General Insurance-Insurance Providers (NM)

All of the following are characteristics of a mutual insurance company EXCEPT

• They are owned by stockholders.

• They may issue policy dividends.

• They are governed by a board of directors.

• They have minimum financial capital requirements that must be met before they can conduct business.

Answer explanation

Mutual insurance companies are owned by their policyowners.

All of the following are characteristics of a stock insurance company EXCEPT:

• They may issue dividends.

• They are governed by a board of directors.

• They are owned by policyowners.

• They have minimum financial capital requirements that must be met before they can conduct business.

Answer explanation

Stock insurance companies are owned by stockholders. Mutual insurance companies are owned by their policyowners.

Why would a large manufacturer choose to self-insure rather than buy an insurance policy from an insurance company?

• to shelter company cash from federal taxation

• to save insurance premiums by paying relatively minor losses out of company funds

• to avoid having to comply with state insurance laws dealing with employee benefits

• so they can pick and choose which losses they cover

Answer explanation

A self-insured company is not exempt from state or federal insurance laws and regulations that prohibit insurers from discriminating between claimants.

All the following statements regarding reinsurance are correct EXCEPT:

• Claims are paid to the policyowner separately by each insurer participating in the reinsurance agreement.

• Reinsurance is a risk-sharing process used by insurance companies.

• The insurer accepting some of the risk being transferred from another insurer is known as the reinsuring company.

• The insurer seeking to transfer some of its risk to another insurer is known as the ceding company.

Answer explanation

The ceding company pays a premium to the reinsurer for the coverage taken by the reinsuring company.