1.5.2 Mutual Insurers
Mutual life insurance companies are corporations and, by law, must be incorporated in order to write insurance. Mutual insurers are incorporated insurers with no permanent capital stock. Unlike stock insurers, mutual insurers are owned by the policyholders. A mutual company exists to serve the insurance needs of those policyholders. Anyone purchasing insurance from a mutual insurer is both a customer and an owner (mutually) with rights to vote for the board of director members.
Mutual insurers are characterized by the following features.
- Participating policies
- Owned by policyholders
- Vote for directors and trustees
- Directors and management have control
- Typically higher rates
What is the operating objective of a mutual life insurance company?
Mutual companies can issue only participating policies, which allow a portion of the company's premiums to be paid out in the form of policy dividends as refunds, which makes those funds nontaxable as income. Mutual companies are sometimes referred to as participating companies because the policyowners participate in dividends.
Demutualization is the process of converting a mutual insurance company to a stock insurance company. A mutual insurer may convert to a stock insurer with the approval of the insurance department of its domiciliary state. In the conversion process, a mutual insurer offers policyholders cash or stock. The company may then also make a public stock offering.
Both stock and mutual companies can write life, health, and property and casualty insurance.
