Manzana’s Fruitvale Branch is experiencing a significant loss in profits. Loss stems from operating performance failures in their process characterized by delays in processing, increased renewal loss , and loss of market share. Key Problems and issues
- Declining profitability
- Increasing turnaround times compels agents to seek out alternative business
- High renewal loss rates because of increasing volumes of late renewals
The Fruitvale branch of the Manzana Insurance Company is at the bottom of the list in the performance figures on Property Insurance and its high turnaround time of 6 days resulting in the loss of policy renewals. The branch is over emphasizing new policies and putting less priority on renewals. The reduction of turnaround time is vital as a high turnaround time will result in loss of renewals, loss of agents, and customers thereby loss of business.
The current company renewal loss rate of 47% this quarter is a 14% raise from the same quarter last year, and significantly higher than that of leading competitor’s, Golden Gate Insurance Company, whose estimated renewal loss rate is only 15%. As a result, agents are making recommendations of the use Golden Gate’s Insurance to their customers. The combined loss of renewals and positive word-of-mouth endorsement for Manzana’s leading competitor there has been considerable loss in market share. There is also a significant lead time of approximately 2 days the calculations on Exhibit 1 of the attachment.
The organization’s inactive growth rate in terms of request processed per quarter is evident despite the increase in industry growth rate. Another key issue in Manzana’s Fruitvale Branch is profitability, which is declining and suffered a loss of $174 and $121 in the first and second quarter of 1999. Lastly there is a major concern for their turnaround time days increasing every quarter. Since last year TAT has increased from 5. 1 days to 6. 2 days and the percentage of late processed request has gone up from 10. 3% to 19. 69%.
The current problems plaguing the company can be explained by an unbalanced proportion of work. The variation leads to employees with significant amounts of work in one week, and little to no work in the subsequent week leaving the member idle. The priority of processes has also lead to the inefficient use of the organizations resources. In the current FIFO system, Under Writing team is processing in the order of RUN, RAP, RAIN, and RERUN. Since RUN and RAP are processed first there is a delay in processing RERUN and many renewal requests are lost or delayed.
Policy writers use a different system putting priority on easier task than moving on to the more complex task. RAP approval request can come anywhere between the first and tenth day leads to uncertainty and difficulty when trying to predict how much resources need to be allocated to that area. The due date for RERUN is known one month in advance but requests to Distribution Clerks are only given one day notice which leads to delays in RERUN and inflexibility. The Industry Manzana Insurance is a leading player in the Californian commercial insurance space. The Fruitvale Branch is positioned in property insurance only.
In the 1970s Golden Gate Casualty entered the market putting Manzana with severe price competition and intensive marketing pressure. The underwriting process in the industry is as follows: Independent agents interact directly with the client whereas functional underwriting teams are occupied with the underwriting process. At Manzana a typical policy is passed on by the agent to a Distribution Clerk who transfers it to a geographically organized Underwriting Team. These Teams evaluate, classify and price the requests, then being passed on to Rating and Policy Writing.
The key performance indicator is the turnaround time of an insurance policy, which at Fruitvale has increased to 8. 2 days recently. The Outcome is Manzana’s consistent loss in customers. In order to maintain market share and improve sustainability the organization needs to improve its TAT to remain competitive in this market in the industry. Analysis Fruitvale’s key problems originate from its Underwriting Process. The turnaround time, especially for renewing policies (RERUNs) is an extremely long time and the key source of their problems.
Agents complain about high TATs, the percentage late figure is too high, and significant renewal business is lost. Out of the 39 requests daily inflow, 22 fall into the new policy (RUN), endorsement (RAIN) or price quote (RAP) category leaving 17 requests for RERUNS. RERUNS in the current system are given lowest priority yet they are a significant profit maker. The current priority system places emphasis on RUNs and RAPs, as they are believed to be more profitable. As a result RERUNs are constantly delayed in priority, resulting in a high percentage of renewals being late and lost.
Ironically, RERUNs had a theoretical processing time of 172. 3 minutes compared to 258. 6 minutes for RUNs. Despite generating an annualized premium of $500 less than a RUN, RERUNs took 67% of the theoretical time to process. Utilization is not uniform amongst the 3 teams. Team 1 is at nearly 93% utilization, subjecting the process to delays with even small amounts of variation and serving as the bottleneck of the system. At 71% utilization, Team 3 has much more room to work with before experiencing delays. The case model returned a result of TAT as 5. 78 days.
