Question

3-Two Moore School graduates decide to start an insurance company, offering traditional homeowners insurance with unemployment benefits if the policyholder becomes involuntarily unemployed. Each of these two entrepreneurs agrees to contribute $150,000 in exchange for ownership of the company. The company raises additional capital by selling ownership rights to other investors. To minimize policy marketing costs the company sells insurance directly to the public by selective advertising on websites and television.

​a-What type of insurance company is this?

​b-What type of marketing system are they using?

4- Explain how stock and mutual insurers differ with respect to (a) governance and (b) dividend policy.

Answer 1

Answer to this question no. 3 is given as follows with respect to the sub questions asked based on the scenario :-

a] Since the insurance company sells insurance directly to the public It is a Direct Seller Insurance company as it is not using any agent or any other channel to sell its policies to the public.

b] Since the company is selling insurance to public by selective advertising on TV and Websites it is using the Paid Advertising Strategy for their Business.

Answer to question 4 is :- The main difference between stock insurer and Mutual Insurer with respect to

a] Governance :- A Stock Insurance company is owned by the shareholders of the company. Whereas a Mutual Insurance company is owned by its policy holders. Policy holders of a Stock insurance company can not take any part in the management of the company. However the policy holders of a Mutual insurance company are owners of the company and can elect the board of directors of the company.

b] Dividends :- A stock insurance company distribute profits in form of dividends to its shareholders. The other aspect is the company may utilise the profits for reinvestment in the company or paying off debts. On the other hand the Mutual Insurance company distribute its profits by way of dividend. If the company does not distribute profits by way of dividend it can be given as a benefit by way of reduction in future premiums from the policy holder.

These are the two major differences between these two types of the companies.