EGRMGMT 280 -- Decision Models Marsh & McLennan; Feb 27, 2012 Assignment: Read the case in the

course-pack page 235 to 239 (or on the Blackboard). Develop a simulation model to analyze the various alternatives Eastern airlines has for insuring its fleet. Which insurance plan do you recommend and why? Calculate distributions for the net costs under the two different insurance plans. In addition, though the case says that Eastern is not considering self-insurance (i.e., not buying any insurance), please consider the distribution for the net costs associated with this possibility as well. Prepare a table describing the statistics of these three distributions (e.g., using Analyze, Extract Data, Statistics) and an overlay chart comparing them. Also prepare a brief write-up (one paragraph) describing which plan you recommend and why. You may work in groups of 2-3 to set up and run the simulation for this assignment (i.e., you can share Excel files within this group), but you should work individually when writing up your recommendation. Deliverables: Each student should hand in the following at the beginning of class: o The paragraph describing your recommendation, o Printouts of your table and overlay chart, and o A printout of your spreadsheet model. Please be sure to indicate on the spreadsheet which probability distributions ("assumptions") you assumed for what cells and which cells you tracked as forecasts. Please note your name and whom you worked with on this assignment. Please upload an electronic copy of your simulation model on Blackboard Digital Drop Box. I need only one electronic submission per team. Please name your file as Your_Lastnames.xls. I may demonstrate some of these models in class and/or review them. A few points of clarification that may help you as you work on this case: 1. A word on Exhibit 1: The calculations in the exhibit are based on the assumption of a fleet insured for $1 billion in each of the three years; the actual number is a little lower. The numbered rows in each of the 10 scenarios refer to losses in each of the three years. Use the 10 scenarios to check your interpretation of the policies and check your calculations. 2. The data used to develop Exhibit 2 is available on Blackboard. 3. In the past, students have asked about the sentence describing the Profit Commission Plan (end of 4th paragraph on the second page of the case): "The incentive credit refunded at the end of the policy was equivalent to the excess, if any, of (a) premiums paid over (b) total losses plus $.20 per $100 value per year." Here the word "over" does not imply division! "Excess of (a) over (b)" means (a) minus (b) (i.e., subtraction).

Recommendation: A trial of 1000 cases was analyzed for obtaining the data based on which a decision model was made and appropriate suggestions have been provided. Based on the analysis in the excel sheet attached herein, the team recommends Eastern to go with the self-insurance plan. The suggested mean for the self-insurance plan is 0.67 with a standard deviation of 0.46. However, the plan 1 mean suggested by the simulation comes out to be 0.33, with a standard deviation of 0.46 also, which makes the analysis more complex.

Considering the Plan costs next, the Plan 2 is always expensive than the self-insurance option. This, in addition to analysis of the statistics of Optimal Plans eliminates Plan 2 as a preferred option. Among Plan 1 and the self-insurance plan, it is imminent that the former remains the less cost effective for the majority of cases and hence the latter may be preferred. However, it would be necessary to keep collecting the data for better understanding of percentile range for which the best estimate can be made.

The risk profile also indicates steep growth in the risk associated with the Plan 1. The self-insurance plan on the other hand seems more risk averse even for higher investments. Considering this, it would be more appropriate to go with the self-insurance plan since it is risk averse in the most compressive way among the other plans.

The sensitivity analysis has also been done for varying percentages of premium rates for the Plan 1. The data and charts suggest that the mean does not vary much with different percentages of the premium. This further bolsters the fact that data for the Plan 1 was not expected to change much and remains more or less constant for varying data. The recommendation based on the above discussion is that company should pursue the Self-insurance plan. However, as mentioned in the case, since company is not considering the self-insurance plan currently, it would be more appropriate to go with the Plan 1.