Two years ago Federal Insurance was charged with making misleading marketing claims about the way it was selling its insurance products. In response to these allegations and subsequent investigations, Federal’s board of directors fired the chief executive officer (CEO), the chief financial officer (CFO), and the senior vice presidents of marketing and underwriting. They replaced these managers last year with other managers from within the insurance industry, but from firms other than Federal.
A similar insurance firm, Northeast, is about the same size as Federal, operates in the same states, and writes the same lines of insurance (home, auto, life). Both firms prepare detailed annual budgets. Which of the two firms, Federal or Northeast, is more likely to use zero- based budgeting and why?