Manzana Fruitvale Case study

Dana Jepson
Hussam Bachour
Ian Magruder
Bindi Desai
Rashmi Tenneti


Hussam Bachour, Dana Jepson, Ian Magruder, Bindi Desai and Rashmi Tenneti









Manzana Insurance Case study
Manzana Insurance founded in California, initially started out as a provider of Farm and Orchard
insurance and went on to become Californias second largest home and commercial property
insurer by 1953. However in the 1970s Golden Gate Casualty, a rival insurance company
launched by one of the biggest retailers in the world started a major marketing campaign and
succeeded in gaining some of Manzanas market share even though Manzana tried to fight
back.
In 1989, Manzana was acquired by a multinational financial services company, Banqu de Soleil.
The new management has been trying to regaining market share, reducing operational
expenses and tightening the underwriting standards. The company functions by setting up
autonomous branches and each branch is treated as a separate profit and loss center.
Fruitvale came under the scanner because of consistent complaints from agents who bring
clients and also losing almost 50% of the renewals even while having three underwriting teams
serving 76 agents. It has a high turnaround time and declining profits.
The Fruitvale has several problems:
- High turnaround time (TAT):
Despite being overstaffed in rating and policy writing. The Fruitvale branch has a much
higher turnaround time (6 days) compared to Golden Gate Casualty (2 days). The long
TAT could be contributed to the variability in process time due to policies variety.

- Decline in Profits, Late Renewals, Renewal Lost Rate and Prioritization of
workload

The Fruitvale branch has showed a continuous decline in profits over years.

Year Quarter 1 Quarter 2
1989 $ 1765 $ 1768
1990 $ 990 $ 786
1991 $ 174 (Loss) $ 121 (Loss)


Hussam Bachour, Dana Jepson, Ian Magruder, Bindi Desai and Rashmi Tenneti

The backlog of policies has increased since 1989, and the number of new policies and
endorsements appeared to be stagnating, whereas Golden Gate reported moderate
growth rates.

An all-time high number of late renewals, causing a dramatic rise in the renewal loss
rate; which was unattractive to agents. So far, the renewal late rate and renewal lost rate
are lagging the companys loss in profits.

1989 (1
st

quarter)
1989 (
2nd

quarter)
1990 (1
st

quarter)
1990 (
2nd

quarter)
1991 (1
st

quarter)
1991 (
2nd

quarter)
Reruns
Processed
1288 1283 1268 1253 1018 1063
Reruns
Late
205 191 225 248 425 468
Renewals
Lost
193 205 400 414 429 497
TAT 4.7 5.7 5.9 5.1 5.8 6.2
Renewals
Late Rate
15.9 % 14.9 % 17.74 19.8 % 41.7 % 44 %
Renewals
Lost Rate
14.9 % 16 % 31.5 % 33 % 42.1 % 46.75 %


The reason behind the late renewals is that the branch gives RUNs and RAPs priority
over RAINs and RERUNs because the new policies (RUNs and RAPs) are more
profitable. But the requests are processed on FIFO basis within each of these two
priority classes. In conclusion, the branch processes the RUNs first, RAPs second,
RAINs third while RERUNs take care of themselves. The branch used to process all the
requests on FIFO basis and the computerized systems at the branch used to
automatically generate a RERUN 30 days before anniversary date of the policy which
used to be the due date of the new RERUN policy. The new practice is the reason
behind late renewals, which seems to be the main problem of the branch.

- Distribution of Workload and Employee Retention:
Some underwriting teams are overworked with their schedules tightened, while some
teams are idle. In addition the company in general is having a challenge retaining its
most experienced employees.

- Low Rates of Accepted RAPs
We have very low conversion of RAPs and RUNs (Only 15%) as well as an
overemphasis on the new policies, leading to a loss of profitability.




Hussam Bachour, Dana Jepson, Ian Magruder, Bindi Desai and Rashmi Tenneti

- Competition from Golden Gate Casualty :
With a lower TAT GGC has already gained a lot of market share and now promises one
working day TAT on new policies , price quotes and policy endorsements and 10 %
premium if they delay over a day , if this service is delivered a lot of agents would deflect
from Manzana.

Comparing the 1991s 2
nd
quarter performance, the Manzana Fruitvales turnaround time
is 3 times that of the Golden Gate. Also the renewal lost rate in Fruitvale is 3.1 that of
Golden Gate. Golden gate has 15 % more new policies, 45.6 % more endorsements and
31.7% more renewals.





