Using Monte Carlo for Claims Assessment

Many associate Monte Carlo with quantitative risk assessment and generating risk costs over a range of confidence levels.

With a few slight modifications, the methodology used for risk can be easily applied to claims assessment. In fact, Monte Carlo is particularly useful where one is dealing with a multitude of claims and is seeking to determine what a reasonable one off settlement would be for the entire bundle of claims.

The following example may be helpful to illustrate.

Schedule of Claims

When the above schedule of claims is put through the P50P90 Monte Carlo model the following range of outcomes is produced.

When in negotiation on resolving the financial aspects of the dispute, the Monte Carlo outputs would suggest that the Employer is obtaining value for money if the claim is settled in the region of the P50 value of 1.3 million. Greater value is obtained at the P10 value of 0.9 million while the outer limit of any settlement should be the P90 value of 1.6 million.

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