Manzana Insurance – Fruitvale Branch

Operations Management Case Analysis

Group 4

Agrim Gupta (1511001)

Sachin Xalxo (1511048)
Udit Jalan (1511063)
Vaishnavi S (1511065)
Vivek T (1511068)

Contents

1 ABSTRACT ERROR! BOOKMARK NOT DEFINED.

2 INTRODUCTION ERROR! BOOKMARK NOT DEFINED.

3 PROBLEMS AT FRUITVALE BRANCH ERROR! BOOKMARK NOT DEFINED.

4 PROCESS AND CAPACITY ANALYSIS ERROR! BOOKMARK NOT DEFINED.

5 RECOMMENDATIONS 3

6 APPENDICES 7
 Abstract
The case of Manzana Insurance gazes on the current ongoing situation at Fruitvale
Branch, where the company is facing threat of losing market to its rival Golden Gate. Higher
management is concerned and demands an immediate solution. For the past two years, all
the financial metrics seems to be falling apart. Growth in terms of new policies has become
stagnant and they are losing on profits. Apart from this, there is an increase in renewal rate
resulting in increase in turnaround time (TAT) for issuance of a policy. Agents are respon-
sible for dealing with the public for their insurance policy needs. Hence it is crucial to main-
tain a healthy relationship with them to sustain market share. Agents expect renewal of con-
tract offer before the expiry of old policy. The announcement by Golden Gate to provide
policy with one-day turnaround time(TAT) or else 10 % premium discount is driving away
agents as they use TAT as important factor and often demand for a commitment.
Calculation para
Introduction
Initially Manzana Insurance started off with property insurance, were forced to expand
their offerings to liability insurance, due to stiff competition from Golden Gate resulting in
lowered rates and decreased profits. More than 2000 independent agents represented Man-
zana and competing insurers. Fruitvale branch focused on property underwriting only and
was served by 76 agents. On an average Fruitvale branch handles 40 requests per day. Or-
ganizational flowchart involves four departments:
 Review and Distribution: A distribution clerk receives written request from originat-
ing agent and forwards the request to the underwriting team. Also, responsible for
analysis of data published by State Insurance Commissioner as well as researching
rates quoted by the competitors.
 Underwriting: Underwriting team is responsible for evaluating, selecting, classifying
& pricing the policy.
 Rating: Rating Dept. is responsible for policy premium calculations.
 Policy Writing: Responsible for typing, assembling and final drafting of the policy.
In 1991, to avoid poaching of its senior underwriters by Golden Gate, Manzana adopted
fixed annual salary plus variable incentives (based on number of policies written). Also
agents were paid a commission of 25% on each new policy and 7% on each policy renewal.
Based on implementation process, Manzana’s policies fall into four categories:
 RUN: Request for Underwriting (RUN) refers to the request for a new policy.
 RERUN: Represents renewal of existing policy, gets automatically generated by a
computer system 30 day before the due date of renewal.
 RAIN: Whenever there is a physical change is property being insured, a policy en-
dorsement in terms of amount of insurance is required and is referred to as Request
for Additional Insurance(RAIN).
 RAP: Price quotes requesting pricing and evaluation of risk is referred to as Request
for Price(RAP).
For the past two years, Fruitvale branch is facing stiff competition from Golden gate as it
is losing out both on revenue as well as market share. Operational efficiency has also de-

2
creased over the years as the total number of requests processed became stagnant and re-
newal loss rate is at all-time high. Golden Gate lures away the agents with guaranteed TAT
of one day and premium discount of 10%. Thus, Fruitvale is losing approx. half of its busi-
ness every year.
Due to the high commission involved in RUNs &RAPs, underwriting teams prioritize
them over RAINs and RERUNs, by dividing them in two priority classes. RERUNs are not
released to the distribution clerk until the last day before due date. All of this and the fact
that prioritized RAP has a success rate of around 15% has increased the renewal loss rate
and the turn-around time (6 days as compared to 2 days for Golden Gate). Also, Manzana is
using 95% Standard Completion Time(SCT) for approximating turnaround time (TAT)
which is significantly higher than SCT. Hence key changes are neede to be done to address
the issues faced by the Fruitvale branch.

Concerns at Fruitvale branch and Reasons

 Turnaround Time
Turn-Around time has increased in the second quarter of 1991 to 6.2 days while the competitor
Golden Gate is preparing to process the requests with 1day TAT.
Reason-
i. Unbalanced Capacity Utilisation
ii. Tracking of policy time projection by 95% SCT where they should be using
mean time for each type of policy.

 Capacity Utilization
1. After calculating the Capacity utilisation at all the operating steps, it was found that Distribution
and underwriting teams are utilized well whereas Rating team is not utilized to the fullest. (An-
nexure- )
2. Within Underwriting, the capacity utilisation is varying widely across all the teams (Annexure-
)

Process Capacity Utilisation

Distribution 89.2%
Underwriting
Team 1 97%
Team 2 78%
Team 3 70%
Rating 76.16%
Policy Writing 63..57%

Reason-
Division by geographies and uniform distribution of teams has caused the capacity under-uti-
lization in some stages and unequal utilization in underwriting.

