Write 8 page essay on the topic Demutualisation of Insurance Companies.Download file to see previous pages... It is advantageous to the members as shares can be traded in the equity or stock markets w

Write 8 page essay on the topic Demutualisation of Insurance Companies.

It is advantageous to the members as shares can be traded in the equity or stock markets while the membership rights in the mutual companies can not be traded. Thus demutualisation increases the possibility for the involved parties to make profits and at the same time benefit the economy as a whole. Demutualisation was originally used to signify this specific conversion process of the insurance companies. However this term is being used more broadly to describe the process of conversion of any member-owned organisation to become shareholder owned. Conversion of London Stock Exchange and New York Stock Exchange are some of the classic examples in the direction of demutualisation of companies other than insurance companies.

The demutualisation of insurance companies is undertaken pursuant a plan of conversion approved by the policyholders and the state legislators Demutualization Claims Clearing House). In the case of mutual life policyholders a time of conversion they may receive stock, cash and/or policy credits in lieu of their ownership rights in the old mutual insurance company. In some cases the compensation is limited only to the subscription rights to acquire shares in the newly formed company. In some other cases the membership rights are transferred to a Mutual Holding Company (MHC) which owns a newly formed subsidiary stock insurance company.

In the context of th...

These changes include:

(1) The traditional life insurance products of life coverage and risk transfers were not favourably looked into by the consumers over the period of time. The consumers showed considerable preference in the wealth management/annuity business which showed good potential for new growth opportunities.

(2) The large scale deregulation of the financial services industry with the passing of Gramm-Leach-Bliley Act in the year 1999 eliminated the barriers between the commercial banking, insurance business and the investment banking which paved the way for combining all the business in one entity

(3) The modifications brought about in the Internal Revenue Codes abolished the tax advantages which were hitherto available to a mutual insurer and

(4) There were a number of foreign insurance companies that showed interest in the insurance market of the United States which changed the structure of the insurance companies

Similar circumstances prevailed in the European economies augmented the need for conversion of the insurance companies to stock companies from their original form of mutual companies with the membership of policyholders.

Mutual Companies and Stock Companies

In a mutual life insurance company the company is owned by the policyholders that make them both insureds and insurers. The policyholders are vested with the right to vote to elect the members of the Board of Directors and also to receive the policy dividends. In the event of insolvency and dissolution, they are also entitled to receive the sale proceeds of the assets of the company. The policyholders as members of the mutual company can have their insurance at the lowest possible cost.