MANZANA INSURANCE

Operations Management Case Study Submitted to Prof Jishnu hazra By VIVEK KUMAR BHAGBOLE ASHISH KUMAR DANDALE GAURAV KUMAR PRAVEEN P ABRAHAM SHWETA SRIVASTAVA 1011144 1111093 1111106 1111132 1111145

Operations Management

MANZANA INSURANCE

Introduction
Manzana Insurance was founded in Sebastopol, California in 1902. It originally specialized in orchard and farm insurance. It deals in property, flood and commercial property insurances. Manzana operated through a network of relatively autonomous branch offices in 3 states of the United States of America California, Oregon, and Washington. Each branch was treated as a separate profit and loss center. Its sales force comprised about 2,000 independent agents who represented Manzana and other competing insurers. The Fruitvale branch of companys performance started taking a hit in early 1970s. This was due to emergence of a nimble competitor, Goldengate, and high interest rate regime. The case is concerned with the performance of a branch, by name Fruitvale, which has been consistently losing business to its archrival Goldengate in its territory. The Fruitvale branch performed badly on various measures like total number of requests for new policies, endorsements, and renewals processed, very high turnaround time resulting in late renewals and increased renewal loss rate.

Insurance Industry Sector

Personal

Commercial

Property

Liability

property

Liability

Problem Overview The Fruitvale branch of Manzana handled property underwriting i.e., issuing new insurance policies, quotes, endorsements or renewals. It had come under the scanner due to declining branch profitability. 2|Page

Operations Management MANZANA INSURANCE It was suffering from poor turnaround time of 6 days and poor percentage late figure. In comparison, Golden Gate consumed a turnaround time of 2 days only. The key problem faced by the Fruitvale Branch of Manzana Insurance is declining market share and profits, which may be attributed to their being non-competitive in following parameters: High turnaround time (TAT), despite being overstaffed in rating and policy writing. The turnaround time of Manzana as compared to Golden Gate is an alarming extra 5 days. The backlog of policies had increased since 1989, and the number of new policies and endorsements appeared to be stagnating, whereas Golden Gate reported moderate growth rates. All time high number of late renewals, causing a dramatic rise in the renewal loss rate, which was unattractive particularly for agents. There are systemic issues with the process for handling requests that have led to this deterioration, including the incorrect prioritization of requests and the uneven distribution of workload amongst its three underwriting teams. Other problems in the Fruitvale branch include ineffective incentive systems, increase in shift to newer policies, bottlenecks in operation, possible idle capacity in the Rating and Policy Writing teams, etc.

Operations - Policy Processing Manzana processes 4 types of policies: RUNS (Request for Underwriting) The Process of writing a new commercial policy began when a distribution clerk received a written request for Underwriting from an agent. The Clerk after performing all the required functions passes it to the Underwriting team to evaluate, select, classify and price it. From there it is passed on to the policy writing department where the actual typing, assembly and distribution takes place. RERUNS (Policy renewal) It dealt with annual revaluation and if necessary re-pricing of risks insured by the commercial policy. The processing was similar to that for RUNS with the difference that renewals are generated by the system. The renewal was done on the anniversary of the policy date. RAIN (Policy endorsement) If there was any physical change in the property being insured, a policy endorsement was needed to amend the terms of the existing policy. The processing of a policy endorsement was called RAIN. 3|Page

Operations Management RAP (Price Quotes)

MANZANA INSURANCE

The processing was similar to that for RUN but the difference was that after the rating for the policy was done it was sent back to the distribution clerk, who was responsible for sending a price quote to the originating agent. If it was accepted the quote was sent directly to the policy writing department. The policies are dealt with on a First In First Out (FIFO) basis while the underwriting team prioritizes them in the order of RUNs, RAPs, RAINs and then RERUNs.

