-Richmond, VA

# Credit card insurance case: calculate break-even claim rate where response rate = 2%, fee charged = 1% of monthly balance, and average balance = \$1,000 per month.

11

Don't think there's enough info here to solve. Response rate is 2%, but you need to know how much the marketing costs to be able to determine the breakeven.

devil in the details on

1

I think the break even claim rate for this insurance scheme would be 1%. (Keeping all other non-mentioned costs aside) Let's assume 100 customers are contacted: 2% response rate = 2 people buy insurance. Revenue: 2 * (1% of 1000) = \$20 At break even, cost would also be \$20. Let the claim rate be x% (Note: this will be a percentage of the people who have bought the insurance, i.e. x% of 2% of 100) Insurance pay-out = \$1000 per claim Cost: 1000 * x% of 2 = 1000 * x/100 * 2 = 20x Now, revenue = cost at break even, hence: \$20 = 20x x = 1 So the B/E claim rate would be 1%.

AB on

0

I am assuming that the marketing cost is \$0.5 per mail. So, if 10000 people are sent mail, 2% respond i.e. 200 people revenue - fee charged * balance * no of people * 12(for a year) i.e. 1% * 1000 * 200 * 12 = 24000 cost- 0.5*10000 = 5000 for mailers lets say claim rate is c% so, c% * 1000 * 200 i.e. 2000c (claims are assumed yearly so no need to multiply by 12) so total cost = 5000 + 2000c in case of break even, revenue will be equal to cost. there for 5000 + 2000c = 24000 i.e. c = 9.5 or break even claim rate = 9.5%

yo on

1

How did you come up to that answer? Thank you

amy on

0

Can you please explain how you got to the break even claim rate?

S on

0

Sorry - Could you elaborate on the answer. Assume a 100 customers. Claims rate = x. Interest revenue = (100-x)*1000*1% = 1000 - 10x Claims paid out = 2%*1000*x = 20x Breakeven scenario: 1000 - 10x = 20x => x = 33.3 Break even claim rate = 33.3% How did you get 9.5%. Am I misunderstanding the question?

?? on

0

break-even claim rate = 9.5%

Anonymous on

5

Yeah, this may be why you did not pass the final round

GG on