An insurance company has two options when deciding on the structure and organization of the company. These structures determine how the company will be carried out and can have a dramatic impact on its final success. Each structure of the company has its advantages and limitations. For a consumer, it is useful to know the underlying motivations of both types of insurance companies.
A mutual insurance company is organized without the use of a public offering of shares. The company is the exclusive property of its insured. The main source of income for a mutual insurance company is the premiums collected from the insured. Mutual insurance companies can pay dividends to the insured since there are no external shareholders participating in the company.
A corporation is a publicly-traded company. This organizational structure allows the company to raise funds by issuing shares and can pay dividends to shareholders, either from policies, or both. However, it is more common for the company to pay dividends from shareholders instead of the insured. The exceptions to this rule are companies like Met Life, which pays a dividend to its insured for comprehensive life insurance policies.
A mutual insurance company is established for the benefit of its insured. As there are no external shareholders and the only source of income comes from the insured, there is a built-in incentive to service the insured. If the insured leaves the company, the insurer may suffer financial difficulties. In addition, it may be easier for a corporation to raise capital, thus offering policyholders more financial security, since external investors can provide the additional cash that the insurance company needs to pay claims or meet the objectives of investment.
Mutual life insurance companies only grow as fast as the insured are added. A decrease or flattening of sales could be detrimental to an insurance mutual since no growth can occur without new insured. Corporations may be affected by a conflict of interest in which the shareholders of the company expect the profits paid as dividends, while the insured are waiting for the money to be invested for the future security of their policies. If the insurer cannot do both, then one may suffer at the expense of the other.