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Manzana Insurance: Fruitvale Branch

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    How important is turnaround time (TAT) in this business?  The turnaround time (TAT) in the insurance business is very important. This because of the following arguments: – The most important factor to the agents in the insurance markets is the level of service provided. One of the most important aspects that determine the service level is the speed of handling the requests (TAT).  In addition, the factors that drive profitability in the industry are related to the needs of the customers: speed. Therefore, the TAT is also of great importance for the profitability in the industry.

    One additional comment, by optimizing the TAT the cost of handling requests is most likely to decrease what will increase profitability as well. The factors on which the industry competes has shifted from price and commissions for agents towards the service level provided. Again, one of the most important aspects of the service level is speed and therefore TAT. Finally, a basis analysis suggests that the increase in TAT is related to the increase in percentage loss rate. What is strongly related to the decreasing profitability of Manzana.

    In summary the TAT is very important in this industry because of the needs of the agents and end-customers, the aspects of competition, the factors that drive profitability and the expected relation between the percentage loss rate and the TAT. What factors are important to agents and what factors are important to their ? customers (i. e. the end-consumers)? In an industry where companies are highly reliable on external agents for their sales and where these same agents favor organizations that offer relatively faster Turn around times (TAT) the TAT is very important for the competitive advantage in this business.

    To elaborate on the importance of the TAT: as described above, the agents are in favor of companies who offer relatively faster turnaround times. Part of their motivation is probably based on the importance of the competitive factor “speed” for the end-customer. The customer would probably prefer a low cost insurance, however, they are probably also looking for a quick offering, after filing a request. In summary, the importance of TAT in this industry is high because of the important of “speed” of the communication of information (prices) and the finalizing of the proposals, in the competitive environment.

    What factors drive profitability in this business? In addition to the answer at question one, the profitability in the insurance business In this particular case is mainly based on the factor speed. This because of the importance that the individual agents value, on the on time and quick response to requests. In addition, because of the increased competition and more general product offering the organizations were not any longer able to compete on price towards the agents. This resulted in the agents comparing companies on their level of service.

    On of the service aspect was speed and reaction time. In summary: the main factor that drives profitably in the business is: speed. How does Manzana compeet with Golden Gate? As mentioned in the previous answers the marketing profitability is depended on the factor ‘speed’. Moreover, in previous years Manzana was market leader in several insurance areas. However, currently the competition: Golden Gate is “killing Manzana in its own territory”. In the current market situation Manzana and GoldenGate compeet on the operation strategy ‘Speed’.

    As a result of the shift from competition based on prices towards service in the form of speed, Manzana is losing sales rapidly. As stated in the case: “A lot of agents are going to defect to Golden gate” This is mainly the case because of the competitive advantage that Golden Gate created by claiming a one day TAT time. In comparrision with Manza, of which the TAT has increase from 3 tot 5 day’s Golden Gate has created a relatively competitive advantage based on their operational strategy.

    Competition has shifted from prices and commissions towards service levels in the form of TAT (speed). To which extent is TAT connected to the % loss rate ? The increase in TAT is expected to be related to the increase in percentage loss rate. This because of the importance of this competitive factor in the current market situation. As the table below suggests there is an expected relation between the increase in the TAT and the increase in the loss rate.

    Analyze and assess the operations system of Manzana. How do the various jobs (RUN, RERUN, RAIN, RAP) flow through the system? How much time do they take? The figure below shows the flow through the system of the various jobs (RUN, RERUN, RAIN and RAP) taken exhibit 2 into account.

    The red numbers in the figure show the daily processed requests on average based on the data of 1991, which can be found in exhibit 7. The daily requests that are coming into the system are calculated by adding all various jobs (RUN’s, RERUN’s, RAIN’s and RAP’s) processed in the first 6 months and dividing this outcome by 120 (E. g. 6 months x 4 weeks x 5 days). This means that the teams can process 39 requests on average per day. (350+1798+451+2081)/(6*4*5) = 4680 / 120 = 39 requests per day on average.

    What is the throughput efficiency of a RUN?

