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FRM Part I · FRM Exam Part I · Insurance Companies and Pension Plans

A mutual life insurer is considering demutualizing into a stock company. Which is the most likely consequence of demutualization for the insurer?

Demutualization lets the insurer raise external equity capital by issuing shares, but ownership shifts to shareholders, creating potential conflict between shareholder profit goals and policyholder interests. Capital requirements still apply, and policyholders are no longer the owners as they were in a mutual.

  1. APolicyholders become the insurer's only owners and receive no change in governance
  2. BAccess to external equity capital improves, but a conflict can arise between shareholders' and policyholders' interestsCorrect
  3. CThe insurer is exempt from solvency capital requirements
  4. DAll existing policies convert automatically into shares with no cash value

Explanation

A stock insurer can raise capital by issuing shares, which a mutual cannot easily do. However, ownership then rests with shareholders whose goals of profit may conflict with policyholders' interests. Demutualization does not remove capital requirements, and policyholders are not the sole owners afterward.

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