Question

Discuss which forms of organizational design and structure that fit nationwide insurance company. Explain and cite your sources. Evaluate whether or not you think this organization structure is the most effective. If not, what other design/structure from your textbook would you recommend?

Answer 1

Introduction

Insurance companies operate under one of two business structures. These structures have their own unique features, advantages and disadvantages. The structure of the company also drives the long-term business activity and how the company operates. It may affect the investments it makes and even the types of policies it designs and sells.

Mutual Structure

A mutual insurance company is an insurance company that is not publicly traded. The company is effectively owned by the policyholders. Because of this, the interests of the management are aligned with those of the policyholders in a direct way. The management is incentivized to work for the long-term benefit of the policyholders, since actions that work against the policyholders may cause them to leave the company. Mutual insurers generally have only one way to make money. They must sell new policies. The exception to this is life insurers, which may also raise funds through interest on policy loans.

Stock Structure

A stock insurance company is publicly traded. The company is not necessarily disincentivized to work for the long-term best interest of the policyholders. However, the insurer has to balance the interests of the policyholders with that of outside stockholders. These stockholders may or may not own policies issued by the company. A stock company may raise money by selling policies or issuing more stock of the company. In the case of life insurance companies, stock insurers may encourage policyholders to take policy loans and collect interest payments.

The Stock Structure is much popular among the Insurance Companies. As Insurance Company is a big institution to handle and also require heavy capital which can be collected from the stockholder.

Mutual vs. Stock Companies

The first mutual insurance organizations were loose-knit groups of merchants who pooled emergency funds for their mutual benefit in case of fire. Modern mutual insurance companies are run as cooperatives, in some ways resembling credit unions. Every policyholder is also a part owner in the company and enjoys better dividends or cash values when the company flourishes. Stock companies sell shares in the business, like other companies, and the shareholders own the company. This creates a potential conflict between the shareholders' interests and the policyholders' interests, and well-run companies are careful to address the needs of both groups.

Demutualization

Although several of the industry's largest players are mutual companies, they operate at a disadvantage in the corporate marketplace. Borrowing is their only option for raising large quantities of capital, and it's not always possible to fund a proposed acquisition or expansion through borrowing. To overcome this difficulty, some companies choose to convert to a publicly traded structure, a process called "demutualization." A majority of policyholders must vote to support the decision, and an initial public offering must be underwritten. The policyholders' stake in the new company is calculated through a formula that accounts for the quantity of insurance they own and the length of time they've made premium payments.

Advantages of Demutualization

Demutualization typically takes 18 to 24 months. Once the process is complete, the newly reorganized company can trade its shares on the open market and float new issues as needed to generate capital. That makes stock-based companies nimbler and better able to respond to changing market conditions. It's easier for them to make an acquisition, attract a takeover bid, or -- if necessary -- repel a takeover bid. A stock company can benefit from any increase in its share price, as well as the performance of its own investment portfolio. At least in theory, it results in a stronger company that's capable of faster growth.

Policyholder Benefits

When a company proposes demutualization, policyholders are offered compensation for their ownership stake. The company's proposal will outline a variety of options, usually including a cash settlement, stock in the new company, increased cash value in your policies or a combination of several benefits. Policyholders who accept stock in the new company continue to hold an ownership stake. Those who accept cash can reinvest it as they please. Any existing policies will remain unchanged, as long as they're kept in force.

Note:- Above question answered on an assumption that student asking question about different structure in insurance company.