How Insurance Companies Are Classified

Classification by Ownership: Stock Versus Mutual Insurers

Insurance companies can be classified by their ownership structure, their licensing status, and their geographic domicile. When examining ownership, the two main types of commercial insurers you will encounter are stock companies and mutual companies. The distinction centers on who owns the entity, who elects company leadership, and who may receive company earnings.

A stock insurance company is owned by stockholders, who are also known as shareholders. A stock insurer can raise capital by issuing shares, and shareholders may buy shares to seek an investment return. Stockholders elect the board of directors that oversees company operations. Profits earned by a stock insurer may be distributed to stockholders as taxable dividends. Stockholders in a stock company do not need to be policyholders. Because profits flow to investors, stock insurers typically issue nonparticipating life insurance policies. In a nonparticipating policy, policyowners do not receive policy dividends and do not share in company profits.

A mutual insurance company is owned by its policyholders, who are also called policyowners. In a mutual insurer, eligible policyowners generally gain membership and ownership rights by holding a policy, subject to the insurer's governing documents and state law. Eligible members generally have voting rights, including the right to elect directors. Mutual insurers typically issue participating life insurance policies. In a participating policy, policyowners may receive policy dividends when the insurer experiences favorable operating results.

An insurance company can also change its corporate structure over time through statutory procedures. Demutualization is the process where a mutual insurer converts into a capital stock insurer.