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 wri ting.
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 Distribution
Underwriting
Rating
Policy 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
hrs/day)
30.00
22.50
60.00
37.50
Capacity Utilization
88.9%
88.9%
77.78%
73.33%
Capacity available (hrs @ 7.5
Exhibit 3- Turnaround Time
Operating Steps
RUNs
RAPs
1
3
1
11
Mean Time
68.5
50
43.5
28
Total time taken
68.5
150
43.5
308
4
10
7
47
Mean Time
43.6
38
22.6
18.7
Total time taken
174. 4
380
158.2
878.9
5
12
8
54
75.5
64.7
65.5
75.5
377.
776.
Total time taken
5
4
524
4077
Number of requests
5
0
9
56
71
NA
54
50.1
355
NA
486
2805.6
Number of requests
Distribution
Number of requests
Underwriting
Number of requests Mean Time
Rating
Mean Time Policy Writing
Total time taken
RAINs
RERUNs
Workers/
Total Throughput
Teams
time(Days)
4
0.32
3
1.18
8
1.60
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
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
UT
DC: Distribution Clerk UT: Underwriting Team R: Raters PW: policy Writers
Exhibit 6: Expected profit from Renewal policies
1990 1st qtr Renewal loss Renewal premium lost
2nd qtr
1991
3rd qtr
4th qtr
1st qtr
2nd qtr
400
414
436
467
429
497
2252
2331
2455
2629
2415
2798
169
175
184
197
181
210
2083
2156
2271
2432
2234
2588
Commission Expenses at 15% Expected Profit
* Expected profit and commission expense calculated considering 50% additional conversion of renewal premium lost
