Manzana Insurance: Help 1:

The Manzana Case Manzana Insurance- Fruitvale Branch Case Study

The Manzana Case Manzana InsuranceFruitvale Branch case study Executive Summary The Fruitvale Branch of Manzana is facing its bitter reality of declining profitability and potential loss of market shares to its main competitorGolden Gates due to its rising renewal loss rate and expanding turnaround time. In our analysis, we dig into several issues that were possible causes for the problem and tend to provide readers with feasible solutions that may resolve the issues on hand. Examples of such issues as we have identified in the case include, but not limited to, various departments deviation from FIFO system, potential capacity and staffing problems, uneven workload among three underwriting teams, outdated SCT for computing TAT, and inaccurate computation process for TAT. In order to lower the number of late renewals and reduce turnaround time, our recommendations include, but not limited to, the following: 1) Making it mandatory for all departments to comply with the FIFO system and implementing monitoring plans for overseeing the entire underwriting process to ensure FIFO is strictly implemented; 2) Revising the incentive scheme for Fruitvale Branch employees to further assist with the successful implementation of FIFO system; 3) Expanding the number of days RERUNs are released to DCs prior to the due dates to ensure that there is sufficient time for relevant departments to complete the requests on or before due dates; 4)Revising and updating the SCT used for deriving TAT; 5) Modifying the computation process for deriving TAT as the process being used is inaccurate and provides an exaggerated figure for TAT. Current Situation

The main objective of the Fruitvale Branch should be to improve its financial performance in terms of revenues and sales growth in comparison with previous years and to retain and gain market shares from its main competitor-Golden Gates. However, all these objectives may turn into non-sense if the branch cannot solve its existing problems throughout its operations. One of the smaller objectives the Fruitvale Branch should set out and convey to its employees is the importance to fully comply with and not deviate from the FIFO system. By setting out and effectively adhere to this smaller objective; the main objective of the Fruitvale Branch can be achieved. In order to identify problems existing at the Branch, we need to know how the various financial data is determined and computed. In particular, we are interested in the process and data from which the turnaround time is derived along with other financial data in determining branchs capacity and staffing condition. Although we are given the SCT data in computing the TAT, this data may be outdated based on our assumption that the SCT for each processing step was completed before the introduction of desk computers and other technological changes, and thus inappropriate to be used in determining the turnaround time. In this case, we can conclude that the turnaround time using the outdated SCT is an inflated figure as the process time has been decreased significantly with the introduction of technological computerization. As the competition in the insurance industry intensifies, the Manzana has gradually lost control over insurance rates and commission schedules as they have become identical among competitors. In order to gain a competitive edge, the Manzana should fully utilize its control over turnaround time and consequently improves its service performance and ultimately, its financial position. Also, Manzana should focus on its control over the compliance with the FIFO system by its various departments. In considering this case on hand, we know that the number of server is multiple in all types of services, and we assume that arrivals and services are pure random, with exponential interarrival and service times. In this case, each request is lined up in a single queue until the next available server processes it. It meets the qualification of M/M/C queue, where the first letter M labels random arrivals, the second letter M labels random services, and the last letter C indicates the number of servers (C denotes multiple). Therefore we are going to use formulas

relevant M/M/C in our analysis (Formula Sheet is attached as Appendix 5). Additionally, coefficient of variation formula is included because it is used to determine the likelihood of variability of processing time, and we have to do it to analyze the capacity. Major Issues at the Fruitvale Branch The issues needing the most attentions from the Fruitvale Branch are its sharp increased renewal loss rate and its inability to keep its turnaround time in line with other competitors such as Golden Gate. According to the case data, the renewal loss rate at the Fruitvale Branch had increased dramatically from 33% to 47% in the previous year. Since the renewal losses represented a significant loss of business and an overall reduction in the number of policies in force, improving this area is both urgent and essential. The second issue on hand is the turnaround time. The turnaround time in terms of the number of days at the Fruitvale Branch is far greater than that at the Golden Gate, its main competitor, and this gap is still expanding. As the competition in the insurance industry intensifies, competing for clients and better financial position stems from the ability to provide with better services of which the turnaround time is one such measure given the fact that insurance rates and commission schedules had become nearly identical among competitors. Analysis of Possible Causes To figure out how Manzana Insurance inside operation works, we should identify the job flow sequence first. All requests will go to the Distribution Department first, and then the distribution clerks will decide which underwriting team will handle each request. The Rating Department will work with all the requests that are passed from the three underwriting teams. Unless the request is a RAP, the Policy Writing Department will finish the last step of writing an insurance policy. We use the data of the first six months of 1991 from Exhibit 6 and Exhibit 7 to generate the mean inter-arrival time to each server group. By using the Littles Law (L=W), we can get the average inter-arrival rate () of each server group by dividing the its total number of requests (L) by the expected waiting time of a request (W). Once we have the for each server group, we can know their respective mean inter-arrival time, which is known as 1/.

