Tennessee Insurance Practice Exam

Which type of insurance company primarily serves the interests of its policyholders?

1. Stock insurance company

2. Mutual insurance company

3. Reciprocal insurance exchange

4. Captive insurance company

The correct answer is: Mutual insurance company

A mutual insurance company primarily serves the interests of its policyholders because it is owned by its members, who are also the policyholders. When a mutual insurance company earns a profit, it can distribute those profits to policyholders in the form of dividends or reduced premiums. This structure inherently aligns the interests of the company with those of its insured members, as policyholders have a direct stake in the company’s performance and decision-making. In contrast, a stock insurance company is owned by shareholders, which means its primary obligation is to generate profits for these shareholders rather than to the policyholders. A reciprocal insurance exchange operates on a similar model in that it is based on the idea of mutual aid among its members, but it functions slightly differently by having members act as both insurers and insured individuals with less direct ownership involvement compared to mutual companies. A captive insurance company is formed to provide coverage to a specific group or corporate entity and is not structured to serve the broad interests of policyholders in the way mutual insurance companies do. Thus, the nature of ownership and profit distribution in a mutual insurance company distinctly emphasizes serving and benefiting its policyholders.