An Insurance Company Derives Its Revenues from Its Three Primary $\quad \underline { 2005 \text { Revenues } } \quad \underline { 2006 \text { Growth Rates } }$

question 24

Essay

An insurance company derives its revenues from its three primary business units: home insurance,auto insurance,and life insurance.The revenues for the year ending 2005,along with the potential growth rates per business unit for 2006 are illustrated below.
Business Unit $\quad \underline { 2005 \text { Revenues } } \quad \underline { 2006 \text { Growth Rates } }$
Home Insurance $\quad \$ 500,000 \quad$ Normal; $\mu = 7 \% , \sigma = 2 \%$
Auto Insurance $\quad \$ 450,000 \quad$ Triangular, $\min = 2 \% , \max = 6 \%$ ,
$\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ most probable $= 4 \%$
Life Insurance $\quad \$ 550,000 \quad$ Uniform, min $= 4 \% , \max = 10 \%$
a.Use Crystal Ball to simulate total revenues for 2006.Run 1000 replications of the model to find the average revenues.
b.What is the probability that 2006 revenues will exceed $1.6 million?

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Definitions:

Net Working Capital

A measure of a company's liquidity, calculated as the difference between its current assets and current liabilities.

Total Equity

The financial value representing the amount of money that would be returned to shareholders if all the assets were liquidated and all the company's debts were paid off.

Progressive Tax System

A tax system where the tax rate increases as the taxable amount or income increases.

Incremental Income

Additional income generated from a specific action or decision, compared to a scenario where the action is not taken.