Life & Health Insurance Practice Exam

Which type of insurance is organized on the basis of ownership by policyholders?

1. Mutual Insurance

2. Reciprocal Insurers

3. Commercial Insurers

4. Captive Insurers

The correct answer is: Reciprocal Insurers

The correct choice is mutual insurance. This type of insurance is specifically structured to be owned by its policyholders, meaning that the individuals who purchase policies from the mutual insurance company also hold ownership rights in the company itself. Policyholders may benefit from this ownership through dividends or reduced premiums when the company performs well financially. In mutual insurance, the profits generated are shared among the policyholders rather than being distributed to outside stockholders, which is common in stock insurance companies. Therefore, the policyholders have a vested interest in the performance of the company, leading to a different operational philosophy focused on serving the interests of its member-owners. Reciprocal insurers, while also a form of insurance sharing among members, do not operate on the basis of ownership in the way that mutual insurance does. Instead, they are organized as an unincorporated association where subscribers support each other through mutual agreement for coverage. Commercial insurers are typically for-profit entities owned by shareholders, while captive insurers are owned by the entities they insure, often to provide coverage specifically tailored to their needs, but they do not operate on a mutual ownership basis.