Chief Operating Officer, Mary Litton
December 11, 1996
Insurance Policy Analysis and Recommendation
As requested, our team has conducted a thorough analysis of the four existing insurance policies (RCNC1, RCNC2, CTC, and HIC), including the costs and benefits of each proposal, and associated risks. Based on our investigation, we recommend using the CTC insurance plan as of March 1, 1997. CTC Excels on Cost Savings and Risk
Our analysis focused on achieving two main goals: 1) minimize the chance of losses exceeding $37m over next year; 2) minimize overall costs over next five years. We assumed an accident rate of 1 in 5,000,000 flights, as used industry-wide, and we have checked the sensitivity of our decision considering a rate 25% more favorable given our aircraft characteristics. Please see below details on our recommendation, and refer to Appendix for additional details.
1. Cost analysis over next year: When using the industry-wide accident rate, three plans offer significant coverage in the next year such that losses of aircraft will not exceed $37m with a probability of over 99%; these plans are: CTC, HIC, and RCNC1. CTC costs are estimated to be the lowest when considering the average of $13.5m and standard deviation of only ~$2m which reflects a lower spread of the costs. Additionally, CTC cost savings average ~$14.5m when compared with the other plan offerings, with a low standard deviation which reflects more predictable savings. Similar results are obtained when we consider a safer accident rate (i.e., 1 in 6,6m flights).
2. Cost analysis over the next five years: When using the industry-wide accident rate and considering the three plans identified, CTC offers the most optimal plan over the next five years, at an average cost of $67.5m with a low standard deviation of ~$3.8m. While this is the second optimal cost of the three identified plans, the lower standard deviation reflects a lower spread...
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