What is Capital Stock Insurance Companies
A capital stock insurance company is a company that gets its capital from stockholder contributions, in addition to its surplus and reserve accounts. In other words, a capital stock insurance company is one that gets a majority of its assets or money from the sale of shares or stock to stockholders.
BREAKING DOWN Capital Stock Insurance Companies
All property and casualty insurers perform the same basic function; however, some are organized as capital stock insurance companies while others operate as mutual companies. There are key differences between the two types of organizations. Each has advantages and disadvantages for insurance buyers.
The main difference between a stock insurer and a mutual insurer is that a stock insurance company is owned by its shareholders, while a mutual insurer is owned by its policyholders. A stock insurer may be privately held or publicly traded. A stock insurer distributes profits to shareholders in the form of dividends, or it may earmark profits to pay off debt or reinvest them in the company. In a mutual insurance company, surplus may be distributed to policyholders in the form of dividends or retained by the insurer in exchange for reductions in future premiums.
In addition to issuing shares or stocks, capital stock insurance companies get their wealth from their surplus and reserve accounts. Reserve accounts are funds set aside by insurance company at the beginning of a year to meet costs of old and new claims that have been filed. It is important to note that only publicly-traded insurance companies can be capital stock insurance companies.
Investing for Capital Stock vs. Mutual Insurance Companies
Both stock and mutual companies earn income from investments. However, their investing strategies often differ. Stock companies' 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 insurers' mission is to maintain capital to meet the needs of policyholders. Policyholders are generally less concerned about insurers' financial performance than investors of stock companies. Consequently, mutual insurers focus on long-term results. They are more likely than stock insurers to invest in conservative, low-yield assets.
In addition to premiums and investments, stock companies can also get money from proceeds of stock sales. When a stock insurer needs money, it can issue more shares of stock. A mutual insurer doesn't have this option since it is not owned by stockholders. If a mutual insurer needs money, it must borrow the funds or increase rates.