The Insurance Marketplace

Stock Companies vs. Mutual Companies

A core concept that our insurance school teaches is the concept of insurance risk and corporate profitability in the insurance marketplace.  The majority of private commercial insurance companies in America are considered to be either stock or mutual insurance companies.  While both types of organization provide insurance to consumers, they differ in how they operate.

Stock Insurance Company

(Non-participating Company)
A stock insurance company is a private insurance organization whose main purpose is to make a profit for its stockholders.  This type of insurer is considered to be a non-participating company because the insured policyowners do not own the company nor do they receive any dividends it returns.

Stock insurers do not issue participating policies; therefore, two groups exist: shareholders and policyowners – though a shareholder could also be a policyowner.

Mutual Insurance Company

(Participating Company)
A mutual insurance company is one in which insured policyowners are also the company’s stockholders (owners).  Mutual insurers issue participating policies, in which policyowners share in the company’s ownership and receive dividends of the divisible surplus of the company’s profits.

More simply put, if you were to purchase insurance from a mutual insurer, you would be both a customer (insured) and an owner (shareholder).  Dividends are simply an annual reimbursement of the excess of premiums that remain after the company has set aside the needed reserves, and has made deductions for claims and expenses.

De-mutualizaiton  – A mutual insurance company has the ability to change its corporate structure to a stock company status, often to help increase capital needs that is more easily accomplished as a stock insurance company.  This process is called ‘de-mutualization.’

Mutualization – Just as a mutual insurance company can ‘de-mutualize’, a stock insurance company can also change its corporate structure to become a mutual insurance company, a process called ‘mutualization.’


The concept of ‘reinsurance’ is the sharing of risk between an insurance company and a re-insurance company, known as a Reinsurer, to provide additional insurance coverage for risks that are too large for the single insurer to adequately cover.

When an insurance company cannot assume an entire risk of an applicant’s request at the time of application, the insurance company will transfer part of the risk to a reinsurer.  A reinsurance agreement provides the details of the agreed reinsurance policy and a reinsurance premium is paid by the insurer to the reinsurer in exchange for the additional coverage.

As an example, if a company applies for a large insurance policy equaling $20 million and an insurance company is only able to cover a single loss up to $10 million, the insurer will purchase additional insurance from a reinsurer for the remaining $10 million to adequately cover the applicants $20 million request.