Insurance decision making

Acme, Inc. is a large regional P&C insurance company.  Management hopes to generate growth in the amount of premium they write.  One proposal is to introduce a substantial bonus for underwriters based on premium.  Thus, an underwriter that writes above-average amounts of premium will get an above-average bonus.  [The bonuses are individual, not pooled.]

Comment on the potential benefits and risks of this proposed bonus plan in terms of:

  1. Fairness, when individual underwriters are assigned to unique geographic territories.
  2. Profitability (measured by Combined Ratio).
  3. Aggregation of risks (like in Florida, where we would not want to take on too much exposure to hurricanes in any one coastal area – like Miami).
  4. Regulatory impact of increasing volume.
 Each question can be answered in a paragraph or two (provide enough detail to demonstrate your understanding).


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