TO BE ANSWERED IN 2 HOURS Part 2: Using Uncertainty Calculations to Develop a Pl

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TO BE ANSWERED IN 2 HOURS

Part 2: Using Uncertainty Calculations to Develop a Plan The following data provides some monetary figures that would likely be considered when an insurance company uses uncertainty data to make business decisions.  

Costs of Crashes According to the Insurance Research Council’s (IRC) Auto Injury Insurance Claims Study:

In 2012, the average auto liability claim for property damage was $3,073; the average auto liability claim for bodily injury was $14,653. (These are claims paid to individuals considered “Not at Fault.”)

In 2012, the average collision claim was $2,950; the average comprehensive claim was $1,585. (These are claims paid to the “At Fault” individuals covered by the insurance policy.)  

Who Pays Private insurers pay approximately 50% of all motor vehicle crash costs. Individual crash victims pay about 26%, while third parties such as uninvolved motorists delayed in traffic, charities, and health care providers pay about 14%. Federal revenues account for 6%, while state and local municipalities pick up about 3%. Overall, those not directly involved in crashes pay for nearly three-quarters of all crash costs, primarily through insurance premiums, taxes, and travel delay.

Using this data and the calculations from Part 1, analyze the scenario and develop a plan for dealing with this uncertainty and chance.

What information do you need to determine a reasonable insurance premium rate for a “Medium” driver?

In determining final costs for insurance companies, what are the variables of uncertainty that cannot be controlled but still need to be considered?

Create a plan to deal with the uncertainty in the decision of calculating a reasonable auto premium. This plan should include the data figures for Good, Medium, and Bad drivers calculated in Part 1, as well as the costs associated with the average costs of auto accidents.  

Explanation / Answer

We are trying to classify drivers in terms of accident risk. You define the top 25% of drivers to be Good, the bottom 25% to be Bad, and the rest as Medium.

From historical data you believe that Good drivers have a 95% chance of no accident in any given year, Medium drivers have a 90% chance, and Bad drivers have a 75% chance.

You also believe that the chance of having multiple accidents in a given year is 3% for Good drivers, 5% for Medium drivers, and 15% for Bad drivers.

You would need the following information to determine Premium for a 'Medium Driver'

2) Variables of Uncertainity that can't be controlled but should be considered is :

3) We consider the likelihood of different Accidental scenario Using the inofrmation provided

Then giving a weightage to different possible claims on the basis of Amount to be payed , we get a normalized score which determines the price of premiums.

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