Structure of life Insurance

Organizational Structure of  life Insurance

Insurance companies operate under one of two business structures. These structures have their own unique features, advantages and disadvantages. The structure of the company also drives the long-term business activity and how the company operates. It may affect the investments it makes and even the types of policies it designs and sells.

Mutual Structure

A mutual insurance company is an insurance company that is not publicly traded. The company is effectively owned by the policyholders. Because of this, the interests of the management are aligned with those of the policyholders in a direct way. The management is incentivized to work for the long-term benefit of the policyholders, since actions that work against the policyholders may cause them to leave the company. Mutual insurers generally have only one way to make money. They must sell new policies. The exception to this is life insurers, which may also raise funds through interest on policy loans.

Stock Structure

A stock insurance company is publicly traded. The company is not necessarily disincentivized to work for the long-term best interest of the policyholders. However, the insurer has to balance the interests of the policyholders with that of outside stockholders. These stockholders may or may not own policies issued by the company. A stock company may raise money by selling policies or issuing more stock of the company. In the case of life insurance companies, stock insurers may encourage policyholders to take policy loans and collect interest payments.

Mutual holding company

There are three basic elements in a mutual holding structure: A mutual holding company, an intermediate stock holding company, and a stock insurance company. A mutual holding company, which is entirely owned by policyholders, owns the intermediate stock holding company. The intermediate stock holding company, in turn, entirely controls the stock insurance company, which actually sells insurance policies.

Intermediate stock holding companies can issue stock to raise capital. If that happens, the mutual holding company will always have majority control of the intermediate stock holding company, usually just over 50 percent.

Which one's better?

There is no clear answer as to which insurance company structure is best. Mutual companies traditionally pay higher interest on their whole life insurance policies. Stock companies and mutual holding companies allocate surplus money to stockholders or the companies' existing operations — not to policyholders. A stock company or a mutual company both have to deal with consumers the same way.In the long run, you won't see a difference.