Insurance Company (Insurer)

Definition

An insurance company, also known as an insurer, is an organization that underwrites and issues insurance policies. Insurance companies offer protection to policyholders against specific risks in exchange for premium payments. The two primary types of insurance companies are mutual insurance companies and stock insurance companies.

Mutual Insurance Company

A mutual insurance company is owned by its policyowners. These policyowners have the right to vote and elect a board of directors that is responsible for the company’s operations. Profits in a mutual insurance company are distributed to policyowners in the form of policy dividends or refunds of part of the premiums paid.

Stock Insurance Company

A stock insurance company is owned by its stockholders. The stockholders elect a board of directors that manages the company’s operations and decisions. Profits in a stock insurance company are distributed to stockholders in the form of stockholder dividends.

Examples

Mutual Insurance Company:
- Northwestern Mutual: One of the largest mutual life insurance companies in the United States, providing life, disability income, and long-term care insurance, along with annuities and investment products.
- State Farm: Known for its auto and home insurance policies, State Farm operates as a mutual company where policyholders become partial owners and can receive dividends.
Stock Insurance Company:
- AIG (American International Group): A global insurance company offering property-casualty, life insurance, and retirement products. AIG is publicly traded, and its shareholders receive dividends based on profits.
- MetLife: A leader in insurance, annuities, and employee benefits programs, MetLife is a stockholder-owned company listed on the stock exchange.

Frequently Asked Questions (FAQ)

Q1: What is the main difference between a mutual and a stock insurance company? A1: The main difference lies in ownership and profit distribution. Mutual insurance companies are owned by policyowners who receive policy dividends, while stock insurance companies are owned by stockholders who receive stockholder dividends.

Q2: Which type of insurance company can issue shares to investors? A2: Stock insurance companies can issue shares to investors as they are owned by stockholders. Mutual insurance companies, on the other hand, do not issue shares as they are owned by policyowners.

Q3: How do policyowners influence a mutual insurance company? A3: Policyowners in a mutual insurance company have the right to vote and elect the board of directors, thereby having a direct influence on the company’s management and decisions.

Q4: Are mutual insurance companies profit-oriented? A4: Yes, mutual insurance companies aim to generate profits. However, profits are typically returned to policyowners in the form of dividends or premium refunds, rather than being distributed to external shareholders.

Q5: Can a company be both mutual and stock? A5: No, a company cannot be both mutual and stock. It must be structured as either a mutual company, owned by policyowners, or a stock company, owned by stockholders.

Policyowner: An individual who owns an insurance policy and holds certain rights in a mutual insurance company, including voting rights.
Stockholder: An individual or institution owning shares in a stock company and entitled to receive dividends from the company’s profits.
Dividends: Profits distributed by insurance companies to policyowners (in the case of mutual companies) or stockholders (in the case of stock companies).

Online References

Suggested Books for Further Studies

“Insurance 101: A Comprehensive Guide to Insurance” by Carol Powers
“Principles of Insurance” by Robert Mehr and Emmett J. Vaughan
“Life Insurance: A Consumer’s Handbook” by Gordon K. Williamson

Fundamentals of Insurance Company: Insurance Basics Quiz

### What distinguishes a mutual insurance company from a stock insurance company? - [x] Ownership and profit distribution - [ ] Types of insurance offered - [ ] Geographical operation area - [ ] Number of employees > **Explanation:** The primary distinguishing factors are ownership (policyowners for mutual, stockholders for stock companies) and profit distribution (policy dividends for mutual, stockholder dividends for stock companies). ### Who elects the board of directors in a mutual insurance company? - [x] Policyowners - [ ] Stockholders - [ ] Government officials - [ ] Employees > **Explanation:** Policyowners in a mutual insurance company have voting rights and elect the board of directors. ### How are profits distributed in a stock insurance company? - [ ] Policy dividends - [ ] Refunds of premiums - [x] Stockholder dividends - [ ] Reinvestment into the company > **Explanation:** Profits in a stock insurance company are distributed to stockholders in the form of stockholder dividends. ### Can mutual insurance companies issue shares to the public? - [ ] Yes, they can issue shares freely. - [ ] Only under certain conditions. - [x] No, they are owned by policyowners. - [ ] Yes, but only to existing policyowners. > **Explanation:** Mutual insurance companies are owned by policyowners and do not issue shares to the public. ### Which type of company may offer voting rights to its policyholders? - [x] Mutual insurance company - [ ] Stock insurance company - [ ] Both mutual and stock insurance companies - [ ] Neither > **Explanation:** Policyholders in a mutual insurance company have voting rights to elect the board of directors. ### What form do profits take in a mutual insurance company? - [ ] Stockholder dividends - [x] Policy dividends - [ ] Interest payments - [ ] Capital gains > **Explanation:** In a mutual insurance company, profits are distributed as policy dividends to policyowners. ### How do stockholders in a stock company receive a return on their investment? - [ ] Through policy dividends - [x] Through stockholder dividends - [ ] Through premium refunds - [ ] Through enhanced policy benefits > **Explanation:** Stockholders receive returns on their investments through stockholder dividends. ### Can policyowners sell their ownership rights in a mutual insurance company? - [ ] Yes, on a public stock exchange - [ ] Yes, but only to direct relatives - [ ] Through a private sale - [x] No, they cannot sell ownership rights > **Explanation:** Policyowners in a mutual insurance company have ownership through their policies and cannot sell these ownership rights like stockholders. ### What happens to the profits if there is excess revenue in a mutual insurance company? - [x] Distributed to policyowners as dividends - [ ] Used solely for business expansion - [ ] Donated to charity - [ ] Invested in stock market > **Explanation:** Excess profits in a mutual insurance company are typically distributed to policyowners as policy dividends. ### What term refers to the payments that policyholders receive from mutual insurance companies? - [ ] Stockholder dividends - [x] Policy dividends - [ ] Interest repayments - [ ] Capital yield > **Explanation:** Policyholders in mutual insurance companies receive policy dividends as a form of profit distribution.

Thank you for exploring the nuanced distinctions and operational mechanics of insurance companies. Keep advancing your expertise in the insurance domain!