Tennessee Insurance Practice Exam

Dividends payable to a policyowner are determined by what?

1. State regulation

2. Policyholder request

3. Declared by the insurance company

4. Market conditions

The correct answer is: Declared by the insurance company

Dividends payable to a policyowner are declared by the insurance company based on its financial performance and surplus. This process involves the company's board of directors making a determination about the distribution of profits, which can be attributed to the underwriting results, investment income, and overall profitability of the insurer. Insurance companies, particularly mutual insurers, may distribute dividends as a return of excess premiums collected when they operate efficiently, manage risks effectively, and have a favorable loss experience. Declaring dividends is part of the company's internal financial management process, where it assesses its profitability and decides how much of that profit will be returned to policyholders. While state regulations might influence how dividends are structured or require transparency in reporting, they do not determine the actual amount of dividends payable. Policyholder requests do not directly influence the declared dividends, as such decisions are based on the company's financial standing rather than individual policyholder desires. Market conditions may impact the overall business environment and investment returns, but they are not the direct determinant in the dividend declaration process. Thus, it is the insurance company's declaration that ultimately sets the dividend amount payable to the policyholder.