Question

Commercial Insurance is a large stock property and liability insurer that specializes in the writing of commercial lines of insurance. The board of directors has appointed a committee to determine the feasibility of forming a new subsidiary insurer that would sell only personal lines of insurance, primarily homeowners and auto insurance. The new insurance company would have to meet certain management objectives. One member of the board of directors believes the new insurer should be legally organized as a mutual insurer rather than as a stock insurer. Assume you are an insurance consultant who is asked to serve on the committee. To what extent, if any, would each of the following objectives of the board of directors be met by formation of a mutual property and casualty insurer? Treat each objective separately.

a. Commercial Insurance must legally own the new insurer.

b. The new insurer should be able to sell common stock periodically in order to raise capital and expand into new markets.

c. The policies sold should pay dividends to the policyholders.

d. The new insurer should be licensed to do business in all states.

Answer 1

commercial lines insurance involves protection for business and organization.

Insurance is the equitable transfer of the risk of a loss,from one entity to another in exchange for payment.

Every day we face uncertainty and risk.

Insurance offers individuals and organizations protection from potential losses as well as peace of mind in exchange for periodic payments known as premiums.

a) Commercial insurance must legally own the new insurer.

One of the objectives of insurance is to pool the risk of a sufficiently large number of policyholders.By collecting premiums from many individuals or organizations,insurers can pay out relatively few claims each year while collecting premiums from the majority of policyholders who don't file claims over that same period.This conclusion follows the Law of large Numbers.

b)The new insurer should be able to sell common stock periodically in order to raise capital and expand into new markets.

Main objective of business is to raise their market share in the Capital markets.To increase the capital need to sell the common stock periodically to meet the business requirement to grow at the same time need to invest that capital into alternative methods of investment where we will get more return with security.

c)The policies sold should pay dividends to the policy owners.

Yes,this is the one of the most important thing to remember of any organization to grow in the current competitive world.

Insurance companies need to satisfy the Insurers in the situation of financially stable and solvent.

Need to pay the policy amount to the insurer which is agreed by the insurance company at the time of claim because if you don't satisfy or compensated for eligible losses it will lead to downfall of the company brand in the Competitive society.

d) The new insurer should be licensed to do business in all states.

Most important aim of insurance is to promote and reward responsible behavior.Need to get the customers from all over the world to increase the Market share of the company.