Manzana Insurance Case Analysis

Submitted to:
Professor Haritha Saranga
Indian Institute of Management, Bangalore

on
October 7, 2010

In

Partial Fulfillment of the Requirement for

Operations Management Course

By:
Jayaprasad V (1011243)
Jagadeesh Y (1011242)
Nirmal Preethi G (1011257)
Pavan Jayanti (1011261)
Sameer Thombare (1011276)
Vijay K (1011292)
Contents
Problem Definition: ....................................................................................................................... 3

Factors Affecting the Performance: ............................................................................................... 3

Process Flow & Capacity Analysis:.................................................................................................. 4

Turn Around Time: ..................................................................................................................... 4

Capacity Utilization: ................................................................................................................... 4

Recommendations:........................................................................................................................ 5

APPENDIX ...................................................................................................................................... 6

Exhibit 1- Work flow process ...................................................................................................... 6

Exhibit 2 – Operating Activities .................................................................................................. 6

Exhibit 3- Turnaround Time........................................................................................................ 7

Exhibit 4 : Capacity Utilization of Underwriting teams ................................................................ 7

Exhibit 5: Capacity utilisation ..................................................................................................... 9

Exhibit 6: Expected profit from Renewal policies...................................................................... 10

Problem Definition:
The case talks about the inefficiencies in operations at Fruitvale branch of Manzana
Insurance Company. Major concerns are:

1) High and increasing Turn-Around Time (TAT) - Total time required to completely process
the insurance request compared to its competitor, Golden Gate. Golden Gate has recently
announced TAT of one day, which can add serious competition-resulting in increasing
renewal loss rate (47%) and late renewals (44%).

2) Declining profitability- the branch reported a loss of $174,000 and $121,000 during the
first quarters of 1991.

3) Backlog of policies.

4) Improper work load balancing among employees resulting in tighter schedules and idle
times.

Factors Affecting the Performance:

As stated in the problem statement, the inefficiencies of the organization results in an
increased TAT. We shall now look at the factors increasing TAT.

1. Prioritizing:
Though the company’s policy was to use FIFO system at each stage of the
underwriting process, RUNs and RAPs are given more priority over RAINs and
RERUNs. This is because of the new policies are the most profitable ones and also
the general perception that customers will anyway renew their policies. Also the
company’s compensation policy is to pay incentive payment for new policies written.
In case of RUNs, agents receive 25% commission where as in case of RERUNs, they
receive only 7%. Hence, for both the agents and employees emphasis is on following
for new requests. This results in increased backlog of RERUNs and sending notice to
agents in last day.

2. Underutilization:
The capacity utilization calculation shown in exhibit 2 is below 80% for rating and
policy writers. The reason for the same can be increased waiting time and uneven
pattern of loads given by utilization team. The capacity calculations of the
underwriting teams in Exhibit 4 show that there is a level of uneven load distribution
among the teams. The team 1 has a high level of utilization at around 97%, while
teams 2 & 3 have utilizations of around 78% and 70% respectively. So there will be
situations where one team is completely loaded while the other teams may not have
that much of work to do. Hence we can say that the strategy being followed by the
company in allocating different territories for different teams might not be the
correct strategy for the company in its present condition to follow.
 3. Loss of Renewals:
According to the data given, over the last quarters, the company has some 44% of
renewals processed late and 47% of renewals lost. When company gives very short
notice for RERUNs to agents, they tend to recommend other insurance agencies to
clients. The inability of the company to provide timely processing of RERUNs is
causing the loss of a large volume of valuable customer base, thus reducing its
revenue and hence the profitability.

4. Very low conversion of RAPs to RUNs:

Though the conversion rate of RAP to RUN is only 15%, it had been given a high
preference, next only to RUN and also they take up a significant time for processing.
But, then considering the conversion percentage, this priority doesn’t sound valid.

Process Flow & Capacity Analysis:

Now that we have seen where Fruitvale branch is going wrong, let us analyse how much impact it
has on their operations.

Turn Around Time:

Turn-Around Time (TAT) is the total time required for complete processing of one policy.

According to the case, TAT is calculated and found to be 8.2 days.

However, there is couple of flaws in the method used to calculate TAT:

1. The mean time for processing should be considered for the calculations instead of the 95%
SCT (Standard Completion Time). Mean process time provided already accounts for time
required for non-productive work.

2. Once the process reach a steady state, the TAT will not be addition of through put time of all
4 processes as the processes will run parallel, reducing the overall TAT. Moreover, it will also
depend on the individual loads of UT teams 1,2 & 3.

Hence, considering above flaw, the revised TAT is 4.7 days which is still higher than Golden Gate.

Exhibit 3 shows the new calculated TAT considering the mean time for each process.

Also by Little’s law Throughput time= Work in progress/Throughput rate= 82/40 = 2(Approx). Our
calculated time is very high compared to this, maybe due to above stated reasons.

Capacity Utilization:
The request for insurance is processed through 4 steps. As the time required for each step for each
kind of request is different, we need to calculate capacity utilization for each step individually and
compare the capacity utilization of each step to arrive at the bottleneck.
To calculate capacity utilization, we need to calculate the total processing time utilized by each of
the function.

From the process description, we know that the RAP does not require going through Policy Writing
Process. Only, those RAPs which are converted into RUNs will need Policy writing. Hence, only RUN,
RERUN, RAIN and converted RUN.

