Helping students study for the exam, I've noticed a big area that leads to confusion, and maybe a few wrong answers, is that of the differences between Stock Insurers, and Mutual Insurance Companies.
The problem is so many similar phrases are used for each topic, it's easy to "cross-your-wires". Here's a lot of what you need to know about this topic.
Stock Insurers Mutual Insurers
owned by ...
Shareholders Policyholders
they want Profit they want Refunds of any over-payment
(as an owner / client, they wouldn't over charge themselves)
These profits are called These refunds are called
Stock DIVIDENDS Policy DIVIDENDS
As Profit they are As a Refund, they are
TAXABLE NOT TAXABLE
The Clients...
Have NO VOTING RIGHTS, Have VOTING RIGHTS,
NO OWNERSHIP, An OWNERSHIP STAKE,
NO RIGHT TO PROFITS A RIGHT TO SURPLUS FUNDS
So they are called... So they are called...
NON PARTICIPATING PARTICIPATING POLICIES (par)
POLICIES (non-par)
< < < -------- When a Mutual Company switches to
become a Stock Insurer, it's called ...
DEMUTUALIZATION
These Dividends are...
NOT TAXABLE &
NOT GUARANTEED
The 5 Dividend Options:
O = one year term (more ins.)
C = cash
R = reduce next / current premium
A = accumulate with / at interest
P = paid-up additions (more ins.)
"Oh CRAP"
* Rarely, but it's possible, you might see Policy Dividends referred to
as Divisible Surplus, or Earnings Surplus.
