Final answer:
A mutual insurance company is formed through reinsurance agreements among its subscribers, offering unique benefits such as dividends or reduced premiums, as it is owned by the policyholders themselves.
Step-by-step explanation:
A mutual insurance company is an insurance company owned entirely by its policyholders. It is a form of consumers' co-operative. Any profits earned by a mutual insurance company are either retained within the company or rebated to policyholders in the form of dividend distributions or reduced future premiums. In contrast, a stock insurance company is owned by investors who have purchased company stock; any profits generated by a stock insurance company are distributed to the investors without necessarily benefiting the policyholders.
A mutual insurance company results from an interchange of reinsurance agreements of indemnity among subscribers. This type of insurance firm is owned by policyholders, with profits returned to the subscribers in the form of dividends or reduced premiums. Unlike traditional stockholder-owned insurers, a mutual insurance company is structured so that the insured individuals are also the owners, providing control and specific benefits to those insured. Mutual insurance companies often engage in reinsurance, which allows them to share the risk with other insurers while ensuring greater stability and financial protection for the members.