National Auto Insurance Company underwrites automobile coverage for the consumer market. As part of the annual planning process, National requires monthly estimates for number of policies in force and the amount of premium revenue associated with this volume of business. You have been asked to prepare these estimates for the coming six-month period. Past experience indicates that number of policies outstanding during a given month is influenced both by macro factors [e.g., market size (total number of households) and market growth rate] and company-specific factors (e.g., market share, cancellation rate experience). At the beginning of January for the new budget year, the number of households is estimated as 100 million; further, past experience indicates that this will increase by approximately 0.05 percent per month. Your own research indicates that approximately 80 percent of households have one or more cars. On average, each household owns 2.2 cars. Because of legal requirements, the average percentage of cars insured is high-your best estimate is that this number is 85 percent and growing by 0.1 percent per month. Current market share of National Auto in the consumer market is approximately 10 percent. Over the past 24 months, the rate of increase in market share for National has been 0.005 percent per month. Because of aggressive levels of customer service, National has been able to keep its monthly cancellation rate below average, to approximately 0.125 percent. Average monthly premium paid per auto insured for the coming year is assumed to be $100.

Required

1. For each of the months January-June in the coming year prepare, a budget broken down in three parts:

a. Market size and volume.

b. Volume for National Auto Insurance (number of policies outstanding).

c. Premium revenues generated.

For (a) above, you should have six rows of data, as follows: total number of households (i.e., market size), percentage of households owning one or more cars; number of cars owned per household; percentage of car owners with insurance; total number of insured cars (marketwide); market share of National Auto; and number of autos insured by National Auto, end of the month. For (b) above, your budget should have four rows, as follows: number of cars insured, beginning of the month; cancellations during the month; number of insured autos, end of the month; and average number of insured autos during the month. For (c) above, your budget should have the following three rows: average number of cars insured during the month; average insurance premium per car per month; total monthly premium revenue.

2. What additional real-life refinements do you envision for the budgets you prepared above in (1)? What additional budgets would you anticipate preparing for the company if you were in charge of the budget-preparation process?

3. The budgets you prepared above in (1) can be referred to as driver-based budgets. List some of the pros and the cons of such budgets, relative to traditional budgeting practices.