Manzana Insurance

Operations Management

Submitted by Group 7
Nikhil Yadav
1511105
Nisha Sharma
1511106
Rohit Raj
1511119
Sharmishtha
1511125
Vivek Mandal
1511143

Why have profits been deteriorating over the past several quarters?
In the 1950s, Manzana Insurance was the 2 nd largest home and commercial property
insurer in California. In 1991, the company was mainly focusing on commercial
insurance with Fruitvale branch being exclusively focused on property insurance
segment. Overtime competition from Golden Gate & internal inefficiencies of Fruitvale
branch have dented its operations.
The issues faced by the Fruitvale branch are as follows:
1)

High Turnaround Time Turnaround time increased from 4.7 days in 1989(Q1) to
6.2 days in 1991(Q2). The TAT is expected (at 95% SCT) to be 8.2 days in the week
ended on 6th Sep 1991 which has led to increased policy backlog.

2)

Backlog of RERUNs The policy writing, underwriting and rating departments had
the practice of prioritizing RUNs & RAPs over RERUNs. In the company, there is a
casual attitude towards processing RERUNs. The hefty bonus on new policies could
be a possible reason for the backlog. Since the RERUN is not released till the last day
to the Distribution Clerk, it just leaves 1 day for processing which has led to
renewal loss rate (47%) and high no of late renewals (44%). Due to this the
customers & agents will have a tendency to defect to the competitors & ultimately
companys revenue will go down as RERUNs drive ~75% of the revenue. See case
exhibit 5.

3) Ordinary Insured Losses - As seen in Exhibit 5, profits reduced from $1765 in

Quarter1 1989 to ($121) in Quarter2 1991. This is caused due to rising Ordinary
Insured Losses. Hence, it can be said that claims are growing but the revenues are
not growing at same pace at which it is reducing the gross underwriting income. This
points out that rating department is not taking care of risk.
4) Job load is not uniformly spread-out The rating and policy writing departments
have extra employees hence, the have not utilizing their full capacity. In the
underwriting department the work pressure is not uniformly spread out, here first
territory is performing at 92% capacity and third territory at 71% capacity.
5) Stagnating income and lowest market share As seen in Exhibit 5, revenue from
new policies, renewals and endorsements is consistently maintained at 0.13%
growth year-on-year & recent result points out that Fruitvale is worst performer.
However, Golden Gate has shown decent growth rate.

Comparison of performance of Fruitvale and Golden Gate

Parameters
Fruitvale (Q2 1991)
Policy requests
1595
(RUN+RAIN+RERUN)
Turnaround Time
6 days
Renewal loss rate
47%
Policy growth rate
Stagnating

Golden Gate (Q2 1991)

2075
2 days
15%
Growing

Use process flow analysis to identify the bottlenecks in Manzanas

operations.
14.625
Underwriting Team 1 1 underwriter,
1 technical assistant

15

39Originating Agent
Underwriting Team 2 1 underwriter,
39Distribution 4 clerks
Rating 8 Raters
1 technical assistant

26.3
Policy writing
5 writers

13.15
Underwriting Team 3 1 underwriter,
1 technical assistant
11.225

24

All calculations are explained in Appendix 3

With reference to Appendix 1, it is to be noted that Standard Completion Time gives
absurd results if we were to compute the capacity utilization (124%) of the organization.
This is theoretically and practically impossible. It also inflates the TAT.
As an alternative, we recommend usage of mean processing time for calculation
purposes by which we arrive at a capacity utilization figure of 75%. Therefore, it is a
more practical alternative.
Also, TAT calculation using mean process time instead of SCT method reduces the
inflated TAT figure of 8.2 days to 4.72 days (Refer Appendix 2)
Shown below is the capacity Utilization of different teams in the Underwriting
department:
Distributio
n

Underwritin
g

Particulars
Weighted average
processing time per
request (t)

41.0 min/req

28.4 min/req

Total capacity =
1/t*60*capacity
Total request per day

1/41*60*4*7
.5 = 43.9
requests
39

1/28.3*60*3*
7.5 = 47.54
requests
39

Rating

Policy
writing

70.4 min/req
1/ 70.4*60
*8*7.5 =
51.14
requests
39

54.8
min/req
1/54.8* 60*
5* 7.5 =
41.06
requests
26.3

(Refer Appendix 3)
Capacity Utilization =
request/day / total
capacity

89%

82%

76%

64%

We find that the maximum capacity utilization is of Distribution stage 89%, so it

becomes the bottleneck for the insurance process.
Capacity Utilization of different teams in the Underwriting department:
Underwriting
Weighted average
processing per
request t
Total capacity =
1/t*60*capacity
Total request per day
Capacity
Utilization = total
request per day /
total capacity