The bottleneck was the Underwriting process. In spite of using different queuing principles, the TAT was still above the required target of 1 day (Golden Gate’s promise) so extra underwriting team was added so that the TAT reduced to 0. 90 for the optimal case. In order to effectively compete with Golden Gate it is essential to bring down time to at least equal to theirs, one day. The variation in the priority of carrying out processes and workload is the primary cause for the high turnaround time which is shown by loss in renewal rate of policies and market shares.
Hence, turnaround time is the most important factor which has to be addressed in order to make profit. The turnaround time can be reduced by eliminating the variations in the process priority. We suggest that the processes should be carried out in the Priority system listen. One employee from each Rating and Policy Writing team should be removed to more adequately utilize resources in areas that are understaffed and not overstaffed like they are in the current system. An extra Underwriting Team is placed for territory three.
The result facilitates the process more smoothly and results in the reduction of turnaround time to about equal to 0. 9 days. The new prioritization of the processes and redistributed work force is essential in decreasing turnaround time. The FIFO priority system yields a turnaround time of 1 day. Proposed Solution As increased competition drove profit margins lower for Manzana, it became apparent that the basis of competition in the industry was driven by customer satisfaction, in the form of turnaround time and late renewals. Fruitvale trailed their competitor Golden Gate by 4 days in turnaround time.
In order to remain competitive and increase market share and profitability the organization has to key factors to focus on decreasing processing time and decreasing renewal loss. In order to achieve these results the company will have to redistribute the work force to more adequately meet customers’ needs and decrease the current two bottle necks: The first is Underwriting Team #1, which has a utilization of 95%. The second bottleneck occurs during the distribution process. The four distribution clerks have a combined utilization of 92%.
The current Manzana policy utilizes the first-in-first-out (FIFO) system. This has resulted in high turnaround time for renewals and a loss of renewal policies. This turnaround time can be reduced by eliminating the variations in the workload and priority in carrying out the processes. After conducting the data analysis we conclude that the most efficient use of resources results in the priority system stated above of: * RUN/RERUN * RAIN * RAP The proposed priority system in the processes as the turnaround time reduces to less than 1 day (0. 62 days).
The appendices attached shows how this priority system and uniform workload reduces the high turnaround time. Recommendations In order to become a more profitable organization the company needs to decrease the turnaround time of 6 days, and decrease the renewal loss rate of about equal to 47%. Day Management and Consulting recommends the following improvements to maximize utilization in the current system and increase process efficiency: The existing priority rule in which the policy is processed in the system should be changed to decrease the total turnaround time and reduce the Renewal loss rate.
Day Management has decided to use the following priority rule that can be found in Exhibit 4 in the attachment A. RUN/RERUN, B. RAIN, and RAP. The system decreases the turnaround time to 0. 90 days. Which is a significant decrease from the current systems TAT time 6 days. Change the way RERUNS are treated. RERUNs are actually very profitable per unit of processing time. Treating RERUNS with lowest priority is not the best strategy, since each policy generates an average annual premium of $6,205 and takes only 172 minutes to complete.
A RUN generates an average premium of $6,724, but takes 259 minutes to complete. In other words, a RERUN generates more revenue than a RUN per minute spent on processing. If the Manzana management still wishes to treat RERUNs with low priority, releasing RERUNS into the system more than one day in advance will improve the ability to meet the deadline. We suggest if the current system is going to be continued to be utilized that they be released between 3-5 days in advance to prevent slow processing times and bottlenecks from occurring.
The work force distribution in the system should be balanced at different processes to improve the efficiency of operations at each process. If one Manzana employee was moved from Policy Writing and one from Rating and transferred to Underwriting creating a new Underwriting Team there could be a more even distribution of work for each teams and eliminating the bottle neck that is slowing down the system. Lost and delayed renewals directly affected the long TAT times.
Underwriting team and the implementation of the new priority system Manzana should see a significant decrease in TAT. After implementing the changes we feel that not only will Manzana’s Fruitvale Branch become more profitable, they will regain the market share they lost and should see an increase in new business as well as renewals. The long TAT times currently plaguing the branch is directly correlated with the loss of business.
Like with any service industry the customers are the main priority and while making a profit you should simultaneously be aware of how the business is treating its customers who are ultimately the profit maker. We are confident that word-of-mouth referrals will increase from the agents and business will flourish.