Manzana Insurance Fruitvale Branch

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Miscalculation of TAT

The way Manzana calculates the TAT has also led to major problems. Exhibit 3 provided by Manzana outlines the current processes to calculate the TAT. (See spreadsheet Syndicate 10_T2_2016_PT_Manzana Insurance Fruitvale Branch, Backlog and TAT sheet). Manzana assumes activities need to wait for earlier activities to finish. The assumption is that policies move from one activity to another in batches equal to the total number of current policies with that area.

As an example, the underwriting team only starts working after 0.6 days once distribution clerks have finished their work. This has resulted in a miscalculation of TAT. Manzana uses the 95th percentile standard completion time, which is too conservative. 95% is a much higher number than the average of 50%. These miscalculations have led to an incorrect TAT of 8.2 days. That is the worst case scenario. We recommend Manzana change how they calculate TAT. A lower TAT can attract more business.

Cost Structure and Prioritisation

Manzana’s profits have deteriorated over the last year. Commissions incentivise staff to prioritise new policies over renewals. Despite this, renewal policies have much higher margins than new policies. They also take less time to process. The high renewal loss rate of Manzana is driving profit down. This can be seen through:

- Flat revenue from Q2 1989 to Q2 1991

- Increased gross revenue % from new policies

- Increased commissions and expenses due to the higher commission rate on new policies

- Increased operating expenses, where Plus Program accounts for ($97,000) or (49%) of the operating expense increase

For a full P/L analysis, please refer to the spreadsheet, Cost and Lead Time Analysis sheet.

The increase of new policies may have hidden affects on profit. One may be adverse selection: clients anticipating a loss may initiate new policies. Underwriters in turn may be too lenient in their assessment of that risk in order to earn their bonus. Manzana may also be forced to service a more risky client base because of their poor service level, they receive the customers that their competitors will not insure.

In 1991, the gross premiums for RUN was $6,724 and RERUN $6,205. Given that the agent fees of 7% commission will go to RERUN and 25% will go to RUN, prioritizing RUN isn’t ideal.

The gross margin for RERUN is higher at $5,771. The Gross Margin percentage is 93%. RUN will only receive gross margin of $5,043 with a Gross Margin percentage of 75%. From gross margin perspective, RERUN gives a better return.

The policy process time for RUN gives higher gross premiums, but the total time cost for RUN is almost double. RUN takes 258.6 minutes to process the request, where RERUN only takes 144.3 minutes to complete the request. This indicates the total time spent on process request for RERUN is much quicker than RUN.

Exhibit 6 provided by Manzana shows the average RUNs increased in the last two quarters of 1991 - 3.36% and 8.59%. Late RERUNs increased by 10.18%. Lost renewals increased by 13.34%. These are the key factors affecting the profit performance.

The incentive structure must reflect the desired behaviour of staff. It is recommended that Manzana flatten the commission structure to encourage a balance of renewals and new policies. It will increase margins and improve the service level. Fewer customers will leave the business because their policy renewal came late to their agent.

Utilisation

The utilisation analysis of the processing teams for distribution and underwriting can be seen below in figure 5 and 6. For a more detailed analysis, please see refer to the spreadsheet, in sheet Cost and Lead Time Analysis. There is a high utilisation in distribution (88.8%) and underwriting (70.4-96.9% across territories). These are bottlenecks. Given these departments are at the front-end of the process and feed the downstream process, the rating and policy writing department are sitting idle for 23.7% and 36% of the time respectively (please see figure 7&8). As such, the system performance is not being optimised. Given the reported backlog of orders, this would suggest that Manzana are not demand constrained, but that variability in the demand and process times impact the utilisation levels.

Policy Type

Distribution (4 clerks)

RUNS

11.1%

RAPS

41.6%

RAINS

9.1%

RERUNS

27.0%

TOTAL

88.8%

Figure 5, utilisation of clerks for distribution by policy type

Policy Type

Territory 1

Territory 2

Territory 3

RUNS

13.1%

8.1%

7.1%

RAPS

53.6%

36.1%

36.9%

RAINS

8.2%

5.2%

5.4%

RERUNS

22.0%

29.1%

21.0%

TOTAL

96.9%

78.5%

70.4%

Figure 6, utilisation of clerks for underwriting by policy type and territory

There is also an unbalanced utilisation across the territories. The division of territories across geographic lines eliminates the economy of

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