Technical Risk Management MEDCON Incorporated Live-On ® Model 7275 MEDCON, an international manufacturer of an implantable cardioverter defibrillator (ICD), is

concerned about product liability concerning their Live-On®Model 7275 which has developed the propensity to short out and render the unit ineffective. ICDs deliver

electrical shocks to the heart to eliminate abnormal rhythms such as ventricular fibrillation or ventricular tachycardia. In the Antiarrhythmics Versus Implantable

Defibrillators (AVID) trial, the device was shown to be superior to therapy with anti arrhythmic medications for reducing all causes of death in survivors of

ventricular fibrillation (irregular, chaotic heart rhythm

that begins in the heart's lower chambers). MEDCON Live-On® MEDCON statistics show that 5 out of 1000 units a year are likely to develop this defect over its service

life. Replacement of a defective unit requires surgery that costs $300k and the unit itself costs $250k. Approximately 80,000 units per year are implanted into patients. MEDCON carrys a liability policy that provides 90% indemnity.

1. Based on MEDCON's own data, the Risk Determinate Factor (RDF) is what?

2. What is the Reliability of Model 7275?

3. What is the failure rate per year?

4. What is the MTBF?

5. At the yearly implantation rate given, what is MEDCON's Risk Cost assuming that their warranty covers all expenses of replacement if a unit fails over its advertised service life?

6. If replacement surgery must be scheduled 3 months in advance (except of emergency cases involving patient distress), what is the Risk Time that each patient faces regarding replacement?

7. Given the results from #5, what amount of Risk Avoidance Investment (RAI) would you expect MEDCON to implement (minimum amount)?

8. Figures show that deaths resulting from the shorting problem (unit is not functioning when patient needs it) follows a Poisson distribution with mu = 1.2. What is the probability of great than 5 deaths in any given period?

9. If the Binomial distribution where n=25 and p=.01 were used instead, what is the above probability?

10. a] If settlements from wrongful death litigation average $1M with a standard deviation of $100K, what will the upper 10% of MEDCON's settlements cost each (out of pocket) assuming that the policy described is in force?

b] If MEDCON could receive substantial reduction in insurance premium if they 'self insured' the first 25% of

wrongful death claims, what $ amount would they need to set aside for each claim?

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