New Jersey Life Producer Practice Exam

What characteristic is associated with a mutual insurer?

1. Capital stock involvement

2. Agency contract

3. Limited Liability

4. Fraud Protection

The correct answer is: Agency contract

A mutual insurer is characterized primarily by its ownership structure. Unlike stock insurers, mutual insurers are owned by their policyholders, meaning that the policyholders have a direct stake in the company. This ownership structure allows policyholders to elect the board of directors and, to some extent, participate in the insurer's profits, often through dividends based on the insurer's performance. The agency contract refers to the agreements between the insurer and agents who sell the insurance products. While agency contracts are common in the insurance industry, they do not specifically define the nature of a mutual insurer. Instead, they are relevant to the operational aspect of how policies are marketed and sold, regardless of the insurer's ownership structure. Understanding this distinction can clarify the role of policyholders in a mutual insurer compared to shareholders in a stock insurer. The limited liability characteristic refers to the protection of personal assets of owners in corporate structures, but in mutuals, policyholders are not shareholders in the traditional sense. Similarly, fraud protection is a general feature of many insurance companies but is not unique to mutual insurers. In sum, the ownership model of a mutual insurer ensures that the policyholders are the beneficiaries of its operations, which is a fundamental characteristic of such entities.