Final answer:
Mutual insurer's premiums that are distributed as policy dividends are considered a return of premium since profits are returned to the policyholders and not counted as income, tax-deductible expenses, or shareholder dividends.
Step-by-step explanation:
A portion of a mutual insurer's premiums that are paid out as policy dividends are considered a b) Return of premium. This is because mutual insurance companies are owned by the policyholders, and any profits can be returned to them in the form of policy dividends. These dividends are not income to the insurer, as they don't represent a profit but rather a return of funds not needed to pay claims or expenses. Therefore, they cannot be accounted for as income to the insurer, a tax-deductible expense, or shareholder dividends, as mutual insurers do not have shareholders in the traditional sense.
As depicted in Figure 16.2, money flows into an insurance company through premiums and investments, and out through the payment of claims and operating expenses. The funds that are not paid out as claims are often invested in liquid investments, which can be quickly accessed in the event of an insurance claim due to a major disaster. These investments can generate additional income for the insurer, contributing to the overall financial stability of the company.