An insurance company may invest in common stocks in order to:

Question

Options

• Aearn dividend income
• Bachieve equity appreciation
• CBoth A and B
• DNeither A nor B

• A
  5% (3)
• B
  8% (5)
• C
  85% (52)
• D
  2% (1)

Explanation

Option C is correct because insurance companies invest in common stocks for both reasons - dividend income provides a steady cash flow stream to help meet policyholder obligations, while equity appreciation grows the company's surplus and strengthens its financial position over time. These two goals are complementary, not mutually exclusive.

Options A and B are each only partially correct - they describe real and valid motivations, but neither alone captures the full picture. Choosing just A or B misses the dual nature of why equities are attractive to insurers.

Memory tip: Think of common stock as a two-engine investment - one engine generates income now (dividends), the other builds wealth over time (appreciation). Insurance companies need both engines running to balance short-term claims payments with long-term solvency.

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