Capital Stock Insurance Company: Meaning, Pros and Cons

Daniel Liberto is a journalist with over 10 years of experience working with publications such as the Financial Times, The Independent, and Investors Chronicle.

Skylar Clarine is a fact-checker and expert in personal finance with a range of experience including veterinary technology and film studies.

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What Is a Capital Stock Insurance Company?

A capital stock insurance company is an insurance company owned by shareholders rather than policyholders. These entities get capital from stockholder contributions, in addition to their surplus and reserve accounts, with the majority of their assets or money coming from the sale of shares.

Key Takeaways

• A capital stock insurance company is a type of insurance company that is owned by shareholders instead of policyholders.
• In addition to their surplus and reserve accounts, a capital stock insurance company generates money by issuing shares or stocks.
• Greater access to capital makes it easier for the company to fund rapid growth and expansion.
• It can, however, be difficult to balance the long-term interests of the company’s customers or policyholders with the short-term financial demands of investors.

Understanding a Capital Stock Insurance Company

All property and casualty insurers perform the same basic function: selling insurance policies to customers. Where they vary is that some are organized as capital stock insurance companies while others operate as mutual companies.

The main difference between the two is that a mutual insurer is owned by its customers or policyholders, while a stock insurance company is owned by its shareholders.

A stock insurer may earmark profits to pay off debt or reinvest in the company and distribute anything that’s left to shareholders in the form of dividends. In the case of a mutual insurance company, meanwhile, the surplus may be distributed to policyholders in the form of dividends or retained by the insurer in exchange for reductions in future premiums; the specified amount of payment required periodically by an insurer to provide coverage under a given plan.

A capital stock insurance company may be publicly traded, while a mutual insurer is always privately held.

In addition to issuing shares or stocks, capital stock insurance companies get their wealth from their surplus and reserve accounts, which are funds set aside at the beginning of a year to meet the costs of old and new claims that have been filed.

Capital Stock Insurance Company vs. Mutual Insurance Company

Both stock and mutual companies earn income by collecting premiums from policyholders. However, their investing strategies often differ. A stock company's primary mission is to earn profits for shareholders. As such, they tend to focus more on short-term results with higher-yielding (and riskier) assets than mutual companies.

By contrast, a mutual insurer's mission is to maintain capital to meet the needs of policyholders. Policyholders are generally less concerned about the insurer's financial performance than are investors of stock companies. That means they focus on long-term results and are more likely than stock insurers to invest in conservative, low-yield assets.

Stock insurance companies outnumber mutual insurers in the U.S., although on a global level, there are more of the latter.

Advantages and Disadvantages of a Capital Stock Insurance Company

Many people favor mutual insurers over stock insurers since their priority is to put their customers first. The argument goes that it’s not always easy to protect the long-term interests of policyholders when forced to kneel to the short-term financial demands of investors.

At times, pressure from stakeholders can be a good thing, though. Mutual insurance policyholders tend to be less vocal than stock insurer shareholders. Calls for change from investors may yield positive results, forcing management to justify expenses, make changes, and maintain a competitive position in the market.

Another benefit of a capital stock insurance company is its ability to raise money. When a stock insurer needs capital, it can issue more shares of stock. A mutual insurer doesn't have this option in its arsenal and must borrow funds or increase rates to boost its coffers.

This additional flexibility explains why many mutual insurers have demutualized over the years. When policyholders become stockholders, and the company’s shares begin trading on a public stock exchange, insurers are able to unlock value and access new sources of capital, making it easier to fund rapid growth and expansion in domestic and international markets.