Assignment 3, Chapter 5 NAME __________________________ FIN 3610 When appropriate, provide a citation and a copy of your source. 1. a. Describe the basic characteristics of stock insurers. A stock insurer is a corporation owned by stockholders who participate in the profits and losses of the company. The stockholders elect a board of directors who appoint the executive officers to run the company. The board of directors has the ultimate responsibility for the companyâ€™s financial success. b. Describe the basic features of mutual insurers. A mutual insurer is a corporation owned by the policyholders. The policyholders elect the board of directors who appoint the executives to manage the company. Because relatively few policyholders bother to vote, the board of directors has effective management control of the company. A mutual insurer may pay a dividend or give a rate reduction in advance. In life insurance, a dividend is largely a refund of a redundant premium that can be paid if the mortality, investment, and operating experience of the company is favorable. Dividends, however, cannot be guaranteed. c. Identify the major types of mutual insurers. Mutual insurers include advance premium mutuals and assessment mutuals. 2. Property and casualty insurance can be marketed under different marketing systems. Compare the independent agency system with the exclusive agency system with respect to each of the following: a. Number of insurers represented by the agent The independent agent represents several insurers. The exclusive agent represents only one insurer or a group of insurers under common ownership. b. Ownership of policy expirations Under the independent agency system, the agency owns the expirations or renewal rights to the business. Under the exclusive agency system, agents usually do not own the expirations renewal rights to the policies. However, some insurers may grant limited ownership of the expirations while the agency contract is in force; this interest terminates when the agency contract is terminated. In addition, the contract usually permits the insurer to buy the expiration list from the exclusive agent to establish its value if the agency contract is terminated.In contrast, under the independent agency system, the agency has complete ownership of the expirations. c. Differences in the payment of commissions Independent agents are compensated by commissions that vary by line of insurance. The commission rate on renewal business is typically the same as that paid on new business. If a lower renewal rate is paid, the insurer may lose business, because the agent would place the insurance with another insurer at the time of renewal.Exclusive agency insurers generally pay a lower commission rate on renewal business than on new business. This approach gives the agent a financial incentive to write new business that pays a higher commission rate. In contrast, as noted earlier, insurers using the independent agency system typically pay the same commission rate on new and renewal business. 3. You have just learned that â€œthe number of life insurers has declined sharply during the past decade because of the increase in company mergers and acquisitions, demutualization of insurers, and formation of mutual holding companies.â€ a. How many life insurers are there currently in the U.S.? How many life insurance companies were there in 1970? Provide a citation and a copy of your source.Need answer.. b. Why have mergers and acquisitions among insurers increased over time? Mergers and acquisitions have increased because insurers wish to reduce their operating costs and overhead expenses; also, mergers and acquisitions occur because some insurers want to acquire a new line of insurance or enter a new area of business. c. What is the meaning of demutualization? Demutualization means that a mutual insurer is converted into a stock insurer. d. Briefly explain the
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