Which statement correctly distinguishes a mutual insurer from a stock insurer?
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Answer & full 3-part explanation (select an option above, or peek)
Why A is correct
A mutual insurance company is owned by its policyholders — there are no shareholders, and any distributable surplus may be returned to policyholders as dividends. A stock insurance company is owned by shareholders who provide capital and expect a return on their investment; profits may be distributed as shareholder dividends rather than policyholder dividends. Both types must remain solvent and are subject to regulation, and both may issue participating policies, but the ownership structure — policyholders versus shareholders — is the defining difference between the two corporate forms.
Why the other options are wrong
- B) This reverses ownership: mutual insurers are owned by policyholders, and stock insurers are owned by shareholders who invest capital in the company.
- C) Ownership differs fundamentally between the two forms; only the mutual is owned by policyholders, and each structure pays dividends to its own owners.
- D) A mutual insurer is not a nonprofit; it operates for the benefit of its policyholders and may build surplus, just without outside shareholders.
Memory hook
Mutual = owned by the customers (policyholders). Stock = owned by the investors (shareholders). Follow the owners.