Case Study: Titan Insurance Company

Preliminary Analysis:

With reference to Table1: Titan Insurance Sales Output, below is the summary of the sample data
available:

Sample Size: n=30

OldScheme -> Sales Output before the scheme was introduced
NewScheme-> Sales Output after the scheme was introduced
DiffScheme-> Difference in Sales Output (NewScheme – OldScheme)
> summary(SalesOutput)
OldScheme NewScheme DiffScheme
Min. : 28.00 Min. : 32.00 Min. :-34.00
1st Qu.: 54.00 1st Qu.: 55.00 1st Qu.: -6.75
Median : 67.00 Median : 74.00 Median : 7.50
Mean : 68.03 Mean : 72.03 Mean : 4.00
3rd Qu.: 81.50 3rd Qu.: 85.75 3rd Qu.: 16.00
Max. : 110.00 Max. : 122.00 Max. : 25.00

> sd(OldScheme)
[1] 20.45598

> sd(NewScheme)
[1] 24.06239

> sd(DiffScheme)
[1] 14.08105

The Sales Output is measured on same set of salespeople at two different times i.e. before and
after the new scheme was introduced. To determine if the new scheme has significantly raised
outputs, a Paired t-Test can be applied here provided the sample data meets below assumptions:

 The data (OldScheme and NewScheme) are Continuous data

 It is assumed that the observations are independent of each other as random sample of 30
salespeople has been taken
 There are no outliers in the difference between the paired values. Refer the boxplot below:

 The difference between paired values (DiffScheme) is approximately normally distributed.

Refer the histogram below:
 To ensure about the normality, we can perform Shapiro-Wilk normality test as shown
below:

p-value > 0.05 means that we fail to reject the null hypothesis that the sample comes from
normal distribution. So we can assume the normality. Since t-Test is a robust test with
respect to sample size and normality, we can proceed with the test even if the data is
approximately normal.

a. Describe the five per cent significance test you would apply to these data to determine
whether new scheme has significantly raised outputs?

Paired t-Test Analysis:

 Hypothesis Formulation: State the null and alternate hypothesis

H0: µd = µnew - µold <= 0 (Mean difference of Sales Output between NewScheme and
OldScheme is less than or equal to 0)
H1: µd = µnew - µold > 0 (Mean difference of Sales Output between NewScheme and
OldScheme is greater than 0)
where
µold is the population mean of OldScheme,
µnew is the population mean of NewScheme and
µd is the population mean of DiffScheme

Based on alternate hypothesis, upper tail t-Test would be performed

 α = 0.05; df=n-1=29; tcrit = 1.699

 Calculate tstat = 1.5559

tstat = (𝐷̅ − µd) / (SD /√𝑛) where

 ̅ = 4 (Sample Mean of DiffScheme)
𝐷
µd = 0
SD = 14.08105 (Sample Standard Deviation of DiffScheme)
n = 30

Or Using R:

 Graphic t-distribution

 Statistical decision:
Since p-value (0.06529) > α (0.05), we Fail to Reject H0

b. What conclusion does the test lead to?

 Since p-value (0.06529) > α (0.05), we Fail to Reject the null hypothesis. At a significance
level of 0.05, there is not enough evidence to support the claim that New Scheme has
significantly raised outputs.

c. What reservations have you about this result?

 Seasonality is a very critical factor for any industry. Usually seasonality in insurance Industry
(Sales) follows a pattern i.e. Q1, Q2, Q3, Q4 = 10%, 20%, 30%, 40% respectively. As nothing
has been mentioned about the time period of the sales data, any analysis tend to be biased.
 Since the p-value (0.06529) is very close to being statistically significant, the alternate
hypothesis might still be true but due to small sample size, the test did not have enough
power to detect that H0 is false.
d. Suppose it has been calculated that in order for Titan to break even, the average output
must increase by £5000. If this figure is alternative hypothesis, what is:
(i) The probability of a type 1 error?
(ii) The probability of a type 2 error?
(iii)The power of the test?

I. Type I error (𝜶): Probability of rejecting the null hypothesis when it is true. The probability
of a Type I error in hypothesis testing is predetermined by the significance level which is
0.05 here. That means there is 5% probability that we make Type I error – rejecting null
hypothesis when it is true.

II. Type II error (𝜷): Probability of failing to reject null when it is false.
It is given that average output must increase by £5000 in order for the company to break
even.
 Formulating the hypothesis:
H0: µd = µnew - µold = 0
H1: µd = µnew - µold > 5
α = 0.05; df=n-1=29; tcrit = 1.699

 ̅ value on null hypothesis distribution:

Corresponding to tcrit = 1.699, we calculate the 𝐷
tcrit = (𝐷̅ − µd) / (SD /√𝑛)
̅ = 4.37
𝐷

OR Using R:

 Corresponding to 𝐷
̅ = 4.37 and for µd = 5, we calculate the probability of drawing the
sample mean difference lesser than 4.37

Hence, Probability of making Type II Error is 40.38%

 Power of the test (1- 𝜷): Power of a test is the probability that we make the right
decision when the null hypothesis is not correct i.e. we correctly reject it
Power of the hypothesis test is 1 minus the probability of Type II error.
Hence, Power = 59.62%

Using R:

Power of a test depends on the sample size, standard deviation of differences, alpha level
and the true difference between the population means.

APPENDIX

Table1: Titan Insurance Sales Output

DiffScheme
(NewScheme-
Salesperson OldScheme NewScheme OldScheme)
1 57 62 5
2 103 122 19
3 59 54 -5
4 75 82 7
 5 84 84 0
6 73 86 13
7 35 32 -3
8 110 104 -6
9 44 38 -6
10 82 107 25
11 67 84 17
12 64 85 21
13 78 99 21
14 53 39 -14
15 41 34 -7
16 39 58 19
17 80 73 -7
18 87 53 -34
19 73 66 -7
20 65 78 13
21 28 41 13
22 62 71 9
23 49 38 -11
24 84 95 11
25 63 81 18
26 77 58 -19
27 67 75 8
28 101 94 -7
29 91 100 9
30 50 68 18