A global insurance company, Global, sells auto insurance online. The company uses its own underwriters and proprietary software algorithms to make determinations on pricing and coverage.

Currently, the company also services the policies in case of a claim.
Global’s Chief Operating Officer, Jane, is trying to decide if it makes sense to outsource the claims function, which is currently provided at a fixed cost of $1.65 million and a variable cost of $500 per claim. Jane estimates that if she were to outsource the claims servicing function to another provider, she would incur a fixed annual fee of $1 million plus $550 per claim. Last year, 1.2 million claims were serviced.

a. What was the cost last year to Jane when the claims management was done in-house?

b. What would the cost have been last year had she outsourced this function?

c. What is the indifference point for the two alternatives?

d. If Jane estimates that the number of claims will rise to 1.3 million next year, should she outsource the function?

e. What additional factors should Jane consider?