Insurance companies are generally classified as either mutual or proprietary companies.[42] Mutual companies are owned by the policyholders, while shareholders who may or may not own policies own proprietary insurance companies. In most countries, life and non-life insurers are subject to different regulatory regimes and different tax and accounting rules. By contrast, non-life insurance cover usually covers a shorter period, such as one year.
The main reason for the distinction between the two types of company is that life, annuity, and pension business is very long-term in nature – coverage for life assurance or a pension can cover risks over many decades. Mutual insurers to form stock companies, as well as the formation of a hybrid known as a mutual holding company, became common in some countries, such as the United States, in the late 20th century. However, not all states permit mutual holding companies. They are self-funded cooperatives, operating as carriers of coverage for the majority of governmental entities today, such as county governments, municipalities, and school districts.
However, self-insured pools offer members lower rates due to not needing insurance brokers, increased benefits and subject matter expertise. Coverage such as general liability, auto liability, professional liability, workers compensation, and property is offered by the pool to its members, similar to coverage offered by insurance companies. Reinsurance companies are insurance companies that sell policies to other insurance companies, allowing them to reduce their risks and protect themselves from very large losses. The reinsurance market is dominated by a few very large companies, with huge reserves. The types of risk that a captive can underwrite for their parents include property damage, public and product liability, professional indemnity, employee benefits, employers' liability, motor and medical aid expenses.
The captive's exposure to such risks may be limited by the use of reinsurance. Heavy and increasing premium costs in almost every line of coverage. Difficulties in insuring certain types of fortuitous risk. Differential coverage standards in various parts of the world. Rating structures which reflect market trends rather than individual loss experience. Insufficient credit for deductibles or loss control efforts. Captives represent commercial, economic and tax advantages to their sponsors because of the reductions in costs they help create and for the ease of insurance risk management and the flexibility for cash flows they generate. Other possible forms for an insurance company include reciprocals, in which policyholders reciprocate in sharing risks, and Lloyd's organizations.