Introduction
A mutual insurer is a company owned by policyholders, with the purpose to provide its members with insurance at a reasonable cost. On the other hand, when a mutual insurer converts to a stock company (MMC), the power to control its future decisions is no longer in the hands of policyholders, and instead it is given to shareholders. Although conversion to a stock company may ensure an increase in capital and financial stability, some of the advantages of a mutual insurer may be lost. This article discusses why mutual insurers may become stock companies, the co-operative properties of a mutual insurer, the potential advantages and disadvantages of conversion, as well as the role of members in the process.
Factors Behind the Conversion
In general, mutual insurers convert to a stock company in order to raise capital and achieve financial stability. Conversion to a stock company would enable a transfer of the control of the company from policyholders to the shareholders, and it allows the company to issue stock, making it more attractive for investors. Furthermore, the company may be able to sell a part of its equity to outside investors, and receive payment over a period of time. With the influx of money, the service that the company is able to provide increases, as well as its presence in the market.
Properties of a Mutual Insurer
Unlike a publicly owned or Stock corporation, a mutual insurer is made up of policyholders and it is owned by individual members. The company retains all its earnings and the benefits are not normally shared outside of the members. Mutual insurers are usually non-profit and provide a high level of service because its main purpose is to protect and serve its members. They issue policies which are generally lower in cost because the company does not use a certain percentage of the premiums to pay shareholders. Additionally, mutual insurers allow members to vote in elections and provide an opportunity to interact and collaborate.
Advantages of Conversion
When a mutual insurer converts to a stock company, it is able to raise capital and become more attractive to potential investors. Conversion to MMC allows for a more responsible management of the assets and guarantees a larger capital base. Additionally, the company is able to issue stock, helping the company to grow and increase its presence, being thus capable of entering markets with more resources.
Disadvantages of Conversion
Although conversion may provide financial stability and an increase in capital, several disadvantages may be encountered. For example, policyholders who were originally members of the mutual insurer may not receive any compensation during the process. Additionally, the decision-making process may no longer be driven by the policyholders, and the financial structure of the company may become more complex. Furthermore, external investments can alter the options available to the company and its policyholders, as many external investors may be interested in more financial returns than members.
The Role of Members
Even though the power to control the future decisions of a mutual insurer may be transferred from policyholders to shareholders in the case of a conversion, policyholders still have the opportunity to make sure that their interests are met by engaging in the process. If a mutual insurer is considering a conversion to a stock company, its policyholders can attend meetings, review documents, ask questions and put forward their recommendations in order to understand the implications of the conversion and take an informed decision.
Fiscal Aspects
When a mutual insurer intends to convert to a stock company, it is first important to consider the fiscal aspects as they play an important role in the process. The company has to be aware of the tax implications of the conversion process, and needs to consider the impact of conversion on the policyholders. Furthermore, the company needs to consider whether to remain as a non-profit or make a transition to a for-profit company.
Intermediaries and Financial Structure
The conversion to a stock company involves the involvement of intermediaries such as intermediaries in the security market as well as registered broker-dealers and/or investment bankers. Investment bankers normally assist in the structuring and syndication process of the stock issue, and help the company to reduce the risk associated with the issue. Intermediaries also play a role in determining the financial structure of the company and in calculating the value of the company.
Regulatory Perspectives
The conversion to a stock company is also subject to the regulations imposed by the state’s insurance department and other regulatory authorities, as they play a key role in the process. Regulatory authorities must ensure that the conversion is fair to the policyholders and meets all legal requirements. Furthermore, stakeholders must understand the industry regulations and requirements in order to avoid potential future issues associated with the conversion process.
Legal Process
Conversion to a stock company requires an attorney to oversee the entire process and ensure that it follows the law. The attorney must be knowledgeable about the regulations associated with the industry as well as the legal implications of the conversion process. Attorneys must also ensure that the legal requirements are met, as the conversion must be approved by both the state insurance department and the shareholders.
Long-term Implications
The conversion of a mutual insurer to a stock company may have long-term implications over the years. One of the long-term implications of such a conversion is the introduction of a new system that changes the traditional approach to doing business with customers. This new system may focus on the shareholders and their goals rather than the policyholders’ interests, potentially diminishing some of the advantages that mutual insurers provide. Additionally, customers may be negatively impacted since the decision to convert may also result in higher premiums and/or fewer benefits.
Conclusion
The conversion of a mutual insurer to a stock company may offer potential advantages such as a larger capital base and a more attractive option for investors. However, members may not receive any compensation during the process, and the decision-making process may no longer be in the hands of policyholders. Additionally, the new business system may focus on maximizing investor’s profits rather than providing optimal services to the customers. It is important to consider all of the implications of the conversion process and understand the role of each of the stakeholders.
