What distinguishes a mutual insurance company from a stock insurance company?

What distinguishes a mutual insurance company from a stock insurance company?

• A. It operates for-profit and pays dividends to stockholders.
• B. It issues stock to the public.
• C. It is owned by stockholders.
• D. It is owned by policyholders who may be referred to as members.

Answer: (D)

Mutual insurance companies are owned by the people who hold the policies—the policyowners, often called members. Because there aren’t outside stockholders, profits aren’t distributed as stock dividends; instead, any excess can be returned to policyowners as dividends on participating policies or used to reduce future premiums. In contrast, stock insurance companies are owned by shareholders who buy stock, and they operate to earn profits for those owners. So the key distinction is who owns the company: policyowners in a mutual, versus stockholders in a stock company. The other statements describe stock companies, not mutuals.

Mutual insurance companies are owned by the people who hold the policies—the policyowners, often called members. Because there aren’t outside stockholders, profits aren’t distributed as stock dividends; instead, any excess can be returned to policyowners as dividends on participating policies or used to reduce future premiums. In contrast, stock insurance companies are owned by shareholders who buy stock, and they operate to earn profits for those owners. So the key distinction is who owns the company: policyowners in a mutual, versus stockholders in a stock company. The other statements describe stock companies, not mutuals.