The capacity utilization analysis (Exhibit 5) shows that the underwriting is the bottleneck process as
the UT Team 1 is fully utilized.

The underwriting team is also affected by the regionalization. The Exhibit 4 shows that the team 1
was overburdened where as the team 2 and team 3 were seating idle for quiet a sometime.

Hence, the overall operations at the Fruitvale branch of Manzana Insurance are not properly
designed and need restructuring. We shall see the recommendations required to be improve the
situation at Fruitvale.

Recommendations:
1. The RERUNs should be given equal priority. They should be processed as they come. In
effect, FCFS (First Come First Served) should be implemented for all requests.
2. TAT (Turnaround time) can be improved by balancing the workload of the three
underwriting teams by pooling the teams together and diving the work as when they come.
This will reduce the waiting time and will ensure proper load to rating and policy writing.
3. The commission structure of agents needs changes. Since the renewals are quite profitable
for the company, the commission for renewals can be revised upwards. Model showing
additional profits to company by increasing commission is given in exhibit 5.
4. The compensation structure for the employees needs to be reviewed. Salary must include
variable pay for reduction in processing time and performing in par with other market
leaders in efficiency.
5. The processing time given in case is based on late 1980s data. However with the usage of
computers and the routine work performed, the processing time can be reduced further.
6. By observing the nature of the rating and policy writing jobs, the underutilization of
distribution clerks, we found that it will be economic to train employees to handle the whole
range of jobs so that in case of overloading of the staff with RAP requests, policy writers can
help distribution clerks and raters.
APPENDIX

Exhibit 1- Work flow process

Exhibit 2 – Operating Activities

Review and Policy
Distribution Underwriting Rating Writing

Arrival Rate 40 40 40 40

Average time per Request (min.) 40 30 70 55

Total time Required (hrs) 26.67 20.00 46.67 27.50

Personnel available 4 3 8 5

Capacity available (hrs @ 7.5

hrs/day) 30.00 22.50 60.00 37.50

Capacity Utilization 88.9% 88.9% 77.78% 73.33%

Exhibit 3- Turnaround Time
Total
Workers/ Throughput
Operating Steps RUNs RAPs RAINs RERUNs Teams time(Days)

Number of requests 1 3 1 11

Mean Time 68.5 50 43.5 28

Distribution Total time taken 68.5 150 43.5 308 4 0.32

Number of requests 4 10 7 47

Mean Time 43.6 38 22.6 18.7

174.
Underwriting Total time taken 4 380 158.2 878.9 3 1.18

Number of requests 5 12 8 54

Mean Time 75.5 64.7 65.5 75.5

377. 776.
Rating Total time taken 5 4 524 4077 8 1.60

Number of requests 5 0 9 56

Mean Time 71 NA 54 50.1

Policy
Writing Total time taken 355 NA 486 2805.6 5 1.62

Total TAT days 4.72

Exhibit 4 : Capacity Utilization of Underwriting teams

Underwriting Team 1

RUNs RAPs RAINs RERUNs Total

Territory 1 162 761 196 636 1755

Mean time 43.6 38 22.6 18.7

Total time 7063.2 28918 4429.6 11893.2 52304

Average Processing Time per request 29.80

Total Requests per day 14.63

 Average Time utilized per day 435.87

Capacity Utilization (total of 450 mins-7.5*60) 96.86%

Underwriting Team 2

RUNs RAPs RAINs RERUNs Total

Territory 1 100 513 125 840 1578

Mean Time 43.6 38 22.6 18.7

Total time 4360 19494 2825 15708 42387

Average Processing Time per request 26.86

Total Requests per day 13.15

Average Time utilized per day 353.23

Capacity Utilization (total of 450 mins-7.5*60) 78.49%

Underwriting Team 3

RUNs RAPs RAINs RERUNs Total

Territory 1 88 524 130 605 1347

Mean Time 43.6 38 22.6 18.7

Total time 3836.8 19912 2938 11313.5 38000.3

Average Processing Time per request 28.21

Total Requests per day 11.23

Average Time utilized per day 316.67

Capacity Utilization (total of 450 mins-7.5*60) 70.37%

Exhibit 5: Capacity utilisation
Percentage of RAPs in policies = 1798/4680 = 38.42%

Percentage of RAPs not converted to RUNs = 1524/1798 = 84.76%

Percentage of policies not processed by Policy Writers = 0.3842*0.8476 = 32.56%

Demand for the first three stages = 22 +17 =39 policies/day

Demand for the last stage = 0.6744*39 = 26.3 policies/day

Capacity Utilization of a stage = Demand for the stage / Capacity

Process Flow Analysis:

Average Capacity Utilization

Stage Processing Time Capacity (%)

DC 41 43.90 88.83

29.80 15.10 96.98

UT 26.86 16.75 78.49

28.21 15.95 70.37

R 70.4 51.14 76.27

PW 54.8 41.06 63.97

DC: Distribution Clerk

UT: Underwriting Team

R: Raters

PW: policy Writers

Exhibit 6: Expected profit from Renewal policies

1990 1991

1st qtr 2nd qtr 3rd qtr 4th qtr 1st qtr 2nd qtr

Renewal loss 400 414 436 467 429 497

Renewal premium lost 2252 2331 2455 2629 2415 2798

Commission Expenses at
15% 169 175 184 197 181 210

Expected Profit 2083 2156 2271 2432 2234 2588

* Expected profit and commission expense calculated considering 50% additional

conversion of renewal premium lost