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  Backlog and Decrease in Profitability
New policies are prioritised over the renewals i.e., RUNS and RAPS are prioritised over
RERUN which has caused increasing Backlog. This in-turn resulted in late processing and
renewal losses.

Calculation for 2nd Quarter of 1991

Type New Policies Renewals
Avg Gross Premium / policy 6724 6205

Commission % 25% => 1681 7% => 434

Gross Margin 75% 93%

Also processing time is less for renewals-

New Policies Renewals
Distribution 68.5 28
Underwriting 43.6 18.7
Rating 75.5 75.5
Policy Writing 71 50.1

As the net contribution is more for Renewals and processing time is less, increase in the
backlog for RERUNS and late processing has given rise to decrease in profitability.

 Quality of Policies
Because of increased turnaround time over the industry competitors, quality of policies has
a high chance of falling. High risk policies may be diverted to Manzana which poses risk
of high insurance loss paid and under-assessment of risk by policy writers for policy con-
version.

1989(Quarter 1) 1991 (Quarter 2) % Increase

Gross Premium 8188 8901 8

Insured Losses 4176 6453 54.5
Bonus Expenses 80 97 21.25

Reason-
As the plus program is giving bonus on new policies it gave rise to the risk of undermining
of high risk policies by Rating team to get the policies converted.
PROCESS AND CAPACITY ANLYSIS:

The process flow usually starts with a Distribution clerk. He / she receives the process request
from an agent and logs in the request before passing it on to the underwriting team based on the

4
geographic origin of the request. The underwriting team evaluates, selects, classifies and prices
the process. The rating team calculates policy premiums. The policy writing team did the typing
and distribution of the policies that have been completed.
Manzana receives 4 kinds of process requests. They are: Request for Underwriting (RUN), Re-
quest for Price (RAP), Request for Additional Insurance (RAIN), Request for renewal (RERUN).
Each type of request required a different processing time.
The processing of requests based on company policy was to use FIFO on the requsts as and
when they arrived. However due to higher profitability RUNS and RAPS were given higher pri-
ority and were FIFO processed before RAINS and RERUNS.
To identify the bottleneck process, we must calculate the time taken per member of a particular
process. There are 4 members in distribution, 3 in underwriting, 8 in rating and 5 in policy writing.
This is done by taking the mean policy processing time as a basis from exhibit 4.

DISTRIBU- UNDER- RATING POLICY

TION WRITING WRITING
RUN 17.12 14.54 9.43 14.2
RAP 12.5 12.67 8.08 0.0
RAIN 10.875 7.53 8.18 10.8
RERUN 7 6.2 9.44 10.02

Thus, the bottlenecks for various types of requests are as follows.

Type BOTTLENECK
RUN Distribution
RAP Underwriting
RAIN Distribution
RERUN Policy writing

In Annexure-4, capacity utilisations of every operating step is calculated and it is found that
underwriting team 1 has the maximum utilisation.

Recommendation
1. FIFO with priority for pool of RUN and RAP over RERUN
RUN is preferred over RERUNS for the reason of getting new customers and high commission.
If we are prioritizing RUNS over RERUNS, backlog of RERUNS is increasing and renewal losses
are incurred. Instead of implementing strict FIFO, we can prioritise the pool of new policies over
RERUNS and increase the buffer of RERUNS processing. Instead of release before 1 day from
distributors, RERUNS can be released 4 days/1 weeks prior to the due date, to prevent late pro-
cessing.
(Or)
Implement Batch-Wise Allocation of Policies

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 As the current backlog has RERUN, to reduce the backlog and in future maintain less backlog,
all the policies should be made in to batch. Each batch consists of a combination of RUN, RAP,
RAIN and RERUN. Track the performance of the teams by the number of batches of policies
processed. Batches should be compiled in such a way that distribution of net worth of policies is
same in each batch.
2. Pooling among geographies for UWT
Pooling among departments: Currently, rating and policy writing teams have the extra capacity in
handling the requests. By removing one member from each team, these two teams still do not
become bottlenecks in the process. Hence, one member from each of these teams can be utilized
in distribution and policy writing teams to improve the total TAT.
Pooling among territories: Different territories have different capacity utilization (Exhibit 7). In
territory 1, underwriting is the bottle neck, whereas at other places – distribution is. Hence, em-
ployees can be pooled to improve overall efficiency and balance the workload.

1.1 Capacity strategies

 Cleaning up the current backlog: We see that no set of teams and workers is 100% utilized
in the current demand scenario. We should use this opportunity to use the free time each
day for clearing the backlogs and inch towards an efficient system. Once at lean level – we
can make use of all the other strategies suggested to maintain maximum efficiency.

 Increase capacity of Distribution Clerks: By employing one more person in distribution,

the bottleneck is removed and it becomes an efficient step in the process. By increasing the
capacity of distribution by one unit, bottleneck now shifts to the underwriting step. Cur-
rently we need ~13 days to clear the backlogs in distribution. Whereas with one more mem-
ber in the team, the backlogs can be cleared much quickly.

