John and Paul both start car insurance companies. They both have two broad goals:

  1. Create lasting, mutually-beneficial relationships with their clients. Everyone wants good relationships, right?
  2. Minimize risk. No one wants to get hosed, right?

Though they have identical goals, John and Paul could hardly have set up their businesses more differently:

  • John prizes personally assessing each client above all else. He hates to generalize. He didn't blindly insure Ringo, who drives a sports car and has several accidents on their record, but after sitting down with Ringo a few times John felt he could trust him and wrote Ringo a reasonably-priced policy. John is fine with insuring most clients for years or even decades.
  • Paul starts by looking for red flags on potential clients' driving records. He operates under the assumption that all drivers have the potential to get in expensive wrecks, but some are significantly more high-risk than others. Paul wrote Ringo a temporary and expensive policy after Ringo's eighth wreck caused him to lose his previous insurance, but Paul was more than happy to see Ringo sign up with John when Ringo's policy expired. In general, Paul has an unusually high bar for who he'll insure for years or decades.

Both John and Paul are happy with the way they run their businesses and have managed to successfully operate for a number of years. Paul doesn't understand why John would give a guy like Ringo such a reasonably-priced policy, and John doesn't understand why Paul would ditch a client like Ringo just because he's made a few mistakes in the past.

Questions:

  1. Is Paul a bad person for running his business the way he does? Why or why not?
  2. Ringo could grow a little older, sell his sports car, and drive more responsibly -- he'd be a pretty good client at that point. Knowing Ringo's past, under what conditions would you insure him?
  3. Which business owner is exposing himself to more risk? Why?