your values and insurance needs.
1 https://www.iii.org/publications/insurance-handbook/brief-history
2 Dividends, which provide an opportunity for cash value growth, are not guaranteed.
This article is provided for general informational purposes only. Neither New York Life Insurance Company, nor its agents, provides tax, legal, or accounting advice. Please consult your own tax, legal, or accounting professional before making any decisions.
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