Company Ownership and Licensing Status in Property Insurance

Classification by Ownership Structure

Insurers are classified by ownership structure, state of incorporation, and authorization status. Understanding how an insurance carrier is owned explains who controls the organization, who supplies the initial capital, and who shares in any financial earnings. The two most common types of commercial insurance organizations are stock companies and mutual companies, though specialized entities like reciprocal insurers, fraternal benefit societies, and Lloyd's marketplaces also play distinct roles in the industry.

A stock insurance company is owned by stockholders or shareholders. Stockholders purchase shares of stock and provide the capital needed to establish a stock company. These shareholders elect a board of directors to oversee management on their behalf. Profits generated by a stock insurer may be distributed to stockholders as taxable dividends. Policyholders of a stock insurer generally do not receive policy dividends under nonparticipating policies, but a stock insurer may also issue participating policies. Stock insurers traditionally issue nonparticipating policies because policyholders do not participate in company profits.

A mutual insurance company is owned by its policyholders. Instead of outside investors, the customers who purchase policies elect the board of directors that oversees management. Surplus earnings in a mutual insurance company may be returned to policyholders as policy dividends. Mutual insurers traditionally issue participating policies because policyholders can participate in the surplus earnings. Policy dividends generally reduce the cost of insurance rather than represent investment profit, but their tax treatment depends on the circumstances, including whether the premiums were deducted as a business expense. Over time, a mutual company can convert into a stock company through a process called demutualization.

Other ownership arrangements provide alternative ways to pool risks. A reciprocal insurer is an unincorporated insurance exchange whose subscribers insure one another and whose operations are managed by an attorney-in-fact. Members of a reciprocal insurer are referred to as subscribers. In contrast, Lloyd's is an insurance marketplace where syndicates backed by individual or corporate members underwrite risks; it is not a single insurance company. Finally, a fraternal benefit society operates through a lodge system and provides life insurance and other authorized benefits to eligible members and their families.