New Jersey Life Producer Practice Exam

How does the legal structure of a mutual insurer differ from that of a stock insurer?

1. Stock insurers are owned by shareholders

2. Mutual insurers pay dividends to shareholders

3. Stock insurers are governed by policyholders

4. Mutual insurers have permanent capital

The correct answer is: Stock insurers are owned by shareholders

The legal structure of a mutual insurer is primarily defined by its ownership model, where the mutual insurer is owned by its policyholders. In contrast, stock insurers are owned by shareholders, who may not necessarily be policyholders. This means that stock insurers are focused on generating profits for their shareholders by providing insurance services, while mutual insurers focus on serving the interests of their policyholders. This ownership distinction plays a crucial role in how profits and dividends are handled. Unlike stock insurers that might pay dividends to shareholders, mutual insurers generally distribute surplus profits to policyholders in the form of dividends or reduced future premiums. Therefore, this is a key aspect that differentiates mutual insurers from stock insurers. The governance of the organization is also impacted by this ownership structure. Policyholders in a mutual insurer often have voting rights that allow them to influence major decisions, whereas in a stock insurer, governance is typically in the hands of its shareholders. Thus, the correct answer highlights the distinction in ownership, clarifying the foundational differences in purpose and operation between mutual and stock insurers.