Territory1

Territory2

Territory3

28.4 mins

28.4 mins

28.4 mins

1/28.4*60*7.5=
15.84 requests
14.625

1/28.4*60*7.5=
15.84 requests
13.15

1/28.4*60*7.5=
15.84 requests
11.225

92.30%

83%

70.80%

We find that that among the underwriting teams, Territory 1 has maximum utilization
92.30%. Territory 2 and Territory 3 are relatively underutilized and they have lesser
workload.
Recommendations:
i)

Follow uniform FIFO method as against biased FIFO method for processing requests:
Given the intense competition in the property insurance business, all competitors play
on similar footing in terms of pricing; the only point of differentiation is the quality of
service. As regards the insurance sector, TAT is a major determinant of quality of
service and Manzanas Fruitvale branch (6 days TAT) is way lagging behind its
immediate competitor i.e. Golden Gate (2 days TAT). On careful analysis, it is observed
that the primary reason for higher TAT is because of mismatch in the request clearing
system across the departments as given below:
a) Distribution Department Uniform FIFO
b) Underwriting Department Biased FIFO
(RUNs and RAPs preferred over RERUNs and RAINs FIFO method adopted within
each of the two priority groups)
c) Rating Department Biased FIFO (method influenced by underwriting department)
d) Policy Writing Department Biased FIFO (within FIFO, simple to complex)
Thus, as can be observed from above, due to differing priorities, some requests are
processed faster by the branch at the expense of delay in processing other requests.

The general belief among the employees is that RERUNS are less profitable than new
policies. However, the employees have grossly failed in appreciating that RERUNs is a
value driven business with 3 times the frequency of new policies and a major source of
revenue for the company. Having said that, the Fruitvale branch has not catered to
them in time and has lost customers to competitors which is evident from a high loss
renewal rate of 47%. This is indeed the major reason for decline in revenue and
profitability of the company. Probably, it is the short sightedness of the underwriting
team in view of the incentive bonus received on new policies because of which they
consider RUNs and RAPs to be more profitable on individual level rather than on
organizational level. In fact, the difference in annualized premiums between new
policies and renewals is merely $519 (6,754 6,205) which is in alignment with
depreciation in value of property insured with passage of time. On the contrary, the
agency commission charged on renewals is a mere 7% as against 25% for new policies
which makes a strong case for renewals business being equally profitable. The reason
for focusing on renewals the new policy business is further strengthened because the
new policies business has almost stagnated for the company while RERUNs is a
recurring business which does not even require separate efforts for soliciting customers.
The Fruitvale branch should therefore adopt a uniform FIFO for all type of requests so as
not to compromise on TAT for any type of request, thereby maintaining consistency in
service quality across all requests.
ii)

Calculation of TAT based on mean time in lieu of SCT

The calculations of TAT based on SCT leads to erroneous results as explained earlier and
therefore, the branch should adopt mean time as basis for TAT calculation for superior
planning in allocation of resources.

iii)

Pooling of underwriting teams from different territories:

As discussed earlier, there is unequal distribution of work among the underwriting
teams as a result of which, Team 1 is more occupied (92.3%) as compared to Team 2
(83%) and Team 3 (70.8%). This compares inconsistently with the overall capacity
utilization of the underwriting department (82%). In order to achieve uniform levels of
capacity utilization, it is advised that the branch pools all its underwriting teams for
equal allocation of work which leads to a consistent TAT and also gives a better scope
for scaling up its business in future.

iv)

Providing higher commission to agents:

Given the dismal state of Fruitvale branch, Manzanas management can consider the
option of providing higher commission to agents for incentivizing sale of new policies
and discouraging agents from defecting the customers to Golden Gate. This can also
improve the conversion ratio of RAPs to RUNS. If not considered, the Fruitvale branch
may lose badly to Golden Gates new scheme of 1 day TAT.

v)

Technological improvements in rating and policy writing department:

The rating and policy writing functions in the industry have highly become mechanical
with the advent of desktop computers. However, there is no significant improvement in
TAT of the branch which indirectly implies that the branch is yet to leverage on the

technological advancement in the industry and that there is a scope for improvement in
TAT.
vi)

Improving risk assessment of requests:

