Problem:
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.
Additional Information:
This question is from Finance as well as the question is about a scenario where an insurance company board is contemplating to start subsidiary insurance company. The board has given the subsidiary company criteria to meet. This has been stated in the solution.