Assignment Task: Abacus Parcel Delivery Service- Loss History 2015 through 2018
Magnanimous Insurance Company
Auto Physical Damage exposures only
Abacus Parcel Delivery Loss Forecast
Historically, Abacus Parcel Delivery has purchased auto physical damage insurance from Magnaimous Insurance Company. The cost of their auto physical damage premium has been growing recently. You have been hired as Risk Manager of Abacus and the CEO calls you in to make some calculations, and to prepare a recommendation on an alternative Risk Financing plan.
Problem 1: Forecast the Expected Losses for 2019, assuming Abacus won't retain any losses (pages 2.13 to 2.15) - Show your calculations.
Problem 2: Estimate the Insurance premium for Abacus Parcel Delivery Service - Show your calculations.
Problem 3: Calculate the current "Cost of Risk" for Abacus? - Show your calculations.
Problem 4: Up until this point, the assumption was that Abacus would be transferring all the expected losses to Magnanimous Insurance. For this complete transfer of risk program, you have forecasted the expected losses, estimated the premiums and determined the Cost of Risk. Your efforts in the prior questions will give you a point of comparison to consider an alternative Risk Financing plan.
Now propose an alternate Risk Financing plan, in order to reduce costs. - Show your calculations.
Part A - How much risk should Abacus Parcel Deliveries self-insure? -Show your calculations
Hint: The table above has data on the Frequency and Severity of losses that are facing Abacus. In Chapter One, the chapter 1 triangle give us direction on what risks to retain, and what risks to transfer. Then in Chapter 2, one of the steps to forecasting losses is said to help Risk Managers determine what losses are retainable. "
Part B - Explain the basis for your recommendation of the amount retained.
Part C - Calculate the new "cost of risk" based on your recommended amount of self insurance in part (A). Assume that (Risk Management costs + Loss Control Expenses) is unchanged at $300,000.
Hint: Assume that the losses above Abacus' SIR (retention) will be transferred to the insurance company. Therefore, you will need to calculate the premium cost for transferring those losses. Use the formula in question 02 to calculate premium. Also, let's not use Increased Limits factors, for we are just doing preliminary calculations to compare different Risk Financing plans.
Part D - Select one of the two plans (either the plan with some retention of losses, or the plan with complete transfer of risk) and explain which of the two plans you prefer.
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Attachment:- Abacus Parcel Delivery Loss Forecast.rar