Manzana Insurance

The business problem:

Profits are down. Why?
Operating Profit Variances
2Q '89 2Q '91 Variances
Revenues $ % $ % $ %
Gross Premiums 8,218 100.0% 8,901 100.0% 683
Comm. + Exp. 933 11.4% 1,126 12.7% 193 1.3%
Net Rev. 7,285 88.6% 7,775 87.3% 490 -1.3%

Losses 4,273 52.0% 6,453 72.5% 2,180 20.5%

Gross Profit 3,012 36.7% 1,322 14.9% (1,690) -21.8%

Operating Expenses 1,244 15.1% 1,443 16.2% 199 1.1%

Operating Profit 1,768 21.5% (121) -1.4% (1,889) -22.9%

Gross Premium Breakdown

New Policies 1,523 18.5% 2,172 24.4% 649 5.9%
Endorsements 113 1.4% 133 1.5% 20 0.1%
Renewals 6582 80.1% 6598 74.1% 16 -6.0%

* Plus Program accounts for $97 of operating expense increase.

•Essentially flat revenues (but increasing % from new policies)

• Increased losses
• Increased commissions & expenses
• Increased operating expenses
Some hypotheses & observations
• Increased losses may be due to shift in mix to
newer policies
– Adverse selection: new policies may be initiated by
clients “anticipating a loss”
– To get PLUS bonus, the underwriters may be too lenient
in their assessment of risk.
– Due to poor service, Manzana may be getting only the
new policies that other insurers don’t want !

• Old policies have a higher contribution net of

commissions and expenses.
Policy Margins ('91) New Old
$ % $ %
Gross Premium 6,724 100% 6,205 100%
Commision 1,681 25% 434 7%
Gross Margin 5,043 75% 5,771 93%

• And old policies take less time to process!

Dist. UW Rating Writing

RUN 68.5 43.6 75.5 71.0
RERUN 28.0 18.7 75.5 50.1

• Conclusion: Old policies are the most profitable

and least costly to serve, so the high renewal loss
rate is driving Manzana’s profits down!
 Why the poor turnaround time?
Look at utilization: Basic input data

Arrival Rates RAPS convert.

('91 6 months) RUNS RAPS* RAINS RERUNS to RUNS
no. request 350 1798 451 2081 274
% 7.5% 38.4% 9.6% 44.5%
#days 120 120 120 120 120
rate (#/day) 2.92 14.98 3.76 17.34 2.28
rate(#/min) 0.00648 0.03330 0.00835 0.03854 0.00507

Mean Processing Times (min.)

RUNS RAPS RAINS RERUNS
Distribution Clerks 68.5 50.0 43.5 28.0
Underwriting 43.6 38.0 22.6 18.7
Raters 75.5 64.7 65.5 75.5
Policy Writers 71.0 na 54.0 50.1

Utilizations
Distribution RUNS RAPS RAINS RERUNS TOTAL
(4 clerks) 11.1% 41.6% 9.1% 27.0% 88.8%

Underwriting Teams RUNS RAPS RAINS RERUNS TOTAL

Territory 1
no. request 162 761 196 636
rate (#/min) 0.0030 0.0141 0.0036 0.0118
Utilization 13.1% 53.6% 8.2% 22.0% 96.9%
Territory 2
no. request 100 513 125 840
rate (#/min) 0.0019 0.0095 0.0023 0.0156
Utilization 8.1% 36.1% 5.2% 29.1% 78.5%
Territory 3
no. request 88 524 130 605
rate (#/min) 0.0016 0.0097 0.0024 0.0112
Utilization 7.1% 36.9% 5.4% 21.0% 70.4%

Rating TOTAL
(8 clerks) 6.1% 26.9% 6.8% 36.4% 76.3%

RAPS conv.
Policy Writing* RUNS to RUNS RAINS RERUNS TOTAL
(5 writers) 9.2% 7.2% 9.0% 38.6% 64.0%

* The 274 RAPS converted to RUNS used for Policy Writing utilization.
NOTES:
1) Based on Exhibit 7, '91 number of requests
2) Assumes 4 wks/month, 5 days/week, 7.5 hrs/day operation
3) If you assumed the same 28.4 min. weighted avg. processing time in each territory,
then the utilizations for territory 1,2 and 3 are (resp.) 92.3%, 83.0% and 70.8%.
The above method is more accurate since it accounts for variations in mix across
territories.
Observations
• High utilization in distribution (89%) and
underwriting (70%-97%)

• Unbalanced utilization in underwriting makes

things worse
– Territory 1 has 97% utilization, which is dangerously high

• Division of territories on geographical lines

eliminates the economy-of-scale benefits of
pooling

Economy of scale advantages

50
Separate
territories
40

30 Waiting time is s=1

lower in pooled
Wq

s=2
system at any
20 given utilization. s=3

Pooled
10
territories

0
0.80 0.85 0.90 0.95 1.00
Utilization ( ρ )
Priority and release rules

• RUNS/RAPS/RAINS given priority in underwriting

– RERUNS delayed even more than they would be under
FCFS
– Makes a bad situation worse at underwriting for RERUNS

• RERUNS released only 1 day in advance

– Ostensibly to get best information to reevaluate risks,
but how much more information is gained in a few days
on a policy that has been in force for a year or more?
– No chance to be on time
– This leadtime is completely controllable, unlike the
RUN/RAP/RAIN leadtime.

Problems with the current quotation policy

• Double counting
Example:
5 jobs 3 jobs

1 2

Question: If each job takes one minute to complete at each station,

how much time does it take to clear the system?

• Standard completion time (SCT) too conservative (95th

percentile of processing time)
• The 95th percentile of the sum of 5 random times is MUCH
less than the sum of the 95th percentile of each time
(statistical averaging)

Manzana is quoting itself out of business!

A reasonable course of action
• Pool underwriting teams to take advantage of
economies of scale

• Keep RERUNS low priority, but release them a

week or so in advance so they have a chance of
being on time (exact leadtime requires analysis)
– RUNS/RAPS and RAINS are time-sensitive work and
cannot be delayed
– RERUNS are not time sensitive if they are released far
enough in advance (“background work”)

• Develop a realistic TAT quotation policy.

Some simulation results: FIFO, no pooling

RUNS

RERUNS
Simulation results: FIFO with pooling
RUNS

RERUNS

Simulation results: Priority for RUNS with pooling

RUNS

1-Day turnaround time

is actually feasible!

Releasing RERUNS 4
RERUNS days prior to due date
is more than enough to
guarantee 100% on-
time!
 Manzana Insurance: Key Lessons
• Diagnose profitability by customer segment ..
– contribution margin (commissions)
– acquisition costs (PLUS program)
– indirect costs (e.g. insured losses)
– workload (e.g. processing time)
Often, repeat customers are the most profitable! (Zero Defections)

• Most managers do not understand the causes and effects of

queuing, and this can lead to very bad decisions
– staffing for maximum utilization
– ignorance of pooling economies (geographic organization)
– wrong priorities (time-sensitivity vs. profitability as basis for
priorities, e.g. RUNS vs. RERUNS)
– release policies (RERUNS) & due date setting (TAT calculation)

• A simple analysis of utilization + knowledge of queues can go a

long way toward diagnosing and solving leadtime performance
problems.