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3. An assessment of a centralized versus decentralized collection system The Premlums Abound Insurance Company (PAIC), a Connecticut-based insurer conducting business in all 50 states, currently uses a centralized collection system that requires all policyholders to send theif monthly, quarterfy, or annual premiums to PAICs office in Hartford, Connecticut. Under the current system, it takes an average of seven days for PAlC's premium checks to be recelved at the Hartford otfice and another four days to be processed by PAIC's. Premuim Processing Department. Once the checks are deposited in the Hartford bank, it takes an average of eight days for the in-state and out-of-state checks to be cleared and made avaltable to PAIC. On average, PAIC recelves per year 350,000 premium payments, which total $700,000,000 in annual premiums. The Hartford bank, which does not require a compensating balance, charpes a monthly fee of $1,400 and $0.15 per payment. Complete the following table for PAlCis current centraized system: The Vault Financial Services Group, a bank based in Kansas City, Missouri, is offering to create and operate a decentralized collection system for PAlC by establishing five regional collection bank accounts at its San Francisco, Denv, Dallas, Philadelohia, and Atianta branches. Notice that these regional branch accounts, which are lacated across the country in cities with federal Reserve banks, were selected to reduce the mail time required to return the funds to Hartford. These locations also create twe alternatyves for the movement of collected funds from the five concentration accounts to the master collection accounti either by mailing a check or by wiring the funds to the Kansas city account. Under Vault's wire-based proposal, the mail time from the customer to the reglonal concentration banks will be reduced to three days, and since the payments will be sent directly to the banks, the payment-processing time is reduced to one day. Each week, each concentration bank will send a list of customer names, policy numbers, and payment amounts to PAIC's Hartford office to be posted separately from the payments to the custamers. accounts. Since the payments are cleared relatively iocally, through the regional concentration banks, the check-clearing defay is reduced to thicet ays. Each regional concentration bank will then wire the coliected funds to the master concentration account at Vault's Kansas City branch, these funds will be available to PAlc immediately after their recelpt from the concentrotion banki Vaut has offered to operate this system for $1,100 per month plus $0.10 per payment and a compensating balance of $50, ogo in each of the six Vauls branches. It wit also charge $20 per wire transfer and expects to remit the coilected funds to Kansas City eivery other day (approximately 182 times per year). Funds kept on deporit as compensating balances cannot be invested in maricotoble secunties, and should any funds:be released by the decentrafized system, they will be invested in marketable secuities to vieid 13.00% before taxes Complete the following table for the proposed decentralized system: Using the previous information, complete the table that follows and determine whether PAJC should change to the decentrafited coliection system. (Note; Assume a 365 -day year in your caiculations and round your final answers to the nearest doliar.) Should Premiums Abound Insuranice Company (PAIC) invest in the proposed system? Why or why not? Yes, because the differential net benefit, calculated as the net befiefit of the proposed systern minus the fet benefit of the currens system, is negative. No, because the differential net benefit, calculated as the net benefit of the proposed system minus the net benefit of the curront systems is prester than er equal to zero. Ves, because the differential net benefit, calculated as the net benefit of the proposed system minus the net benefit of the current system, is greater than or equat to zero. No, beauue the differential net beneni, calculated as the net benefit of the proposed system minus the net benefit of the current system. Under Premlums Abound insurance Company (PAIC)'s current centralized collection system, all policyholders send their monthly, quarterly, or annual premiums to its Hartford, Connecticut, office. It takes an average of seven days for the premium cheeks to be received at the Hartford otfice and another four days to be processed by the company's Premium Processing Department. Once the checks are deposited in the company's bank in Hartford, it takes an average of eight days for the in-state and out-of-state checks to be cleared and made available to PAIC. On average, the company receives per year 350,000 premium payments, which total $700,000,000 in annual premiums. The Hartford bank, which does not require a compensating balance, charges a monthly fee of $1,400 and $0.15 per payment. The Vault Financlal Services Group, a bank based in Kansas City, Missouri, is offering to create and operate a decentralized collection system for PAlC by establishing five regional collection bank accounts at its San Francisco, Denver, Dallas, Philladelphia, and Atlanta branches, These regional oranch accounts were selected to reduce the mail time required to return the funds to Hartford. Two alternatives are available for moving funds from the five concentration accounts to the master collection account: a mail transfer or a wire transfer. Under the wire-based proposal, the mail time from the customer to the regional concentration banks will be reduced to three days, the paymentprocessing time is reduced to one day, and the check-clearing delay is reduced to three days. Each regional concentration bank will then wire the collected funds to the master concentration account in Kansas City. Funds will be avallable immediately after their receipt from the concentration bank. The proposed system will cost $1,100 per month plus $0.10 per payment and will require a compensating baiance of $50,000 in each of the six branches of the bank. Vault will also charge $20 per wire transfer and expects to remit the collected funds to Kansas City every other day (approximately 182 times per year). Any funds released by the decentralized system will be invested in marketable securities to yield 13.00% (approximately 182 times per year). Any funds released by the decentralized system will be invested in marketable securities to yield 13.00% before taxes