Types of Insurance Company

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Types of Insurance Company

Just as there are several varieties of life insurance there are likewise several types of life insurance company. Conventional with-profit and non-profit policies are the speciality of the "ordinary branch" life insurance companies, which may be mutuals (owned by their own policyholders), or proprietary companies (owned by shareholders like any other industrial company).

One separate class of proprietary company is the composite companies, which transact not only life insurance but general business, too.

Many of the largest life companies fall into this latter category (such as Prudential, Guardian Royal Exchange, Legal & General, Commercial Union and Royal).

The difference between mutuals and proprietary companies is that in the case of the mutual all the profits go to the policyholders, whereas in the proprietary company the shareholders get a proportion of the profits.

In practice, however, the difference between mutuals and shareholder-owned companies is not so significant.

Several proprietary companies used to have a clause in their constitutions allowing 10% of profits to be distributed to shareholders, but some have dropped or amended this because they could not actually afford to do it without weakening their competitive position.

In theory, the funds provided by shareholders are an extra resource for the proprietary company to draw on if things go wrong; in practice, many of the old-established companies, whether mutual or proprietary, have such large reserves that the amounts of shareholders' funds can be of academic interest only. Strictly speaking, the management of mutual companies is answerable only to policyholders, while that of proprietary companies is answerable in the first instance to shareholders. Policyholders are in general less aware of the activities of management than are shareholders, who are likely to react more quickly than policyholders to any decline in the fortunes of their company. Mutual companies are more inclined to regard themselves as trustees for their policyholders' savings and are therefore less likely to take risks with the introduction of new policies or methods of development than proprietary companies, whose desire for expansion and growth may drive them dangerously fast. There is overall no real advantage in the type of company in itself; what is important, as we shall see later, is that there are very good and very poor companies in both classes and it is highly desirable to avoid the inferior ones.

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Unit Linking

In the conventional bonus systems we have been looking at, the sum assured plays the central role in surplus distribution, which is achieved by additions to the sum assured. Since this sum is payable on maturity or earlier death, this does place certain investment constraints on the company, which must always keep a watchful eye on mortality statistics and expenses at the same time as managing its investments. In the late 1990s, a number of people discovered that it was possible to detach investment from the protection inherent in the conventional with-profit policy through the use of unit linking.... see: Unit Linking

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