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IAI Actuarial Core Principles · Business Management · Business and consumer needs, the industry value chain and competitive forces

A mutual-style cooperative insurer owned by its policyholders is considering converting into a company with outside shareholders. Which change in stakeholder objectives is most likely after conversion?

After conversion, shareholders become a distinct group expecting returns on their capital, which may conflict with policyholders' desire for low premiums and generous bonuses. Previously owners and customers were the same people. The regulator's solvency interest continues, and management remains accountable to owners.

  1. APolicyholders will become the only residual claimants on profit
  2. BManagement will no longer face any accountability to owners
  3. CThe regulator's solvency interest will disappear
  4. DA new group will expect a return on capital, which may conflict with policyholders' wish for low premiums and high bonusesCorrect
  5. Employees will have no interest in the firm's profitability

Explanation

After conversion, shareholders supply risk capital and expect dividends and share-price growth. This can conflict with policyholders' desire for cheaper cover or higher bonuses, which previously were the owners' own interest. The regulator's solvency concern remains.

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