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:
- Fairness, when individual underwriters are assigned to unique geographic territories.
- Profitability (measured by Combined Ratio).
- 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).
- Regulatory impact of increasing volume.
Each question can be answered in a paragraph or two (provide enough detail to demonstrate your understanding).