Industry Profitability
Profitability in the insurance industry is driven by three primary forces, which are sometimes at
odds. The first, however, is relatively uniform. Insurance companies must make good decisions
about the policies they issue and the assets they underwrite in order to remain profitable. They
need to take in more money than they pay out benefits to their policyholders, wages to their
employees, and commissions to their sales agents if they are to be in the black by at the end of
the year. This means that the risks must be carefully analyzed and weighed. For Manzana by
the early nineties this was mostly contingent on the outcomes of various computer models. It
was, further, roughly equivalent amongst the various companies operating in the region and
industry
The second are the rates offered by the company. While they must succeed in meeting the
initial criteria of covering the operating costs of the company and providing enough intake of
money to offset any payoffs, they must also compete in the market with a number of other
companies offering roughly equivalent levels of protection against risk. Market forces determine
the success here, as individuals select the level of coverage they want and then find the
cheapest policy that will grant them that protection. Large companies need to make less money
on any individual contract and are thus able to accept lower margins and offer lower rates.
Companies backed by other large sources of capitol also have the potential to accept lower
margins while retaining viable. As a result of a previous price war which established the
Hussam Bachour, Dana Jepson, Ian Magruder, Bindi Desai and Rashmi Tenneti

accepted market value, Manzana and their main competitors have reached a fairly neutral price
point .

Finally, there is the question of service. Modern insurance law obligates companies to be able to
reliably cover their risks within any reasonable standard. Their customers are offered roughly
the same insurance packages at roughly the same rates. Therefore the company that is easiest
to work with has the market advantage. Even today the State Farm companys advertising
focuses on their accessibility and quality of service rather than the specifics of their rates or
policies. This is also the issue which proximally generated the Manzana situation as
inefficiencies within the workplace generate the sort of tardiness and slow response time that
impact both agents and customers. The fact that insurance is sold by agents who represent
multiple underwriters means that the customer will usually to receive honest and accurate
information. If all insurance policies are similar in their particulars, the company that is easiest to
work with for the agent and for the customer will be recommended, and consequently be the
most profitable.

Process Analysis
According to Tom Jacobs estimates the Fruitvale Branch handles 40 policies a day (22
RUNS, RAINS AND RAPS & 17 RERUNS). He also calculated the process time in each
step; he based his calculation on a companywide study, completed in 1986. We have 4-
step process (Reviewing& Distributing, underwriting, Rating, and Policy Writing).

Workers Capacity Workload Implied
Utilization
DC 4 (4/40)*60=6 u/h 40/7.5=5.3 u/h 88.3%

UT 3 (3/30)*60=6 u/h 40/7.5= 5.3 u/h 88.3%
RT 8 (8/70)*60=6.9 u/h 40/7.5= 5.3 u/h 76.8 %

PW 5 (5/55)*60=5.5 u/h 30/7.5= 4 u/h 72.7 %


This process is demand constrained, and the bottle necks of this process are the
Distributing and Underwriting steps. We can easily see how rating and policy writing are
over staffed, which might lead us to think of a better line balancing in case we can have
a higher demand rate, or we need to eliminate the excess capacity in RT and PW so
that we dont have idle times. Since the process is demand constrained, implied
utilization equals to utilization. So if we need to calculate the average labor utilization we
take the average of implied utilization for all of the four steps.
Hussam Bachour, Dana Jepson, Ian Magruder, Bindi Desai and Rashmi Tenneti

Average labor utilization = (88.3 + 88.3 + 76.8 + 72.7)/4 = 81.5 %
As seen above, labor is underutilized and we have considerable idle time. Given the
recent demand rate eliminating the excess capacity in policy writing and rating could be
a wise decision to reduce cost and therefore increase profitability.
If the branch reduces TAT and the number of late renewals, then customer satisfaction
might increase and demand rate might also increase. If this is the case the
management should think of line balancing. According to the Tom Jacobs each new
policy takes 40 min, 30 min, 70 min, and 55 min in Distribution, Underwriting, Rating,
and Policy Writing respectively. With the assumption that the process is capacity
constrained we need to either assign less work on bottleneck or to add work force on
the bottleneck from other steps. Thats only incase demand increased and the process
became capacity constrained.
The Manzana is calculating turnaround time (TAT) using the following method



Hussam Bachour, Dana Jepson, Ian Magruder, Bindi Desai and Rashmi Tenneti



For example, in the week ending September 1991, the distribution step has one run in
process that is everyone of the 4 clerks has 0.25 RUN and based on the company wide
study completed in 1986 the standard completion time SCT (average time for
completing 95 % of the work) for RUNs in distribution step is 128.1 minutes. Therefore
the time needed by the 1 distribution clerk to finish the RUNs in process is 32 minutes.
The same calculation is made for RAPS, RAINS and RERUNSs in the distribution step
, and the same calculation is made for RUNs, RAPs, RAINs and RERUNs in process
in each of the other 3 steps. Then the figures are added to give a total turnaround time.
Assuming the TAT calculated on Monday 1
st
of September is 6 days then if a new
request is made on the 3
rd
of September, its given a due date of on 12
th
of September
Hussam Bachour, Dana Jepson, Ian Magruder, Bindi Desai and Rashmi Tenneti

