An insurer established and owned by a parent firm for the purpose of insuring the parent firm's loss exposures is known as a

Rationale

Captive insurer.

A captive insurer is specifically created and owned by a parent company to provide insurance coverage for its own loss exposures. This model allows the parent firm to tailor coverage to its specific needs while retaining control over the risks it faces.

A (stock company.) YOUR ANSWER

A stock company is an insurance organization owned by shareholders, who may or may not be policyholders. Unlike a captive insurer, a stock company operates primarily for profit and provides insurance to a broader market rather than exclusively to a single parent firm.

B (mutual company.) YOUR ANSWER

A mutual company is owned by its policyholders, who share in the profits and losses. While it may provide tailored coverage, it does not specifically exist solely for the purpose of insuring a single parent firm's loss exposures, which is the defining feature of a captive insurer.

C (captive insurer.) CORRECT

As stated, a captive insurer is designed to insure the risks of its parent company, providing specialized coverage and potentially reducing costs associated with traditional insurance models. This allows the parent firm to manage its own insurance needs effectively.

D (fraternal society.) YOUR ANSWER

A fraternal society is a type of mutual organization that provides insurance benefits primarily to its members, who typically share a common bond, such as religious affiliation or community ties. Fraternal societies do not operate to insure a parent firm's loss exposures and serve a different purpose in the insurance landscape.

Conclusion

A captive insurer serves a unique role in the insurance industry by being established and owned by a parent firm to manage its specific risk exposures. This structure distinguishes it from stock companies, mutual companies, and fraternal societies, which operate under different ownership and operational models. Understanding these distinctions is crucial for firms considering their insurance options to effectively mitigate risks.

An insurer established and owned by a parent firm for the purpose of insuring the parent firm's loss exposures is known as a

Captive insurer.

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