Question

Excel Insurance Company is a large capital stock property and liability insurer that specializes in commercial lines of insurance. Excel’s board has appointed a committee to determine the feasibility of forming a new insurance company that would sell personal lines of insurance (home and auto insurance) rather than commercial lines. The board is having difficulty prioritizing the objectives for the new insurer, so you have been asked to serve as an advisor to the committee. Treat each of the objectives separately and independently (a, b, c), assuming it is the primary objective (or the only objective if you prefer) for the formation and discuss your recommendation as to whether the insurer should form as a capital stock property and liability company or a mutual property and liability insurer.

a.) Some board members want to offer low rates by making the policies assessable up to one times premium.

b.) Some board members believe this personal lines insurer will grow quickly and want to be able to raise capital quickly in order to expand into new markets.

c.) Some board members like the idea of providing dividends to policyholders for favorable claims experience.

Answer 1

a) Offering low rates for insurance premiums is not advisable. This is because the company might develop solvency issues, ie it might not be able to service its claims as the premiums it receives are insufficient.

(b) This seems to be a valid reason and can be the primary objective. If the company feels that demand for personal lines is going to increase, it can quickly raise money from investors and expand into new markets.

(c) Rather than providing dividends, the company can offer NCD (no claim discount) to policyholders ie if policyholders do not invoke insurance policy, they will get discount on the premium they have to pay.