The insurance industry today

The global insurance industry collects over $9 trillion in premiums annually. It is an incredibly rich and powerful industry that provides a service that is widely considered a public good, but is run by profit-seeking entities. This often results in misaligned incentives that pit insurance companies against their customers.

The insurance industry can be divided into stock insurance and mutual insurance companies. Stock insurance companies are owned by shareholders who provide capital to the company and whose objective is to make profit for shareholders. Policyholders do not share in the profits or losses of the stock insurance company. Mutual insurance companies are owned by policyholders who are “contractual creditors'' with a right to vote on the board of directors and enjoy dividend income based on corporate profits. Stock insurance companies dominate while mutual insurance companies are about 26% of the global insurance industry.

Stock vs. Mutual Insurance Companies

	Stock Insurance Co.	Mutual Insurance Co.
% of global market	74%	26%
Ownership	Owned by external shareholders who contribute the capital in the risk fund, but who are themselves not insured by the fund.	Shareholders are policyholders who are “contractual creditors” and are themselves insured by the fund.
Profits & Dividends	Profits are either retained by the insurance company as reserves or paid to external shareholders as dividends.	Profits are either retained by the insurance company as reserves or paid to policyholders as dividends or in the form of discounts on the premium
Management	For-profit management employed by the company with oversight by the board of directors and shareholders	For-profit management employed by the company with oversight by the board of directors and policyholders
Disclosures	Required by regulations to make extensive quarterly financial disclosures to shareholders

In theory, mutual insurance companies have incentives that are aligned with policyholders and should be a better option for consumers; in reality, pricing and operations are opaque across both stock and mutual insurance companies and it isn’t clear that aligned incentives produce better results. While the mutual insurance company is meant to be a “not-for-profit” association, it is nonetheless managed by for-profit management. As such, there are those who argue that for-profit stock insurance companies are more operationally efficient and offer lower prices because they are incentivized to keep costs low. Whereas in a mutual insurance company, the for-profit management team would seek to boost their own compensation which increases overall costs for the company.

Furthermore, the lack of transparency results in abuse. It is common for mutual insurance executives to have double digit multi-million dollar salaries and to travel on private jets, even in a financial year when no dividends are paid to policyholders. Furthermore, shareholders are policyholders who generally don’t take active part in governance decisions nor have much individual power as shareholders. They don’t know who the other policyholders are and are unable to organize to form voting blocs. As a result, company decisions are often made by executives with little oversight of shareholders.

Perhaps the most acute challenge faced by a mutual insurance company is the inability for mutuals to raise external capital in the event of unforeseen losses. Unlike the stock insurance company, a mutual insurance company cannot simply issue more stock to raise capital from external parties, instead, it only raises capital from selling more policies to policyholders. This, in addition to the desire for mutual insurance companies to engage in wealth management and investments to boost profitability, has resulted in companies opting for demutualization.