New Jersey Life and Health State Practice Exam

An insurer owned by its policyholders typically functions on what principle?

1. Profit maximization

2. Demutualization

3. Participatory model

4. Capital accumulation

The correct answer is: Participatory model

An insurer owned by its policyholders typically functions on the participatory model principle. In this structure, policyholders have a stake in the company and share in its profits and losses. This means that decisions made by the insurer often reflect the interests and needs of its policyholders rather than a focus solely on maximizing profits for external shareholders. In the participatory model, policyholders may receive dividends based on the insurer's performance, which aligns the insurer's operations with the interests of those it serves. This structure encourages a sense of community and collective benefit, ensuring that policyholders are actively involved in the company's direction and decisions. In contrast, other principles such as profit maximization are typically associated with stock companies where the focus is on generating returns for shareholders. Demutualization refers to the process of converting a mutual insurance company into a stock insurance company, which fundamentally changes its operational dynamics away from the participatory model. Capital accumulation, while important for any insurance company, does not define the mutual ownership structure focusing on policyholder interests.