There are a couple of problems in the fruitvale including ineffective incentive system, incorrect prioritizing of requests, increase in shift to newer policies, bottlenecks in operation, pending work not considered on a territory basis and increased turn around time etc. These problems have resulted in loss of almost half of renewal business for Manzana-Fruitvale. Some of the recommendations by which the Fruitvale can be pulled up are pooling together of underwriting teams and catering to any requests received from any of the agents of the branch.
Also RERUNS should not be discriminated against because they are actually more profitable both in terms of value and the time they take to be processed. Fruitvale has to streamline its processes and will have to compete on the basis of services in this highly competitive scenario where insurance rates and commission schedules are nearly identical among competitors. Increase in commission of agents for RERUNS policies can also be looked into. MANZANA INSURANCE We at Manzana Insurance deal in commercial insurance with branches at California, Oregon, and Washington.
This case refers to one of our branches at Fruitvale, which has consistently been loosing business to Golden Gate, a new player in the Insurance industry. Golden Gate has been performing significantly better than our Fruitvale branch on various measures like the total number of requests for new policies, endorsements, and renewals processed. Most importantly, Fruitvale is plagued by a very high turnaround time resulting in late renewals and increased renewal loss rate. The following exhibit chalks out the current process plan followed at Fruitvale
REPORT FOR MANAGEMENT COMMITTEE DISCUSSION
Observations and Hypotheses 1. Ineffective incentive system: Our incentive scheme is probably doing more harm than good. As the incentives to the senior employees are based on the number of requests processed over their existing quota. However they get incentive based on the premium on the policy. Hence they give priority to RUNs, which happen to have higher premiums than RERUNs. 2. Incorrect prioritising of requests: RERUNs are being given last priority in the order of requests taken-up based on a false assumption that RUNs and RAPs are more important and generate more revenue than RERUNs.
Based on our profitability analysis of each type of request, it can be seen that RERUNS have a higher contribution net of commissions and expenses than RUNs 3. Standard Completion Time (SCT) usage. We have been calculating Turn Around Time (TAT) based on Standard Completion Time for pending items at the beginning of the week. SCT is defined as the time to finish 95 percentile of all the requests. However, using SCT to calculate TAT does not seem reasonable and the estimate of TAT is on the higher side.
Pending work not considered on a territory basis: The backlog for Underwriting Team is not taken on a territory basis. This leads to using the same TAT across all territories. This is an incorrect estimate because TAT for Underwriting Team1 (Which handles territory 1) must have higher TAT as it handles more number of requests per day. Accordingly, it will have a higher backlog also. 5. Increased losses may be due to shift in mix to newer policies * Adverse Selection: New policies may be initiated by clients “anticipating a loss”
To get PLUS bonus, the Underwriters may be too lenient in their assessment of risk Due to poor service, Manzana may be getting only the new policies that other insurers don’t want! 6. Bottleneck in operation flow: Underwriting of Territory 1 requests: Underwriting is done by each team on territory basis. Territory 1 has the highest capacity utilisation amongst all territories. This estimate is based on steady state of operations but in reality, due to fluctuations in requests, it will not be sufficient.
The average variation in the requests per day is 16.7 (from the data in case exhibit 6), which the system will definitely not be able to handle. We also note that the renewal loss rate associated with territory 1 is the highest. Hence Territory 1 is a major source of bottleneck. SOLUTION ANALYSIS AND RECOMMENDATIONS The analysis of the case and the corresponding recommendations have been provided based on the following points which can be implemented without any compromise on the quality of the work: ; The underwriting teams need to be pooled together and they will perform the requests received from any of the agents of the branch.
This has been recommended to ensure that the capacity is utilized to the fullest across the underwriting teams. The pooling together of the teams will ensure that all of them work together to reduce the turnaround times. However, the agents have got used to being serviced by a particular set of team who cater to their needs. Thus, initially it needs to be ensured that as regards any queries from the agents, full support will be provided by the earlier teams irrespective of the fact as to which team processes their requests.
The branch needs to service all the requests from the customers and agents at the lowest turnaround times. The provision of RAP is an important starting point to acquiring new business and hence the first experience of the customers needs to be as good as that of the customer getting a new commercial policy (RUN). Thus, the two complement each other and play an equally important role in getting incremental business. Also, considering the loss of the renewal policy business, it is equally important to service them with equal efficiency.
Therefore, for the branch to be able to serve its customers better and improve its perception, it needs to ensure that the turnaround times are improved for all the products. Alternatively, the processing of request can be scheduled on the basis of the product offering highest revenue per minute of the labor time. But this option is not being considered for the reasons mentioned above. The recommendations based on the above can be summarized as below: ; The pooled system should be followed for distribution of the work amongst the different underwriting teams.
Based the data available for the second quarter of 1991 and the respective means for each process, the turnaround can be reduced to 2. 86 days for all the products (Refer Exhibit I) ; It is recommended that the work should be evenly divided amongst the various processes namely distribution, underwriting, rating and policy writing. This has been computed to ensure that the turnaround time is same for all the products. (Refer Exhibit II) It can be observed that the two employees for the distribution activities need to be recruited and two employees from the rating activity should be transferred to comprise an underwriting team.
As a result, the turnaround time for each activity will average around . 625 days. This will not only lead to the efficient utilization of all the available resources but also result in reduction in the total turnaround to 2. 49 days (Refer Exhibit II) ; Our agents receive a commission of only 7% on RERUNS. This is substantially lower than the amount they receive for RUNS, and hence acts as an incentive for agents to divert this business to our competitor. An increase in the commission rate should be effective in tackling this problem.
We should not discriminate against RERUNS as a secondary priority, because they are actually more profitable both in terms of value and the time they take to be processed. We need to implement the policy of first in first out regardless of the policy that is being processed. ; We have lost out on a large number of renewals to the fact that the policy reaches the holder for renewal only after the due date is over. It is recommended that the process of RERUN initiation should start at least one week before the due date. This would result in the policies reaching in time, and hence a significantly higher rate of renewal.