Question

Your leader has asked you to evaluate the defects based on insurance claim type (auto vs. injury). You have a total of 600 claims, with 400 auto, 200 injury, 100 with a defect, and 60 auto or has an injury.

    Provide at least three relevant probabilities for the leader that will be important for use in making business decisions.

    Explain why the selected probabilities are important.

Answer 1

The 3 probabilities are defect rates, individually for Auto and Injury and the combined defect rate

1. Defect rate (Auto) = Total defects (Auto) / Total claims (Auto) = 100/4== = 0.25

Why is it important: This will provide a metric to decision makers as to how pure Auto based defects are impacting claims and claim amounts and how better underwriting with improved Auto information can help price insurance better and inspect claims

2. Defect rate (Injury) = Total defects (injury) / Total claims (injury) = 60/200= 0.3

Why is it important: This will provide a metric to decision makers as to how pure Injury based claims are impacting claims and claim amounts and how better underwriting with improved information can help price insurance better and inspect claims

3. Overall Defect Rate = Total defects (injury+auto) / Total claims (injury+auto) = 160/600 = 26.66%

Why is it important: This is an indication of overall defect rate and hence takes into account relative proportions for both auto and injury. For Ex: If the number of injury claims are very high and no. of auto claims are low then the overall defect rate will be defined by injury claims only and defect rate of auto claims will be irrelevant from a business perspective given its low rates of claims