Final answer:
A mutual insurance company is owned by its policyholders, who may receive dividends as a return of unused premiums. These dividends represent excess funds not paid out in claims, which the company has managed to save or earn through investments. This structure differs from a Captive Insurance Company and a corporation, with the latter distributing dividends to shareholders based on profits.
Step-by-step explanation:
An insurance company owned by policy owners who receive a return of unused premiums in the form of policy dividends is known as a mutual insurance company, not a Captive Insurance Company. In a mutual insurance company, policyholders have the dual role of being both customers and owners of the company. The profits earned by the company are redistributed to the policyholders in the form of dividends or reduced future premiums.
Such companies generate income through insurance premiums and investment income. They invest the funds that have not been paid out in claims, typically in safe, liquid assets to ensure they can cover claims during major disasters. When these investments generate returns, the income can be used to pay dividends to policy owners or to lower future premium costs.
Unlike a corporation that pays dividends to shareholders, a mutual insurance company pays dividends to its policyholders. These dividends are a reimbursement of the excess premiums paid and not an investment return.