Allied Insurance Company asked the regulatory board for permission to increase the premiums of its insurance operations. Insurance premium rates in the jurisdiction in which Allied operates are designed to cover the operating costs and insurance claims. As a part of Allied’s expenses, its agents earn commissions based on premium revenues. Premium revenues also are used to pay claims and to invest in securities.

Administrative expenses include the costs to manage the company’s investments and investment services (e.g., retirement annuities). All administrative costs are charged against premium revenue.

Allied claims that its insurance operations “just broke even” last year and that a rate increase is necessary.

The following income statement (in millions) was submitted to support Allied’s request:

Insurance income:

NOM UNMMTEVSMUGWY ths Sassen rcetce sues Mpeimaren snrtase Plone $300 Operating costs:

CIA Sheree ate tet aA ndcde hoa 2 ats cotinataea dea. chk meen 205 Administrative.............. Re ae ee een Tn San ear eb ADS doe APE 58 SASSOON MISSION Sromsmcrmc ee meme aa ee etre uses emake cote. pee OtallOOeralinGkCOStS Bence scene ca ran aecoietren eesti ie io $300 ImStinaneerOrotitn(lsOcaSrtS c)omsep ceanssasuenen raoem uccanyer es 0 HAVEStINIEM el MOOMCen. crus teat certiaeadiecnertcneccerrett aecnGe s “si 30)

Profits after InvestMent INCOME ......... cece ceeeetteeeesenteeeeees $ 35 Further investigation reveals that approximately 20 percent of the sales commissions might be considered related to investment activities. In addition, the investment division uses 30 percent of the support services. The state insurance commission (which sets insurance rates) believes that Allied’s insurance activities should earn about 5 percent on its premium revenues.

Required Form separate groups to prepare responses to the following:

a. If you were a consumer group, how would you present Allied’s income statement? (For example, how would you allocate administrative costs and sales commissions to the insurance income and investment income categories?) What ethical issues do you perceive as a consumer?

b. If you were Allied’s management, what arguments would you present in support of the cost allocations included in the income statement presented in the problem? What ethical issues do you perceive as management?

c. Meet as opposing groups to resolve the allocation issue with the instructor acting as the mediator.