An Analysis of Toro Corporation’s S’No Risk Program
Risk analysis from the point of view of Toro: Toro bears relatively minimal risk on this S’No risk program the year they ran it, as the most they are going to pay-out to the insurance company in 1983 is around $680K, while in-turn profiting $106K. (Bell, 2004). The year they ran the promotion, a confluence of elements came into play: the insurance company erroneously quoted them 2.1% of the retail value of the snowthrowers covered; the snowfall was significantly higher than the year before, but because of this premium cap by the insurance company, it did not lose its shorts on its liabilities. Additionally, they did not have to pay vendors the 10 percent discount they normally did in…show more content… With the program, the risks shift to a win-win for the consumer, rather than buyer’s remorse. It removes the uncertainty component in the decision-making process.
Why insurance rates increase. American Assurance Insurance needed to raise its rates for Toro because they must be able to spread the risk among individuals or groups in order to operate. By using the past snowfall and claims they were able to predict an average level of for the snowthrower purchases. Because in 1982-1983 they saw a 19 percent increase in payouts to consumers they needed to factor this into their new premium, which was quoted at 8 percent of sales (Bell, 1994). If the S’No Risk had been offered for the prior three years, American Assurance would have based their premiums on the average payouts 1979-1982. That number would have been 4.3 percent, instead they quoted a premium of 2.1 percent. Weather is impossible to predict, as we all know, so actuarial science techniques are really a shot in the dark when analyzing risk in this instance. If I were at American Assurance, I would have used the same formula to determine a fair insurance rate for the payouts to Toro customers.
Analysis of payback structure from consumer’s viewpoint. From the consumers’ perspective, the payback structure was truly a win-win for anyone buying a snowthrower in the snow belt. The payback structure