The mean inter-arrival time for each server group is shown in the table below. Detailed calculation can be found in Appendix 1. Server Groups | Average Inter-arrival Rate per Hour (=L/W) | Mean Inter-arrival Time per Hour (1/) | Distribution Department | 5.20 | 0.1923 | UW Team 1 | 1.95 | 0.5128 | UW Team 2 | 1.75 | 0.5703 | UW Team 3 | 1.50 | 0.6682 | Rating Department | 5.20 | 0.1923 | Policy Writing Department | 3.51 | 0.2852 | A few points have to be notified. Since all requests will go to the Distribution Department first, when we calculate this server groups interarrival rate, we should consider all the incoming requests, which include both processed and late requests. Then all the processed requests will be allocated to different underwriting teams. This means that, for the following three steps, those late requests will not be passed on. Moreover, we should keep in mind that the number of RAPs for the Policy Writing Department is zero. From the resulted data, we can see that the mean inter-arrival time to the Distribution Department is 0.1923 hour, which means the average time between each arrival of requests is 0.1923 hour. The same intuition also applies to the other departments; such as the average time between each arrival of requests to the Policy Writing Department is 0.2852 hour. The servers utilization rate can indicate how well the server uses its finite capacity. Normally for a stable system, the output is smaller than capacity. In our case, the servers utilization rate is the average number of requests in service per hour. We can use the formula = /(c*) to calculate the utilization rate of each server group. Here, c refers to the number of servers in each server group, and is the department specific service rate. | Utilization Rate per Hour ( = /(c*)) | Capacity per Hour |

Distribution Department | 0.89 | 5.85 | UW Team 1 | 0.92 | 2.11 | UW Team 2 | 0.83 | 2.11 | UW Team 3 | 0.71 | 2.11 | Rating Department | 0.76 | 6.82 | Policy Writing Department | 0.64 | 5.47 | Utilization Rate is a measure of steady state. If the rate is less than one, it means that all incoming request can be complete within capacity. Otherwise the capacity is exceeded. The detailed calculation of TAT flow time involves using utilization rates. The flow time is the total expected time of a request in a queue, including its waiting time and its processing time. By using various formulas mentioned earlier in this report, the expected time spend on a request in each department can be calculated by computing the equation W = Wq +1/. Taking the average of the expected time spent of the 3 underwriting teams, and summing up the expected time on each department, we get the total flow time equal to 5.4 days (Detailed Calculation in Appendix 3), which is lower than what we had earlier, but still a lot higher than the competitors turnaround time. Identifying Possible Causes i) Deviation from the Current FIFO System due to Prioritization Currently the company is operating in FIFO, first-in-first-out system, at each stage of the underwriting process, meaning that all requests are processed in the order according to their arrival time. However, RUNs and RAPs are given priority over the other 2 policy requests because they provide with a greater profit margin, and employees salary bonuses are linked to the number of RUNs they have processed. As a result, the number of late RERUNs has soared significantly, leading to a greater renewal loss rate. ii) The Problematic Incentive Scheme The incentive scheme implemented by the Fruitvale Branch contradicts with their companys policy to use a first-in-first-out system. Based on

