Insurance Companies

An insurance company is defined as an organization that provides financial protection and reimbursement of damages to an insured person or an organization according to the policy agreement. These companies provide insurance by collecting premiums from policyholders and ensure those policyholders to cover the losses if they suffer during the policy period. Because of the nature of their policies, an insurance company must perform common functions that are unique in providing its services, underwriting, loss adjustment, and investment.

Insurance companies may be classified in different ways: according to the type of insurance that they sell, their licensing status, type of provider(private or government) & according to their legal organization and form of ownership. In this blog, we will discuss the classification of insurance companies according to legal organization and form of ownership.

The Legal Organization and Ownership of Insurance Companies:

• Multiple-line Insurance Company
  Multiline insurance introduces complex insurance instruments that are used by a company to bundle the risk exposures of multiple corporate insurance obligations into one insurance contract. The term ‘multiple-line insurance companies’ also refers to an insurance agency that writes policies for several different lines of insurance products. These various products include coverage for a variety of risk categories such as liability, fire, and auto insurance. Individual customers may bundle their risk coverages of auto, marine, and homeowners into a multiline contract. By bringing all policies under one agency or carrier, commercial clients manage their single multiline contract easier instead of an entire portfolio. Bundling of various coverages in a single contract reduces the overall premium and makes it easier for year-end accounting. At the same time, the liability limits increase, much as it happens under an umbrella policy.
• Stock Companies
  A stock company is an organization with stockholders that participate in the gains and losses of the organization. Stockholders have the right to vote and to elect the board of directors. The stock company’s agreement specifies the types of insurance that will be sold. To operate a stock company, an insurer must have a minimum of capital and surplus in hand. Stock insurance companies distribute profits to their shareholders in the form of dividends. A stock insurer may reserve profits to pay off debt or reinvest them in the company. Along with this, stock insurance companies also make their wealth from their surplus and reserve accounts(funds set aside by insurance companies at the beginning of a year to meet costs of old and new claims).
• Mutual Insurance Company
  Mutual insurance companies are corporations owned by the policyholders, who elect the board of directors. The board of directors appoints the administrators who run the mutual insurance company. Instead of issuing stock, Mutual insurance companies raise their capital by selling surplus notes, which are unsecured debt.Policyholders of mutual insurance companies have less influence than institutional investors, who can accumulate significant ownership in a company. These policyholders may either receive a profit in the form of dividends or get an advance reduction in premiums. Mutual insurance companies are further categorized into the following specific types:
  1. assessment mutual,
  2. advance premium mutual,
  3. factory mutual,
  4. fraternal mutual,
  5. perpetual mutual

An assessment mutual company can charge more premiums to its policyholders if losses and expenses have been greater than expected. These companies usually concentrate on writing insurance for farm properties in rural areas. These types of companies are based on premium costs loss-sharing method. The members of these companies do not pay premiums in advance. The total loss experience is divided among the members of the company so that each member of the company can pay an equal portion of the total.

An advance premium mutual insurance company assesses premiums in advance and these premiums are not changed for a stated period of time. In case of advance premium mutual, higher premiums or taxes aren’t sought for policies already in force. Any higher than expected losses can be paid out from the surplus of the company, which is the difference between the income and expenses of the company.

The factory mutual is a type of mutual insurance company that insures only those sites that meet its rigid safety and construction qualifications. These companies insure mostly factories and other industrial sites, therefore these companies are named factory mutual insurance companies. A factory mutual insurance company inspects all sites regularly and offers loss control services to reduce risk.

Fraternal insurers are mutual insurance companies that provide health and life insurance to members of a social or religious group. These companies are non-profit organizations created by a lodge system that is limited only to its members. As charitable foundations, fraternal insurance companies don’t pay any federal income or state premium tax.

Perpetual mutual insurance companies provide mainly the homeowner’s insurance policy. Customers of this type of insurance company deposit money, called a deposit premium, to the insurer for insurance for the life of the risk. Perpetual mutuals charge a single premium or a lump sum that covers a long time. This capital is invested to cover losses. If an insured wants to cancel his policy, part of the premium will be returned.

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