How Does an Insurance Company Work?

Insurance companies provide monetary protection against the uncertain risks that can affect the lives of their policyholders. The ultimate purpose of insurance is indemnification, which simply means that insured individuals or organizations are restored to their original financial situation prior to a loss. The two major types of insurance companies, mutual and stock, work differently to indemnify their policyholders. 

Mutual Insurance Companies

Mutual insurance companies work using the principle of shared risk. Policyholders contribute to the financial resources of the company through their premium payment, which is paid on a monthly, quarterly or yearly basis. When an insured experiences a loss that is covered under the terms and conditions of their policy, they are entitled to indemnification using the available funds in the shared pool of member contributions. An elected body of officials called the board of directors is responsible for overseeing the insurance company ventures and often act as investigative underwriters when policyholders make claims. Should there be a monetary overage, policyholders benefit by receiving dividends in the form of reduced monthly premiums or a check.

Stock Insurance Companies

Stock insurance companies work by utilizing capital contributed by a group of stockholders who seek to gain profit from company revenue. Unlike mutual insurance companies, stock owners may or may not be policyholders, but they acquire voting, decision making and monetary privileges through their financial contributions. Indemnification funds are acquired via the combination of stockholder monies and premium payments elicited from policyholders. A skilled team of underwriters are employed by stock insurance companies to keep claim expenditures as low as possible, increasing potential company revenue. Stockholders profit when there is a company surplus, which is paid to each shareholder according to their stake in the organization.