State RegulationsTX specificDifficulty 3/5
A Texas applicant asks why one company charges higher premiums but may return part of them as policy dividends, while another company never does. Which explanation is correct?
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Answer & full 3-part explanation (select an option above, or peek)
Why B is correct
TIC 801.001(2) treats mutual companies and stock companies as the two forms in which an insurer may be organized, and that distinction determines where the money goes: because a mutual company has no shareholders, its divisible surplus is returned to participating policyholders as dividends, while a stock company's earnings belong to its shareholders. Dividends are not guaranteed, are not set by the department, and can never be used to promise a lower net cost.
Why the other options are wrong
- A) Only a mutual company returns surplus to policyholders, and no insurer must pay dividends whenever it profits.
- C) A stock company's earnings go to shareholders, and TDI does not guarantee any dividend.
- D) The commissioner does not fix dividend scales for insurers doing business in Texas.
Memory hook
Mutual surplus goes back to the policyowners; stock profit goes to the shareholders.