Vose SoftwareModelChoice decision tree · Insurance
Insurance Product Launch
Launch cyber insurance nationwide, in three states, through an MGA partner, or not at all?
From the model’s decision tree
Best first decision: Limited Launch (3 States)
The expected value of each first option when every later decision is also made well (the tree rolled back).
| First decision | Expected value | |
|---|---|---|
| Full Launch Nationwide | −$7,812,500 | |
| Limited Launch (3 States) | $3,205,000 | ✔ best |
| MGA Partnership | $2,920,000 | |
| Don't Launch | $0 |
| Measure | Value |
|---|---|
| Expected value of the best strategy | $3,205,000 |
| Chance of a loss on the best strategy | 46.8% |
| Best outcome on the best strategy | $24,000,000 |
| Worst outcome on the best strategy | −$11,000,000 |
S-curve (cumulative probability) of Limited Launch (3 States) from the saved simulation.
The decision
A mid-size property & casualty insurer is evaluating whether to enter the rapidly growing cyber insurance market. Cyber premiums have doubled in 3 years but loss experience is volatile and a single catastrophic ransomware or data breach event could wipe out years of underwriting profit.
Objective
Maximize expected 5-year underwriting profit net of startup costs. Key uncertainties include loss ratio experience, regulatory approval timelines, market penetration rates, and the risk of catastrophic cyber events.
The options
- Option 1: Full Launch Nationwide ($20M)
Build an in-house cyber underwriting team, file forms in all 50 states, and deploy $20M in startup costs (staff, systems, marketing). Highest upside but maximum exposure to adverse loss ratios and catastrophic events.
- Option 2: Limited Launch in 3 States ($6M)
Pilot the product in 3 target states to build loss data and underwriting expertise. If results are strong, a subsequent decision to expand nationwide or stay regional follows.
- Option 3: MGA Partnership ($2M)
Partner with a Managing General Agent that already has cyber expertise. Lower investment but share profits and cede underwriting control.
- Option 4: Don't Launch
Pass on the cyber market. No investment, no risk, no upside.
The decision tree
The tree has 3 decisions, 12 chance events and 25 outcomes. The best path is open: at every decision the best choice is marked, and the expected value beside each branch counts every cash flow from the start. Open any other branch to see what follows it.
DecisionChance event+$ cash flow on the branch
Full Launch Nationwide −$20,000,000expected −$7,812,500
Chance: Loss Ratio Experience25% Favorable (<55%)expected $32,500,000
Chance: Catastrophic Cyber Event?- 75% No Major Event +$80,000,000payoff $60,000,000
- 25% Catastrophic Event −$30,000,000payoff −$50,000,000
45% Expected (55-75%)expected −$6,250,000
Chance: Catastrophic Cyber Event?- 75% No Major Event +$35,000,000payoff $15,000,000
- 25% Catastrophic Event −$50,000,000payoff −$70,000,000
30% Adverse (>75%)expected −$43,750,000
Chance: Catastrophic Cyber Event?- 75% No Major Event −$15,000,000payoff −$35,000,000
- 25% Catastrophic Event −$50,000,000payoff −$70,000,000
Limited Launch (3 States) −$6,000,000expected $3,205,000 ✔ best
Chance: Regulatory Approval55% All 3 States Approvedexpected $8,800,000
Chance: Market Penetration (3 States)35% Strong Penetrationexpected $24,000,000
Decision: Expand After Strong Results?Expand Nationwide −$14,000,000expected $22,500,000
Chance: Cat Event During Expansion?- 75% No Major Event +$65,000,000payoff $45,000,000
- 25% Catastrophic Event −$25,000,000payoff −$45,000,000
- Stay Regional +$30,000,000payoff $24,000,000 ✔ best
40% Moderate Penetrationexpected $6,000,000
Decision: Expand After Moderate Results?Expand Nationwide −$14,000,000expected −$6,250,000
Chance: Cat Event During Expansion?- 75% No Major Event +$30,000,000payoff $10,000,000
- 25% Catastrophic Event −$35,000,000payoff −$55,000,000
- Stay Regional +$12,000,000payoff $6,000,000 ✔ best
- 25% Weak Penetration −$2,000,000payoff −$8,000,000
30% Partial Approval (1-2)expected $50,000
Chance: Market Penetration (Partial)- 40% Good Results +$15,000,000payoff $9,000,000
- 35% Mediocre Results +$3,000,000payoff −$3,000,000
- 25% Poor Results −$4,000,000payoff −$10,000,000
- 15% Major Delays / Denied −$5,000,000payoff −$11,000,000
MGA Partnership −$2,000,000expected $2,920,000
Chance: MGA Performance25% MGA Exceeds Targetsexpected $13,000,000
Chance: Loss Ratio (Strong MGA)- 40% Favorable Losses +$25,000,000payoff $23,000,000
- 40% Expected Losses +$14,000,000payoff $12,000,000
- 20% Adverse Losses −$3,000,000payoff −$5,000,000
45% MGA Meets Targetsexpected $2,600,000
Chance: Loss Ratio (Meets MGA)- 30% Favorable Losses +$12,000,000payoff $10,000,000
- 45% Expected Losses +$5,000,000payoff $3,000,000
- 25% Adverse Losses −$5,000,000payoff −$7,000,000
- 30% MGA Underperforms −$3,000,000payoff −$5,000,000
- Don't Launchpayoff $0
Change the numbers. Open the workbook with ModelChoice, change a probability or a cost in the tree, and the best decision updates at once.
Key assumptions
| Assumption | Value | Notes |
|---|---|---|
| Full Launch Investment | $20,000,000 | Staff, systems, regulatory filings |
| Limited Launch Investment | $6,000,000 | 3-state pilot program |
| MGA Partnership Cost | $2,000,000 | Integration and oversight |
| Favorable Loss Ratio | <55% | 25% probability (full launch) |
| Expected Loss Ratio | 55-75% | 45% probability (full launch) |
| Adverse Loss Ratio | >75% | 30% probability (full launch) |
| Catastrophic Event Prob. | 25% | Major ransomware/breach event in 5 years |
| Expansion Cost | $14,000,000 | Nationwide rollout after pilot success |
| Max Upside (Full Launch) | $80,000,000 | Favorable loss + no catastrophe |
| Max Downside (Full Launch) | −$50,000,000 | Adverse loss + catastrophic event |
The figures are illustrative: the companies and numbers are invented for teaching.
Try it in ModelChoice
- Strategy Table. Compare full launch vs limited vs MGA partnership
- Sensitivity Analysis. Impact of loss ratio and catastrophe probability on EV
- Risk Profile. Tail risk from catastrophic cyber events
Find similar models
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Further reading
Download the workbook and open it with ModelChoice. The free trial opens every example.
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An illustrative example: the figures are invented for teaching. Last updated 9 October 2026.