State RegulationsTX specificDifficulty 2/5
A Texas mutual life insurer finishes the year with surplus earnings. How are those earnings typically used?
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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 stock and mutual insurers (Chapters 547 and 801), a mutual insurer has no stockholders to whom profits can be paid; the earnings belong to the members, meaning the policyholders. Surplus is therefore either paid back as dividends on participating policies or retained to strengthen the company for those same policyholders. This ownership structure is why mutual policies are commonly participating while stock company policies are usually nonparticipating.
Why the other options are wrong
- A) Insurers pay premium taxes and fees, but the surplus earnings of a mutual are not remitted to the state.
- B) Agents are paid commissions and contractual bonuses, not a share of the company's surplus.
- C) Dividends to shareholders describe a stock insurer; a mutual has no capital stock or shareholders.
Memory hook
No shareholders in a mutual, so surplus flows back to the policyholders.