Uncertainty Decision

Uncertainty Decision: Rental Car Insurance

QNT 561

April 15, 2013

Decision of Uncertainty: Rental Car Insurance

In the United States, one of every five adults expects to take a business trip in the next six months (U.S. Travel Association, 2013). Professionals typically rent cars during their business trips, and if a company does not have a corporate insurance policy the professional must decide whether or not to purchase rental car insurance from the rental car company or use a rider on her own personal policy. Probability concepts used in conjunction with statistical data provide the professional with the means to make her decision regarding insurance for the rental car.

Scenario

The professional’s business trip will take her 148 miles from Madison, Wisconsin, to Chicago, Illinois. Because of the short nature of the trip, which will take three days, she chose to rent a car instead of purchase an airline ticket in an effort to decrease costs. National Rental Car provides a rate of $60 per day for a midsize vehicle and offers supplemental liability insurance for $13.95 per day (National Car Rental, n.d.). The policy also requires a $500 deductible.

Data

In 2009, 10.8 million motor vehicle accidents happened in the United States (United States Census Bureau, n.d.a). During this year, approximately 246 million motor vehicles were registered (United States Census Bureau, n.d.b). With these statistics, one can determine that approximately 4.4% of registered vehicles took part in an accident. In this case, our business professional must use the data to determine the probability of getting in an accident. From here, she can determine whether or not to purchase the rental car insurance.

Theory

In this case, using Bayes’ theorem as the probability model seems appropriate. The theorem identifies subjective probability estimates based on general experience rather than collected data (Cooper & Schindler, 2011). To...