Georgia Property & Casualty Practice Exam

Which type of insurance company pays policy dividends to its policyowners?

1. Stock insurance company

2. Mutual insurance company

3. Captive insurance company

4. Reinsurance company

The correct answer is: Mutual insurance company

A mutual insurance company is structured in a way that allows policyowners to also be members or shareholders of the company. This unique structure means that any profits generated by the company can be distributed back to the policyowners in the form of policy dividends. These dividends serve as a return of excess premiums and can provide financial benefits to the policyowners, rewarding them for their loyalty and participation in the mutual company. In contrast, a stock insurance company operates with the primary goal of generating profits for its shareholders rather than for policyowners. While stock companies may pay dividends to shareholders, they do not typically provide dividends to policyholders, so this option does not fit the criteria of paying policy dividends. Captive insurance companies are created to provide coverage for a parent company or group of affiliated companies, often limiting their operations to insuring their owners' risks. Because of this niche focus, they do not distribute dividends like mutual companies. Lastly, reinsurance companies provide insurance to other insurance companies, allowing them to reduce their risk exposure. They function more as a risk management tool for the insurance market and do not issue dividends to policyowners because their structure is not designed for direct policyholder engagement in the same way as mutual companies. Overall, the mutual insurance company stands out as