Understanding Insurer Structures: Types, Demutualization, and Holding Companies

Understanding Private Insurer Types

In terms of legal ownership and structure, private insurers can be categorized as follows:

1. Stock Insurers: A corporation owned by stockholders. The primary objective is to earn profits for the stockholders.
2. Mutual Insurer: A corporation owned by its policyholders, with no stockholders. The policyholders select a board of directors, who then appoint executives to manage the corporation.
3. Advance Premium Mutual: Owned by policyholders with no stockholders, this insurer does not issue assessable policies. Premiums charged are expected to be sufficient to cover all claims and expenses.
4. Assessment Mutual: Possesses the right to assess policyholders an additional amount if the insurer’s financial operations are unfavorable.
5. Fraternal Insurer: A mutual insurer that provides life and health insurance to members of a social or religious organization. Also known as a fraternal benefit society.

Evolution of Mutual Insurer Structures

The corporate structure of mutual insurers has undergone significant changes, driven by various factors:

1. Increase in company mergers.
2. Demutualization: The process by which a mutual insurer converts into a stock insurer.

Reasons for Demutualization

1. The ability to raise new capital is increased.
2. Stock insurers have greater flexibility to expand by acquiring new companies or through diversification.
3. Stock options can be offered to attract and retain key executives and employees.
4. Conversion to a stock insurer may provide tax advantages.

Methods for Mutual to Stock Conversion

A mutual insurer can convert into a stock insurer through several methods:

1. Pure Conversion: A mutual insurer amends its articles of incorporation and reorganizes as a stock insurer.
2. Merger: A mutual insurer and a stock insurer join to form a single company, with the stock insurer as the surviving entity.
3. Bulk Reinsurance: A mutual insurer cedes all its assets and liabilities to a stock company, after which the mutual insurer is dissolved.

The Role of Mutual Holding Companies

Demutualization can be expensive, slow, and requires the approval of regulatory authorities. As an alternative, many states have enacted legislation that allows a mutual insurer to form a holding company.

Holding Company:

A company that directly controls an authorized insurer.

Advantages of Mutual Holding Companies

1. Insurers have an easier and less expensive way to raise new capital to expand or remain competitive.
2. Insurers can enter new areas of insurance more easily.
3. Stock options can be given to attract and retain key executives and employees.