It is observed that over the past two years, insurance claims have increased
disproportionately by 54% in comparison to gross insurance premiums which have
barely increased by 9%. This implies that the risk assessment of the rating department
is poor and this anomaly requires immediate attention of the management.

vii)

Retrenchment of one employee each in rating and policy writing department:

Given the low capacity utilization of rating and policy writing department, there is a
scope for cost cutting in the Fruitvale branch by retrenching one employee each in rating
and policy writing department post which capacity utilization is still maintained at an
optimal range of 80-90% (Refer Appendix 4).

viii)

Other recommendations:
- Incentivize processing of RERUNs by giving a bonus to employees in consonance to
new policies
- Initiate RERUN request 10 days prior to due date for eliminating cases of late renewals
and thereby reducing rate of renewal loss

______________________________________________________________________________________________

APPENDIX 1

Capacity Utilization
Using Mean Time (50%)
Request
Type

Distributio
n time

Underwritin
g time

Rating
time

Policy
writing
time

Total
Minutes
per
policy

No. of
policies
in 1991

No. of
man
hours

RUNs

68.5

43.6

75.5

71

258.6

350

1508.5

RAPs

50

38

64.7

152.7

1798

4575.9

RAINs

43.5

22.6

65.5

54

185.6

451

1395.1

RERUNs

28

18.7

75.5

50.1

172.3

2081

5975.9

Total

13455.4

Max Total

18000

Utilizatio
n

75%

Using SCT (95%)

Request
Type

Distributio
n time

Underwritin
g time

Rating
time

Policy
writing
time

Total
Minutes
per
policy

No. of
policies
in 1991

No. of
man
hours

RUNs

128.1

107.2

112.3

89.3

436.9

350

2548.6

RAPs

107.8

87.5

88.7

284

1798

8510.5

RAINs

68.1

49.4

89.4

72.1

279

451

2097.2

RERUNs

43.2

62.8

92.2

67

265.2

2081

9198.0

Total

22354.3

Max Total

18000

Utilizatio
n

124.0%

20 employees*7.5 hrs/day*20 days a month*6 months a half-year

APPENDIX 2

Total Turnaround Time (Mean Process Time Method)

RERUN Workers/Tea Total Throughput
Operating Steps
RUNs RAPs RAINs
s
ms
time (days)
Number of Requests 1
3
1
11
4 clerks
Mean Time (min)
68.5
50
43.5
28
Distribution
0.32
Total Time Taken
(7.5 hrs/day)
68.5 150 43.5
308
(min)
Number of Requests 4
10
7
47
Underwriting Mean Time
43.6
38
22.6
18.7
Total Time Taken
174.4 380 158.2 878.9

Rating

Number of Requests 5
12
8
Mean Time
75.5 64.7 65.5
Total Time Taken
377.5 776.4 524

Number of Requests 5
Policy Writing Mean Time
71
Total Time Taken
355
TOTAL

0
NA
NA

9
54
486

3 teams

1.18

54
75.5
4077

8 raters

1.6

56
50.1
2805.6

5 writers

1.62

4.71 days

APPENDIX 3

Total number of requests in the Fruitvale branch = 39/ day [includes RUNs, RAPs, RAINs
and RERUNs]
Team 1 receives 14.625 (162+761+196+636/120), Similarly from Exhibit 7, Team 2 and
Team 3 receive 13.15 and 11.225 requests per day respectively.
From exhibit 7, the number of RAPs processed in 1991 for a period of 6 months = 1798
Number of RAPs per day = 1798/120 = 15
15 RAPs are returned to distribution clerk, who was responsible for sending a price
quote to the originating agent. Its given that 15% of these RAPs resulted in new
policies which is equal to 2.3 RAP requests per day.
The number of requests sent for policy writing are 39-15 = 24
Number of requests received by the policy writing department = 24+2.3 = 26.3
requests per day

APPENDIX 4

Capacity

Distribution
clerks
Underwriting
(all 3 teams
pooled)
Rating
Policy Writing

After
restructu
ring

Capacity
after restructuri
ng

Revise
d
capacit
y
utilizati
on

Reque
sts per
day

Initial
Manpow
er

Actual
Capaci
ty

Current
capacit
y
utilizati
on

39

43.9

89%

43.9

89%

39

47.54

82%

47.54

82%

39
26.3

8
5

51.14
41.06

76%
64%

7
4

44.74
32.84

87%
80%

_______________________________________________________________________________________________