i.e 6 working days later. This method is probably flawed and we are overestimating the
due date of a new policy. As a result customers and agents wont be motivated to
request new policy or to renew a policy. In our example the due date for the new policy
requested on the 3
rd
of September could be before the 12
th
of September if we did a
more precise calculation. Therefore, there is no reason to hold this method of
calculating TAT because it is negatively affecting customers expectations.
However the management decided to take variability of requests into account by
prioritizing workload according to profitability. So the branch processes policeis in the
following order : 1. RUNs 2. RAPs (RUNs and RAPs on FIFO basis.) 3. RAINs. For
RERUNs the computer system sends the request for renewal to the distribution step or
department 1 day before the expiry date of the policy. Then after rating the policy a fax
is sent to the agent. During the wait time the customer is covered under a contingent
policy. This way of handling variability caused a huge delays and loss in renewal
business.
The high variability in process time is due to variety of policies requested. The first thing
the branch could do is to consider pooling the underwriting process. Assigning each
underwriting team a geographical territory might not be the most efficient way of work.
Some territories might require more work than others and we can see that if we look at
the following exhibit.



Hussam Bachour, Dana Jepson, Ian Magruder, Bindi Desai and Rashmi Tenneti


Hussam Bachour, Dana Jepson, Ian Magruder, Bindi Desai and Rashmi Tenneti

The renewal lost rate differs from one territory to another.
According to analysis of the first two quarters of 1991,
The lost rate of renewals of territory 1 : 403/636 = 63.3 % ,
The lost rate of renewals of territory 2 : 227/840 = 27 % ,
The lost rate of renewals of territory 3 : 296/605 = 48.9 %
So territories not only differ in number of policies requested but also in policies variety
and renewals lost rate. By pooling the underwriting activity the process time ( T= Tq +
Activity time ) will decrease and we will have a lower TAT.
The pooled system and separate queue system will have the following figures.
Utilization = 83.3 %
Activity time = 40 + 30 + 70 + 55 = 195 minutes
Inter-arrival time = N/A
So, the two systems will have the same U, a, p, CV
a
and CV
p
.
However, wait time for the separate queue system is

But the average wait time in pool system is



The second equation gives us a shorter wait time for the pooled system. Therefore,
RUNs will have less time sitting on peoples desks.



2 2
Average in queue Activity Time
1 2
a p
q
CV CV
utilization
Time T
utilization
| | +
| |
= = - -
|
|
|

\ .
\ .
2 2
2( 1) 1
time
Time in queue
1 2
m
a p
q
CV CV
Activity utilization
T
m utilization
+
| | | | +
| |
= = - -
| |
|
| |

\ .
\ . \ .
Hussam Bachour, Dana Jepson, Ian Magruder, Bindi Desai and Rashmi Tenneti

Another way to handle variability and lower wait time is to reduce the arrival variability
by giving customer incentives to submit their requests in less busy times. Also
standardization can be helpful in reducing variability in process time. The branch can
have a standardized process for each of RUNs, RAPs, RAINs and RERUNs.
In conclusion, when John Lombard is back in the office, these key issues need to be made
crystal clear to him. Fortunately, the new plan of action will get the Fruitvale on track regarding
productivity and towards becoming a market competitor and leader.

First, Manzana needs to modify their strategy in terms of the order in which they review policies.
By implementing a first come, first serve prioritization plan, we will no longer be pushing
renewals to the back of the line and therefore greatly cutting the number of late or lost renewals
we currently have. There wont be lost time due to employees rifling through policies in order to
find the new ones. Also, by going back to a true FIFO system, rather than our current modified
version, we will make the structure much more efficient. Focusing on RUNS first, RERUNS
second, and RAINs and RAPs (which only produce 15% as it is) last, we can achieve greater
efficiency.

RERUN policy needs to be changed to reduce the loss rate, particularly due to late policies. We
have no reason to wait so long to send policies to distribution and should implement a policy,
perhaps computer automated, that alerts staff 30 days before a policy expires and that they
need to be send AT LEAST a week before expiration. To promote this we can change our
current compensation plan, which leads employees to favor new policies over renewals. It has
not helped us thus far, yet has hurt the ability of employees to focus on renewals.

We have determined that our calculations for TAT are flawed, and therefore should adopt the
theoretical TAT that is 2-3 times less than the one we are currently quoting to our agents. We
can assume this new TAT to stop scaring off agents and understand that there is significant
variation in the input process for different types of requests. We require enough flexibility to
compromise between productivity and utilization in the system. Pushing us back into the
competitive limelight, we have to go after Golden Gate and their promise of turning RUNs in 1
day. That policy will likely harm their other policies. To counter, we can market the ability to
turn any policy in under 3 days time, or pay agents a penalty of 15%. We can be competitive,
retain our agents and their loyalty, and perhaps attract more people interested in Manzana over
Golden Gate. Moreover considering pooling the system and/or eliminating the excess capacity
is decisive in changing the whole performance of the branch.

When John Lombard is back in the office, I believe outlining the issues roots will help to
understand why Manzanas policies have negatively impacted each other to get to our current
situation. When he is on board with the proposed recommendations outlined for handling these
through this plan of action, we can launch Manzana back into the market as a profitable
competitor.