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Question

Difficulty: EasyTypes of Insurers

A newly incorporated insurance entity raises its operating capital by issuing shares to external investors. The board of directors is elected by these investors, who expect a return on their investment through taxable profit distributions. Based on this ownership structure, how is this entity classified?

  1. A stock insurerAnswer
  2. B
    A mutual insurer
  3. C
    A reciprocal exchange
  4. D
    A reinsurer

Answer

A stock insurer
The correct classification is a stock insurer. Stock insurance companies are corporations owned by individuals who purchase shares of stock. These shareholders elect the board of directors to manage the company. When the company operates profitably, it may distribute those profits to the shareholders in the form of stock dividends, which are considered taxable income.

Step-by-Step Solution

1
Analyze the source of the company's operating capital.
The capital is raised by issuing shares to external investors.
Identifying who provides the capital is the first step in distinguishing between corporate insurance structures.
2
Examine who controls the company and receives the profits.
The investors (shareholders) elect the board of directors and receive taxable profit distributions (dividends).
The defining characteristic of a stock insurer is that it is owned and controlled by shareholders seeking a return on their investment, contrasting with mutual insurers which are owned by policyholders.

Key Concept

Corporate Organization of Insurers
Estimated Time:45s
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Topics

Types of Insurers

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