What is the weekly average cost of all claims

Assignment Help Business Management

Reference no: EM133338168

Case Study: Vinton Auto Insurance is deciding how much money to keep in its checking accounts to cover insurance claims. In the past, the company held some of the premiums it received in interest-bearing checking accounts and put the rest into investments that are not quite as liquid, but tend to generate a higher investment return. The company wants to study cash flows to determine how much money it should keep in its checking accounts to pay claims. There are two types of claims: "repair" claims, and "totaled" claims. After reviewing historical data, the company has determined that the number of repair claims filed each week is a random variable that follows the probability distribution shown in the following table:

# Repair Claims	0	1	2	3	4	5	6	7	8	9	10
Probability	0.030	0.106	0.185	0.216	0.189	0.132	0.077	0.039	0.017	0.007	0.002

The company has also determined that the average cost per repair claim is normally distributed with a mean of $1,200 and standard deviation of $300 (with no negative values). To be clear, the costs of covering of each individual repair claim are not normally distributed; rather, the average cost per repair claim for a given week is normally distributed with a mean of $1,200 and a standard deviation of $300. In addition to repair claims, the company also receives claims for cars that have been "totaled" and cannot be repaired. There is a 15% chance of receiving one claim of this type in any week, and there is no chance of receiving more than one in any week. The cost for "totaled" cars is given by the following: $7500 * X, where X is a log-normal random variable with a mean parameter of 0.15 and a standard deviation parameter of 0.5.

Questions:

Develop a descriptive model of this scenario; identify and name random and non-random variables along the way. You may develop a flowchart for yourself to help you visualize, but do not attach it to the submission.
List all random variables, their distributions, and parameters.
Code the model in Excel and replicate it 10,000 times. Answer the following questions (do not attach the spreadsheet):
What is the weekly average cost of all claims?
Suppose that the company decides to keep $15,000 cash on hand to pay claims. What is the probability that this amount will not be adequate to cover claims in any given week?

Reference no: EM133338168

Questions Cloud

Ratify an optional protocol : What is the difference between a treaty and optional protocol and do states have to ratify an optional protocol if they have ratified a treaty?

Identify a project or process at your company or former : Identify a project or process at your company or former company in which you can challenge the process and change the business as usual.

Territory for child protection and child safety : Provide the name of the principal Act currently in force in your state/ territory for child protection and child safety,

What is pdca and what is fmea : What is PDCA, What is FMEA

What is the weekly average cost of all claims : Develop a descriptive model of this scenario; identify and name random and non-random variables along the way. You may develop a flowchart for yourself to help

The purpose of abandonment : The purpose of abandonment. The Federal Wild Card Exemption. Property of the chapter 7 estate includes:

What is global marketing research what are the types : What is global marketing research? What are the types of global marketing research? How is global marketing research designed, implemented and monitored?

What is david portraying : Imagine an employee named David frequently does not return from tea break on time because he believes others will get the work done for him.

What are the firm core competencies : Describe the key external opportunities and threats from the general environment. Also, what forces seem to have the greatest effect on industry attractiveness

User Account

All Pages