Process Flow Analysis

All requests start with the distribution clerk distributing the request for insurance policy (RUN, RAIN or RAP) received from an agent or computer (RERUN) to the respective underwriting team. Distribution also analyses and disseminated published data, researches competitors rates and oversees rating. The underwriting team evaluates, selects, classifies and prices the request and then it passes on to the rating department where the premiums are calculated. The policy writing departments does the actual typing, assembly and distribution of completed policies. In case of RAP, the quote was transferred to the originating agent from the rating department and once accepted, went straight to the policy writers. Only around 15% of all quotes translated into policies. The process of writing a new commercial policy or renewing an existing one is depicted below Number of requests in each department per day 14.625 Underwriting Team 1 1 underwriter, 1 technical assistant 26.3 39 Originating Agent 39 Distribution 4 clerks
13.15

15

Underwriting Team 2 1 underwriter, 1 technical assistant Underwriting Team 3 1 underwriter,

Rating 8 Raters

Policy writing 5 writers

11.225 1 technical assistant Total number of requests received by the Fruitvale branch: 39 per day

24

From Exhibit 7, one can identify the number of requests received by each team using

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Operations Management MANZANA INSURANCE (Number of RUNS + Number of RAPS + Number of RAINs + Number of RERUNs )/ (20 days *6) Team 1: (162+761+196+636)/120 = 14.625 requests per day Similarly for Team 2 and Team 3 it is 13.15 requests per day and 11.225 requests per day From Exhibit 7, it is given that number of RAPs is 1798 for 6 months in 1991 or (1798/120) = 15 requests per day. Out of these 15 RAPs request only 15% are converted for policy writing, i.e 15*.15 = 2.3 requests per day. 24 requests (39-15) are directly send for policy writing. The policy writing department therefore actually receives (2.3 + 24) = 26.3 requests per day. Under the present organisation structure there are three Underwriting teams, with each team assigned to a particular geographical territory. We have calculated the capacity utilization for each territory as well as each step. One important point to be seen is that they have made use of the 95% Standard Completion Time for calculating turnaround time. In Appendix-1 we have calculated the capacity utilization using both the standard completion time and mean time. From Appendix-1 we can see that using 95% SCT, the capacity utilisation is 127%, which is not possible. This shows that the usage of the 95% SCT inflates the figures and shows a larger turnaround time. A more practical measure will be the use of Mean processing time rather than 95% SCT, and hence we are using mean processing time for all further calculations. Also, as is evident from Appendix-1, the capacity utilization is only 77.35%. Capacity utilization of each department in the process flow Distribution 41.0 min / req Underwriting 28.4 min / req Rating 70.4 min / req Policy writing 54.8 min / req

Weighted average processing time per request t Total capacity = 1/t * 60 * capacity Total request per day Capacity utilization = total request per day / total capacity

1/41 * 60 * 4 clerks* 7.5 days = 43.9 requests 39 89%

1/28.3 * 60 * 3 * 7.5 = 47.54 requests 39 82%

1/ 70.4 * 60 * 8 * 7.5 = 51.14 requests 39 76%

1/54.8 * 60 * 5 * 7.5 = 41.06 requests 26.3 64%

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Operations Management MANZANA INSURANCE Capacity utilization of underwriting teams located in three different geographies. UnderWriting Weighted average processing time per request t Total capacity = 1/t * 60 * capacity Total request per day Capacity utilization = total request per day / total capacity Territory1 28.4 1/28.4 * 60 * 7.5 = 15.84 requests 14.625 92.3% Territory2 28.4 1/28.4 * 60 * 7.5 = 15.84 requests 13.15 83% Territory3 28.4 1/28.4 * 60 * 7.5 = 15.85 requests 11.225 70.8%

