Financial Markets and Institutions (2-downloads)

Mutual insurance companies are owned by the policyholders. The objective

of mutual insurance firms is to provide insurance at the lowest possible cost to the

insured. Policyholders are paid dividends that reflect the surplus of premiums over

costs. Because the policyholders share in reducing the cost of insurance, there may

be some reduction in the moral hazard that most insurance companies face. A unique

feature of mutual insurance dividends is that they are not taxed like dividends

received from other types of corporations. The Internal Revenue Service regards

the dividends as refunds of overcharges on insurance premiums.

Most new insurance companies organize as stock corporations. As Figure 21.2

shows, at the end of 2008, only 137 of 873 insurance companies were organized

as mutuals.

M I N I - C A S E