Insurance Companies: Understanding Their Private Nature

Insurance companies can be classified in several ways, including by the type of insurance they sell, their licensing status, their legal organisation and form of ownership, their marketing system, or the type of provider. The two major categories of insurance according to the type of provider are private insurance, which is provided by non-governmental organisations, and government insurance, which is provided by a government or one of its agencies. Private insurance companies are typically either life and health insurance companies or property and casualty insurance companies.

Private insurance is provided by non-governmental organisations

Non-profit organisations that provide private insurance include the Nonprofits Insurance Alliance (NIA), which is a 501(c)(3) nonprofit that provides liability and property insurance for other 501(c)(3) nonprofits. NIA offers fair and equitable pricing, and its insurance is tailored to the unique operations and budgets of nonprofits.

Private insurance is also provided by for-profit companies, such as WPA, The Exeter, Bupa, Axa Health, Saga, Vitality, Freedom, Aviva, and National Friendly. These companies offer a range of policies with different benefits, cover levels, and pricing. Some companies, like Bupa, do not have shareholders and can reinvest profits into the business, while others, like WPA, are solely focused on providing health insurance.

In addition to private insurance provided by non-governmental organisations, there are also government-funded insurance options, such as the Affordable Care Act (ACA) plans in the United States.

Private insurance companies are either stock insurance companies or mutual insurance companies

Stock Insurance Companies

Stock insurance companies are owned by stockholders or shareholders, and their objective is to make a profit for them. They can be either privately-held or public companies. Policyholders do not share directly in the profits or losses of the company. If a stock insurance company needs to raise capital, it can do so by selling additional shares. Some well-known American stock insurance companies include Allstate, MetLife, and Prudential.

Mutual Insurance Companies

Mutual insurance companies are "owned" by qualified policyholders, who have purchased certain insurance products from the business. Policyholders are co-owners of the firm and enjoy dividend income based on corporate profits. Mutual insurance 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 large mutual insurance companies include Northwestern Mutual, Guardian Life, Penn Mutual, and Mutual of Omaha.

Differences and Considerations

Mutual insurance companies cannot raise money by issuing shares, which can hamper their growth through mergers and acquisitions. On the other hand, mutual insurance companies are not beholden to shareholders and can focus on the long-term interests of policyholders. When deciding between a stock or mutual insurance company, it is important to consider the company's ratings, surplus, premium persistency, and whether their products meet your financial needs.

Stock insurance companies are owned by stockholders

Stock insurance companies are private organisations with the same structure as any corporation. They are incorporated under state laws and are owned and controlled by a group of stockholders who elect the firm's board of directors. Stock insurance companies are designed to make a profit for their stockholders, who are paid dividends that are considered taxable income.

Stock insurance companies are publicly traded and owned by stockholders, who are responsible for voting for the company's officers. Stockholders are prioritised over policyholders, and the company's profits are distributed to stockholders or reinvested in the business. Stock insurance companies are also able to raise capital by issuing stock, which provides flexibility in their financial strategies.

Stock insurers are characterised by nonparticipating policies, where policyholders do not share directly in the profits or losses of the company. The majority stockholder controls the company, and stock insurance companies are incorporated insurers whose capital is divided into shares.

The directors and officers of the corporation are responsible to all the stockholders in the company, regardless of whether they are policyholders or not.

Mutual insurance companies are owned by policyowners

Insurance companies are typically classified as either stock or mutual companies, depending on their ownership structure. Mutual insurance companies are owned by their policyholders, who are considered "contractual creditors" with voting rights on the board of directors. Policyholders enjoy dividend income based on corporate profits and benefit from long-term decision-making.

The mutual insurance model originated in England in the 17th century to cover losses from fires. It was introduced to the US in 1752 by Benjamin Franklin, who founded the Philadelphia Contributionship for the Insurance of Houses from Loss by Fire, which is still in operation today. Mutual insurance companies can range from small, local providers to large, international insurers. Some well-known mutual insurers in the US include Northwestern Mutual, Guardian Life, Penn Mutual, and Mutual of Omaha.

As owners of the company, policyholders have the right to vote on management decisions and personnel. The company's management and board of directors determine the amount of operating income paid out as dividends to policyholders each year. While these dividends are not guaranteed, some companies have consistently paid them out even during difficult economic times.

Mutual insurance companies are not listed on stock exchanges and therefore do not face pressure to meet short-term profit targets. As a result, they can operate in the best interests of their members, focusing on long-term benefits. However, this structure may make it challenging for policyholders to assess the company's financial solvency or dividend calculation methods.

Mutual insurance companies raise capital by issuing debt or borrowing from policyholders, and they must repay this debt from their operating profits. In contrast, stock insurance companies have greater flexibility in raising capital by selling additional shares. Due to their limited access to capital, mutual insurance companies may face challenges in pursuing growth through mergers and acquisitions.

Demutualization is the process by which a mutual insurance company transitions to a stock company. This shift allows mutual insurers to access more capital, expand their markets, and increase profitability. However, it also shifts the focus from serving policyholders to prioritising the interests of shareholders.

Private insurance companies sell life and health insurance or property and casualty insurance

Life insurance financially protects a family in the event of the policyholder's death, providing survivors with the ability to meet ongoing financial obligations. Health insurance, on the other hand, allows individuals and their families to gain access to necessary medical care so they can live active and healthy lives.

Property and casualty insurance covers tangible assets such as homes, businesses, automobiles, and boats. It also includes liability insurance, which protects individuals against lawsuits.

When deciding which type of insurance to sell, insurance agents should consider their interests and what they are most comfortable with. For example, those who enjoy working with investments, estate planning, or family continuation may prefer life insurance, while those who prefer dealing with tangible assets may be more suited for property and casualty insurance.

It is important to note that the career paths, responsibilities, and work environments can vary greatly between different types of insurance. Additionally, the competition and customer buying decisions differ between the two types of insurance. Property and casualty insurance often faces intense competition, with price being a significant factor for customers. On the other hand, selling health and life insurance can be extremely competitive due to many agents pursuing the same prospects or clients.

Regardless of the type of insurance sold, success in insurance sales depends more on the agent's approach and strategies rather than the specific type of insurance being offered.

Frequently asked questions