Mutuals vs. Stock Insurers: What’s the Difference?

All insurers may have the same basic function of selling insurance policies to customers, but some operate as mutuals, while others are stock companies. Mutual insurance dates back to 17th century England, and the first successful U.S. mutual insurer was founded by Benjamin Franklin in 1752—it’s still in business today!

So what’s the difference between mutual and stock insurers? We’re here to break down five major ways these kinds of insurers vary.

Main goals:

The primary mission of a mutual insurer is to continuously maintain enough capital to meet policyholder needs. On the other hand, the main goal of a stock insurer is to maximize profits for its shareholders.

Ownership and leadership:

The major difference between mutuals and stock insurance companies is their ownership structure. A mutual insurance company is owned by its policyholders, while a stock insurance company is owned by its shareholders and can be either privately held or publicly traded. Policyholders of a stock company have no control over the company’s management unless they are investors as well. Policyholders of mutual insurers are also the owners of the company and therefore get to vote on its board of directors.

Earnings:

Both mutuals and stock insurance companies earn their income by collecting premiums from policyholders—the difference lies in what they do with those earnings. Mutual insurers may distribute surplus profits to policyholders through dividends, or retain them in exchange for discounts on future premiums. Stock insurers can distribute surplus profits to shareholders in the form of dividends, use the money to pay off debt, or invest it back into the company. Stock companies are also able to issue shares of stock to generate income, but mutual insurers don’t have this option, and must take out loans or increase premium rates if additional money is needed.

Investments:

Due to their varying goals, the investment strategies of these two kinds of insurance providers are often different. Since stock insurers are under pressure from investors to maximize profits in order to higher dividend payouts, they tend to be more concerned with short-term results. They’re more likely to invest in higher-yielding, riskier assets than mutual companies. Mutual insurers are more long-term focused, leading them to invest in conservative, low-yield assets.

Risk:

Stock insurers offer policyholders greater stability, as they have more options available to generate earnings. This makes it easier for them to overcome financial difficulties, while a mutual’s reliance on policy premiums as their main source of income can be a major disadvantage. If they’re unable to raise enough funds, they may be forced out of business. When a mutual company is sold, policyholders may receive a cut of the money from the sale. Instead of dissolving the company, a mutual insurer that is in financial trouble also has the option to turn into a stock company, through a process called demutualization.

Now that you know some of the differences between mutual and stock insurers, you can decide which is right for you. Need additional guidance? Get it from the experts here.