Texas General Lines — Property and CasualtyGeneral InsuranceMedium
An insurance company is structured such that it is owned by its policyholders, who receive dividends if the company's operating results are favorable. The primary objective of this type of insurer is to provide insurance at the lowest possible cost, rather than to maximize profits for shareholders. What type of insurer is being described?
- ALloyd's Association
- BStock company
- CReciprocal exchange
- DMutual company
Show answer & explanationAnswer & explanation
Correct answer: D. Mutual company
A mutual company is an insurance company owned by its policyholders. Policyholders often receive dividends, and the company's primary objective is to provide insurance at the lowest possible cost, aligning perfectly with the description.
Why the other options are wrong
- A. Lloyd's Association (like Lloyd's of London) is a market where members (Names) underwrite insurance, not a single company owned by policyholders in the described manner.
- B. Stock companies are owned by stockholders, who receive dividends, and their primary objective is to maximize profits for these stockholders.
- C. A reciprocal exchange is an unincorporated group of individuals or organizations that agree to insure each other, managed by an attorney-in-fact, and is distinct from a traditional mutual company.
Mutual Insurance Company
An insurance company that is owned by its policyholders, who may receive dividends and have voting rights.
- Owned by policyholders.
- May pay dividends to policyholders.
- Primary goal is to provide insurance at the lowest possible cost.
- No stockholders.
Memory trick: Insurers' forms: Stock for profit, Mutual for members, Reciprocal for peers.