Economics

Economics

Paper instructions:
In the past year, Innovative Insurance, a car insurance start-up lost money on a new type of insurance policy they sold. Trying to be innovative in the marketplace, they instituted a no-haggle rate of $100 per month for comprehensive coverage as long as the policy was maintained for a 12-month period. At the end of the year, the price could be re-negotiated. The sales force was paid on a piece-rate basis. For each policy they sold, they would earn $50.

In this first year, Innovative enrolled 25,000 customers. Based on actuarial estimates of the average driver (in which 15% of drivers would be in an accident each year), they anticipated paying an average of $78 per month in claims per customer. At the end of the year, their actual average was at $119 with the last three months showing a steady increase in the frequency of claims being submitted.

You have been hired as a consultant to make recommendations for how to make Innovative Insurance profitable. Provide an explanation for why you believe Innovative Insurance is currently struggling and include recommendations for turning things around that support your analysis. Also, make sure to provide a financial justification for your analysis and recommendations.