Refer to the Hungry Dawg Restaurant example presented in this chapter. Health claim costs actually tend to be seasonal, with higher levels of claims occurring during the summer months (when kids are out of school and more likely to injure themselves) and during December (when people schedule elective procedures before the next year’s deductible must be paid). The following table summarizes the seasonal adjustment factors that apply to RNGs for average claims in the Hungry Dawg problem. For instance, the average claim for month 6 should be multiplied by 115%, and claims for month 1 should be multiplied by 80%.

 

Suppose the company maintains an account from which it pays health insurance claims. Assume there is $2.5 million in the account at the beginning of month 1. Each month, employee contributions are deposited into this account and claims are paid from the account.

a. Modify the spreadsheet shown in Figure 12.9 to include the cash flows in this account. If the company deposits $3 million in this account every month, what is the probability that the account will have insufficient funds to pay claims at some point during the year?

b. If the company wants to deposit an equal amount of money in this account each month, what should this amount be if they want there to only be a 5% chance of having insufficient funds?