our client, InsureCorp, is an insurance company considering launching an `income insurance’ product in the nation of Motherland. Income insurance is a product that fully insures a household against changes in income caused by a major injury or illness. At present, no businesses are selling income insurance products in Motherland. Initial market research suggests that there are 15,000 households in Motherland interested in purchasing income insurance.
Your client expects that the xed cost of launching the income insurance product will
be $25,000,000 per year, and that each policy issued to a customer will cost the company an additional $2,000 in sales commissions.
2.1 Your task
Your client wants you to analyse the potential market for income insurance and report on the following:
What is the maximum price the company can charge a household for an income
insurance policy?
What is the expected pro t (or loss) for the company if it becomes a monopoly
provider of income insurance?
Is there a risk that rival insurance companies will also enter the market, selling
identical income insurance products? If so, what would be the expected pro t of
your client? (You should assume that any competitors would face the same costs as
your client.
