Problem Diagnosis
Marsh and McLennan Company, who was the employee benefits consultant and the international insurance brokers, helped the institutional and the corporate organizations to assess the exposures faced by the company and then insure those risks against the employee benefits and the insurance requirements of the company. However, for now the company was assessing and evaluating one of the insurance policies of the company known as the hull insurance provided to the entire jet fleet of Eastern Airlines.
The premiums paid by the company are determined on the basis of the predetermined formulas and the entire losses incurred by the companies over the coverage period. However, there is also an upper limit placed upon the insurance premiums paid to Marsh and McLennan Company, therefore, some of the risk is also taken up by the insurer.
This resulted in significant costs for the Eastern Airlines aircraft fleets despite the facts they insured their losses so the management of the company was considering two proposals offered by Marsh and McLennan Company for now which were the loss conversion plan and the profit commission plan. Therefore, a decision needs to be made by John Lawton, the account executive of Marsh and McLennan Company and he had assigned the analysis task to Charles Porter, the actuary of Marsh and McLennan Company to evaluate both the options and make a recommendation.
Analysis
The analysis of the two proposals has been performed using the @Risk Simulation and analyzing the critical variables in the determination of the relative probability of the total claims under the loss conversion plan and the profit commission plan. However, before that the decision criterion for opting for a proposal has been assessed for Easter Airline.
Eastern Airline’s Decision Criteria
The insurance plan which should be chosen by the management of Eastern Airlines should be based upon a number of factors. First of all the management of the company needs to analyze the probability of the losses taking place for the company’s aircraft fleets. The management of the company operates a total of 206 jet aircrafts and the total value of the fleets is equal to 1 billion with per fleet value of $ 4.6 million. First of all, the likely number of the claims should be estimated with the help of the historical data.
Next the management of the company needs to determine the total value of the claims in dollar terms for the total estimated number of the claims of the company for its 206 jet aircrafts and lastly, the management needs to determine the total value of the claim amounts which would be covered by the respective insurance proposals laid by Marsh and McLennan Company. In the end, the total annual premium costs with the same $ coverage of the losses needs to be computed for the loss conversion plan and the profit commission plan and the proposal resulting in the lower costs should be opted by the management of Eastern Airlines...........................
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