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

Which statement best distinguishes a mutual insurance company from a stock insurance company?

A mutual insurer is owned by its policyholders, whereas a stock insurer is owned by shareholders who bear residual risk. Stock insurers can raise capital by issuing equity, while mutuals depend mainly on retained earnings and policyholder premiums, which limits their capital-raising flexibility.

  1. AA mutual is owned by its policyholders, while a stock insurer is owned by shareholders who bear the residual risk and can raise capital in equity marketsCorrect
  2. BA mutual is owned by shareholders, while a stock insurer is owned by policyholders who share in underwriting results
  3. CA mutual can issue common equity easily, while a stock insurer can raise capital only by retaining earnings
  4. DA mutual must be a property-casualty insurer, while a stock insurer must be a life insurer

Explanation

Mutuals are owned by policyholders, which limits their ability to raise external equity, and they rely largely on retained earnings. Stock insurers are owned by shareholders and can issue equity. The other options reverse ownership or invent a restriction by line of business.

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