Problem Identification By Littles Law, we calculated the average lead time using the inventory and the average flow rate which comes out to be 2.1 days (82 policies/ 39 policies per day). From the capacity utilization calculation done we identified two major bottlenecks 1. The Underwriting team is the bottle neck for RUNs, RAPs and RERUNs, while distribution centre is the bottleneck for RAINs. 95% SCT per request No: Process people Distribution 4 Capacity Underwriting 3 Capacity Rating 8 Capacity Policy Writing 5 Capacity RUNS RAPs RAINs RERUNs 128.10 107.80 68.10 43.20 32.03 26.95 17.03 10.80 107.20 87.50 49.40 62.80 35.73 29.17 16.47 20.93 112.30 88.70 89.40 92.20 14.04 11.09 11.18 11.53 89.30 17.86 NA NA 72.10 14.42 67.00 13.40

2. Looking at the overall figure, the Policy Writing department is the bottleneck.

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Operations Management Recommendations

MANZANA INSURANCE

1. Pooling of Underwriting teams from different territories The current scenario has the market for Fruitvale branch divided into 3 territories, whose agents report to their corresponding underwriting team. Therefore, an agent is only assigned one particular underwriting team without any consideration of the work load of the underwriting team concerned. Consider the current scenario where underwriting team for territory 1 is working at a capacity utilization of 92.3% (given the 7.5 hour work day). In comparison, underwriting teams 2 and 3 are operating at a utilization of 83% and 70.8% respectively. Here, underwriting team 2 and 3 are underutilized, while the underwriting team 1 is close to full capacity. Thus team 1 would be over burdened, which reduces its efficiency and satisfaction of the employees. Therefore, it is proposed that the underwriting teams be pooled together so that any of the teams can handle any of the agents. In this way, the capacity utilization will be brought down to an average of 82.04%, which is well within an optimal range of 75-85% as expected in operations.
Underwriting - All 3 teams pooled Territory 1 Mean Processing time for the team Mean Processing Time (Mins) RUNs 350.00 43.60 14.53 RAPs 1798.00 38.00 12.67 RAINs 451.00 22.60 7.53 RERUNs 2081.00 18.70 6.23 44230.43 9.47 39 369.20 82.04% Total 4680.00

Total time (Mins) 5086.67 22774.67 3397.53 12971.57 Weighted Average Processing Time per request Total Requests per day Average Time utilized per day Capacity Utilization (total of 450 mins)

2. Redistribute Man power across departments from the underutilized teams to the highly stretched teams. The Rating Department currently employs 8 raters. If we shift one employee to the policy writing department, which is currently the bottleneck, the bottleneck shifts to the distribution department (bottleneck 43.9 from 41.06). However, this is a short term solution as the

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Operations Management MANZANA INSURANCE bottleneck doesnt change a lot. For better performance it is essential that new employees are hired. Initial Manpower 4 3 8 5 Wt avg Processing time 41.00 28.40 70.40 54.80 Actual Capacity 43.90 47.54 51.14 41.06 After Reallocation 4 3 7 6 Capacity After the Employee Shifting 43.90 47.54 44.74 49.27

CAPACITY Distribution Clerks Underwriting - All 3 teams pooled Rating Policy Writing

APPENDIX Appendix 1: Capacity Utilization

Capacity Utilization Using Mean Time RT PW

DC

UT

Total mins 258.6 152.7 185.6 172.3

No. of No. of policies man in 1990 hours 678 3079 895 4987 2922.18 7836.055 2768.533 14321 27847.77

RUNs 68.5 RAPs 50 RAINs 43.5 RERUNs 28 Total number of man hours Max Total number of man hours Capacity utilization

43.6 38 22.6 18.7

75.5 64.7 65.5 75.5

71 0 54 50.1

36000 0.7735 Using 95% SCT RT

DC

UT

PW

Total mins 436.9 284 279 265.2

No. of No. of policies man in 1990 hours 678 3079 895 4987 4936.97 14573.93 4161.75 22042.54 45715.19

RUNs 128.1 RAPs 107.8 RAINs 68.1 RERUNs 43.2 Total number of man hours Capacity utilization

107.2 87.5 49.4 62.8

112.3 88.7 89.4 92.2

89.3 0 72.1 67

1.2699

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