Question 86

An Insurer that is owned by its policyholders and can pay annual dividends to them is considered a mutual company.

A mutual company is defined as an insurance organization that is owned by its policyholders. Such companies can distribute profits in the form of dividends to their policyholders, reflecting their ownership stake.

A) mutual company.

This option is correct because a mutual company is specifically characterized by its ownership structure, where policyholders are the owners. This ownership allows them to receive dividends based on the company’s profitability, aligning with the definition provided in the question.

B) reciprocal exchange.

A reciprocal exchange is an insurance arrangement where members insure each other's risks and share losses amongst themselves. Unlike mutual companies, reciprocal exchanges do not operate under a policyholder ownership structure and typically do not pay dividends to members, making this option incorrect.

C) fraternal society.

Fraternal societies are organizations that provide insurance benefits to their members, often based on a common bond, such as religion or ethnicity. While they may offer some form of benefits, they do not operate on the same principles as mutual companies and do not primarily focus on profit distribution through dividends, thus rendering this option incorrect.

D) stock company.

A stock company is owned by shareholders who may or may not be policyholders, and profits are distributed in the form of dividends to shareholders, not policyholders. This structure contrasts with mutual companies, where policyholders are the owners entitled to dividends, making this option incorrect.

Conclusion

The correct answer is mutual company because it accurately describes an insurer owned by its policyholders who receive dividends. All other options fail to meet this definition, as they either involve different ownership structures or do not provide dividends to policyholders.