A Texas insurer has no capital stock, is owned by the persons who hold its policies, and returns any divisible surplus to those policyholders as policy dividends. How is this insurer classified?
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Answer & full 3-part explanation (select an option above, or peek)
Why D is correct
Under the Texas Insurance Code provisions governing insurer types (TIC 547.001 for stock companies and TIC 801.001 for mutual companies), classification turns on ownership. A mutual insurer has no capital stock; it is owned by its policyholders, who elect the board of directors and are entitled to any divisible surplus returned as policy dividends. Because the policyholders are both the customers and the owners, an agent selling a mutual contract is selling a participating product in which surplus flows back to the policyowner rather than to outside investors.
Why the other options are wrong
- A) A stock insurer is owned by shareholders who furnish the capital and are entitled to the profits; its policies are generally nonparticipating, so surplus is not returned to policyholders as dividends.
- B) A reciprocal exchange is an unincorporated association of subscribers who exchange risks among themselves through an attorney-in-fact; it is a separate form from a mutual company and is not the member-owned structure described here.
- C) A fraternal benefit society is also member-owned, but under TIC 885.001-.706 it must additionally operate under a lodge system with a representative form of government and provide benefits only to members and their beneficiaries; nothing in this fact pattern describes a lodge system.
Memory hook
No capital stock plus policyholder ownership plus dividends back to the owners equals a mutual insurer.