Texas Property and Casualty License Practice Exam

Which of the following describes a Mutual Insurer?

1. Operated for stockholders' benefit

2. Managed by a board of directors chosen by policyholders

3. Establishes a private market for insurance

4. Allows public participation in the board selection

The correct answer is: Managed by a board of directors chosen by policyholders

A mutual insurer is defined as an insurance company that is owned by its policyholders. This structure means that the policyholders have a vested interest in the operations and management of the company. They are entitled to vote on important matters related to the insurer’s governance, including the election of the board of directors. Choosing option B conveys the essential characteristic that a mutual insurer is managed by a board of directors selected by the very policyholders who contribute to the company. This governance structure ensures that the interests of the policyholders are prioritized, aligning the company's operations with the benefits of its members instead of external stockholders or investors. In contrast, options that suggest a focus on stockholders, such as the first choice, misrepresent the fundamental nature of a mutual insurer. Likewise, a private market or public participation in board selection do not accurately reflect the governance by policyholders that defines mutual insurers. Therefore, the correct answer effectively captures the essence of mutual insurers and their operational model.