 We are not suggesting switching members from one type of task to another because each
task requires specific skills and are not generic

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2 Appendices
2.1 Process Flow

Underwriting
team 1

14.6

Originating Distribution Underwriting Rating Policy Writing

Agent (4 Clerks) team 1 (8 Raters) (5 Writers)

39 13.2 26.1

Underwriting
team 1
11.2

From exhibit 7 of the case, we can get information about the number of request processed at the
Fruitvale branch in the last 6 months. Also, as per the case, there are 20 working days in a
month.
So total request per day is given by (RUNs+RAPs+RAINs+RERUNs)/120 which is
(350+1798+451+2081) / (120) amounting to 39 requests per day.
Out of the 5 stations depicted in the above process flow diagram, there is distribution of work
only in the underwriting and policy writing stations. In the remaining 3 stations, average number
of requests processed per day will be 39. In the policy writing station, those RAPs which are
not converted to RUNs will not be processed. That will be (1798-274)/120 amounting to 12.7
requests /day. So, the average number of requests processed in the policy writing desk will be
(39-12.7) amounting to 26.1 days
However, since the requests are directed by distribution clerk to Underwriting team based on
the geographical origin of the request, there is a non-uniform flow of requests amongst the
underwriting teams.
From exhibit 7, total requests for these 3 teams for 6 months are 1755, 1578, 1347 amounting
to 14.625,13.15 and 11.225 requests/ day respectively in these three territories

2.2 Revised Turn Around time

Backlog at each operating step as given in exhibit 3

RUN RAP RAIN RERUN

DC 1 3 1 11
UW 3 7 6 36
RT 1 2 1 7
PW 0 0 1 2

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 Throughput days at each operating step
DC (4) 1 3 1 11
Mean/ request 68.5 50 43.5 28
Total time 68.5 150 43.5 308
Total time/DC/product 17.125 37.5 10.875 77
142.5 0.32 days
UW (3) 4 10 7 47
Mean/ request 43.6 38 22.6 18.7
Total time 174.4 380 158.2 878.9
Total time/DC/product 58.13333 126.6667 52.73333 292.9667
530.5 1.18 days
RT(8) 5 12 8 54
Mean/ request 75.5 64.7 65.5 75.5
Total time 377.5 776.4 524 4077
Total time/DC/product 47.1875 97.05 65.5 509.625
719.3625 1.60 days
PW(5) 5 12 9 56
71 0 54 50.1
355 0 486 2805.6
71 0 97.2 561.12
729.32 1.62 days
Total turnaround time for the complete process is 4.72 days

2.3 Capacity Utilisation:

capacity utilisation is estimated by calculating the total number of requests received per day across
each product category to begin with.
Total requests received per day = (350+1798+451+2081)/(6*20)= 39 (from exhibit 7). Category
wise requests are calculated on prorate basis.

Type Requests received per day

RUN 2.96
RAP 15.22
RAIN 3.82
RERUN 17
39
TOTAL

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 The mean time for processing are as given in exhibit 6.
Policy writ-
DC Underwriting Rating ing Total
RUNS 68.5 43.6 75.5 71 258.6
RAPS 50 38 64.7 NA 152.7
RAINS 43.5 22.6 65.5 54 185.6
RERUNS 28 18.7 75.5 50.1 172.3

Thus, let us calculate the time taken for the number of each type of requests per day, which will
help us in calculating the capacity utilisation.

Type Num- Underwrit- Policy writ-

ber Dc ing Rating ing
RUNS 2.96 202.76 129.056 223.48 210.16
RAPS 15.22 761 578.36 984.734 162.09
RAINS 3.82 166.17 86.332 250.21 206.28
RERUNS 17 476 317.9 1283.5 851.7
Total time for 1605.93 1111.65 2741.92 1268.14
processing
Total available 1800 1350 3600 2250
time for pro-
cessing
Capacity utilisa- 89.2% 82.34% 76.16% 63.57%
tion

Rating and policy writing department are underutilised. Whereas, Underwriting and distribution
processes are being fairly utilized. Further, capacity utilisation of three underwriting teams indi-
vidually are calculated.

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Capacity utilisation of the 3 individual underwriting teams:

TYPE RUNS RAPS RAINS RERUNS

43.6 38 22.6 18.7

Territory 1 162 761 196 636
7063.2 28918 4429.6 11893.2
Processing time 52304
Available time 54000
Capacity utilisa- 97%
tion
Territory 2 100 513 125 840
4360 19494 2825 15708
Processing time 42387
Available time 54000
Capacity utilisa- 78%
tion
Territory 3 88 524 130 605
3836.8 19912 2938 11313.5
Processing time 38000.3
Available time 54000
Capacity utilisa- 70%
tion

Thus we can observe that the territory 1 team has maximum capacity utilisation whereas the terri-
tory 2 and 3 teams are underutilised.

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