Stock insurance company
Also known as: stock insurer
A stock insurance company is an insurer owned by its stockholders (shareholders), who share in profits through dividends and stock appreciation. It contrasts with a mutual insurance company, which is owned by its policyholders.
A stock insurance company is an insurer organized as a corporation and owned by its stockholders — investors who purchased shares of the company. The shareholders elect the board of directors, control the company, and share in its profits, even though they may not own any of the company's insurance policies.
The key contrast is with a mutual insurance company, which has no stockholders and is owned by its policyholders. The ownership difference drives how profits flow. A stock insurer distributes profits to shareholders as taxable shareholder dividends. A mutual insurer returns surplus to policyholders as policy dividends, which are treated as a nontaxable return of overcharged premium. For this reason, policies issued by stock companies are traditionally called nonparticipating (policyholders do not participate in profits), while mutual company policies are called participating.
A stock company can convert to a mutual structure through mutualization, and a mutual can convert to a stock structure through demutualization — often to gain easier access to capital markets, since stock insurers can raise funds by issuing more shares.
This distinction is a staple of state insurance licensing exams. Life and health and property and casualty exams alike expect you to identify who owns each type of insurer, who receives the profits, and which type issues participating versus nonparticipating policies. A classic question stem is: "A stock insurance company is owned by its..." — and the answer is its stockholders.
Key takeaways
- A stock insurance company is owned by its stockholders, who elect the board and share in profits.
- A mutual insurance company, by contrast, is owned by its policyholders.
- Stock insurers traditionally issue nonparticipating policies; mutual insurers issue participating policies that can pay policy dividends.
- Policy dividends from mutuals are a nontaxable return of premium, while dividends paid to a stock insurer's shareholders are taxable.
- Insurance licensing exams frequently test the stock-versus-mutual ownership distinction.