the FIFO system, all requests were supposed to be processed in the order in which they arrived. Receiving an annual salary plus an incentive payment for each new policy written above their established quota is the compensation program for all Fruitvales underwriters and branch managers. This incentive program lures employees away from sticking to its FIFO system in the sense that employees tend to process new policies first regardless of their arrival time since writing new policies are made more lucrative than processing other policies. iii) Capacity and Understaffed or Overstaffed Problem According to the capacity for different types of services given in the rough calculation, the branch is currently overstaffed since none of the services exceeds the capacity. This means that we reach the steady state: the output does not exceed input. However, according to the detailed calculation in Appendix 2, the utilization rates of most of the services are close to one. The risk of being close to 100% is to be unable to handle possible variability of the number of incoming requests. The rates we have calculated are based on historical average information, and we have assumed that the arrivals are pure random, and so are the services. Therefore, it is possible to have an unexpected long processing time on a number of requests, which leads to a utilization rate exceed 100%. We are definitely understaffed if that situation occurs. The problem is more severe in Distribution Services and Underwriting Team #1 and #2. If any requests take longer time than usual, delays and late requests are likely to happen. iv) Inaccurate Computation Process for TAT The turnaround time as calculated in Exhibit 3 is misleading as the computation process from which the TAT is derived in inaccuracy. First of all, it assumes that other processing activities were halted until the previous activities were finished. To illustrate, according to the Exhibit 3, the underwriting teams begin their processing activities after their downstream distribution department has completed their work, and rating department only process their work after their down-stream underwriting team has finished their activities, and so on. This assumption is problematic because it distorts the true processing time required for each activity, which, in turn, results in the distortion of TAT.

Moreover, the current turnaround time is computed based on the SCT completed in 1986, from which the standard completion times sufficient to handle 95% of all requests bad been assigned to each processing step. We think this SCT was misleading because it was completed before the development and introduction of desktop computers in the policy rating and writing department. As we know from the case, the time required to process an average policy in these departments had decreased significantly during the late 1980s and early 1990s. As a result, the SCT that was still being used in computing TAT is outdated, and it overstated the true standard processing time required to compute TAT. In addition, we think it might be misleading to use the 95% SCT instead of using 100% SCT because the remaining 5% of requests may require more time to complete, and the exclusion of this 5% would lead to the distortion of TAT from its true value. v) Problems with the Rating and Policy Writing Department Based on the information provided in the case, the average time required per request is 70 minutes in the Rating Department, and the average time required per request is 55 minutes for the Policy Writing Department. These two numbers combined represents a significant portion of the total processing time. Because we do not know if these two numbers were updated after the introduction of desk computers in these two processing stages, we have to make assumptions corresponding to the situation. First of all, if we assume this average time required is up-to-date, we can conclude that the Fruitvale branch hasnt utilized its technological development efficiently to reduce its processing time required in these two stages, and only when they can fully utilize their technological developments, will they be able to compete with their main competitor-Golden Gate. If, however, the numbers were not up-to-date, then they will have to update the information to make the them more relevant in computing other important data. Solutions and Recommendations In order to make corrections in the two main issues addressed above, we recommend that the Fruitvale Branch should take the following actions.

First of all, the first-in-first-out system must be strictly implemented. That is, all departments must fully comply with the FIFO system regardless of the profit margin generated from each of the insurance policy. The Fruitvale Branch should set out strict rules and monitoring plans and deliver this message clearly to every employee that is in control of his or her department, and any violation of the FIFO system should be warned and taken corrective actions to in accordance to its rules and monitoring plans. In addition, the computer-generated RERUNs should be released to DCs several days before the due date to ensure the rated renewal policies can reach independent agents before due date. Also, we notice that the FIFO system cannot be fully complied until the branchs current incentive scheme is modified. As we have discussed in the preceding paragraph of the analysis, the current payment incentive scheme rewards only new policies written instead of rewarding all policies written regardless of their profit margin. As it is a clear contradiction to the FIFO system, the incentive scheme should be modified so that not only the new policies are rewarded, but other policies are also rewarded. Moreover, even though none of the utilization rates exceed 100% according to our calculation, distribution service and underwriting teams #1 and 2 have comparably high utilization rates close to it, signaling a lack of flexibility to the variability of request arrivals. However, the problem is not as terrible as it looks. CV denotes for coefficient of variation of request processing time, and it indicates a high variability if CV exceeds 1. Currently we have CV below 1 for all types of services at all departments (See Appendix 4). Most of the departments have low CVs, which means that variation in processing time is unlikely to happen, and only Underwriting Department has a CV of 0.79, which signals moderate variability. Therefore we may be understaffed for that position, and perhaps more employees for underwriting are desirable. On the other hand, the utilization rates for other service are not high, and their CVs are low in value: they are not understaffed. In addition, Manzana and the Fruitvale Branch should focus on utilizing its technological developments in the Rating and Policy Writing Departments to reduce its processing time, or they should update and revise their processing time data in the two departments.

Lastly, the computation process for deriving TAT should be revised based on the updated SCT.

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