    Flow time efficiency = Theoretical processing time / Flow time 1. The theoretical processing time can be calculated by using the mean figure in exhibit 4 per department. 68. 5 + 43. 6 + 75. 5 + 71. 0 = 258. 6 minutes 2. The processing time can be calculated as follows by using the information on page 1 of the case study. All teams are working 6 days per week, 7. 5 hours per day, which corresponds to the following: Turnaround time = 6 days = 6 * 7. 5 hours per day = 45 hours = 45*60 minutes = 2,700 minutes The flow time efficiency can be calculated by dividing both outcomes and multiply by 100%.

    Which resource is the bottleneck? When looking at the last column of the table above there can be seen that both the Distribution department and Underwriting Team 1 have the highest utilization percentage, respectively 88. 8% and 92. %, and can therefore be seen as the bottlenecks within the process because they are almost working on full capacity. What is the capacity of the system? The capacity of the system normally is determined by the department that takes the longest time and runs at (almost) full capacity, thus the current bottleneck, which would be Underwriting Team 1 with an utilization of 92. 4% as can been seen in the table corresponding to question C & F. Nevertheless, Underwriting Teams 2 and 3 are not working on full capacity. The entire Underwriting dept. has a combined capacity of 47. requests per day. In this case the capacity of the system is determined by the department that has the lowest daily capacity within the process, which is the Policy dept. of 41. 1 requests per day. What is the utilization of the various resources? The answer on this question is given in question C and can be found in the corresponding table. How can the current system be improved? The answer tot his question is listed in the next chapter. Question 3. In what way can the TAT be adjusted? Currently, the SCT time is calculated based on a 95 percent completion time.

    However, this could potentially result in five percent of all requests taking longer than the expected time. This could lead to a substantial backlog and increase in the expected TAT. To prevent this from happening, an increase in the SCT percentage to 99 percent will result in an increase in the TAT from 8. 8 (exhibit 3 case) to 9. 25 (exhibit 1 document). These calculations have been made under the assumption that all request are based on a normal distribution. The Z-value of a SCT percentage of 99 percent is 2. 58. By calculating the new average TAT of all products the confident interval of the requests is increased.

    This would lead to an increase in reliability. In other words: a larger number of requests would be processed within the expected TAT. However, we do not advice Manzana to implement this new and different way of calculating. Even though there is a significant backlog in RERUN requests the other products do not run behind. We would advice Manzana to solve this problem with the solutions stated in question 4. This new way of calculating would increase the reliability. However because of the small amount of products in the backlog we do not advice Manzana to mplement this change, because this would expect to result in an increase in TAT. For the full calculations we refer to exhibit 1 in this document.

    Assess the scheduling (generation of jobs) and sequencing (priority policy) of the various jobs. Three ways to improve the process by improving the deployment of personnel and priority of tasks are: Eliminating additional departments based on geographic departments. In the current situation the organizational design is based on the different departments, all responsible with their own tasks. Distribution, Underwriting, Rating, Policy Writing). However, in the underwriting department there is an additional separation into three teams aligned to geographic profiles. While in theory this makes sense, analysis shows that the elimination of these teams and the corporation of the resources of this teams would eliminate a potential bottleneck within the organization. In the current situation the utilization of Team1 in the underwriting department is approximately 95 percent. In the case of fluctuations in demand the utilization could increase to 100 percent and lead to a bottleneck.

    This would lead to an increase in the TAT. Moreover, the merge of the three teams would decrease the potential risk of a bottleneck. The total utilization of the combined teams would then become: 82 percent.

    Change in the organizational design and allocation of personnel within Manzana The creation of the ‘administration department’ By creating one department responsible for the distribution, overall assistance and policy writing the total efficiency could be improved. In the case is mentioned that the tasks of the distribution clerks and the policy-writing clerks have become highly automated. Therefore these departments could all be combined into one administration department. This new department will consist out of three sub departments.

    However, we advice Manzana to give training to the personnel to become cross-functional personnel. By doing so they are able to be effective in all three departments. This will lead to the following average utilization: 75 percent of the capacity. This is under the assumption that the record and copy clerks have, on average, the same utility.  Reduction of staff in departments As seen in the table below the utilization of the departments, taken into account the newly created administration department, show a low utilization in the administration and rating department. Total time available is calculated by multiplying the number of workers of the previous departments with the available hours per worker. In addition: average processing time is the weighted average of the task for this department per day. Distribution clerks: 4 people and policy writing: 5 people. Times 7. 5 hours per day and 60 minutes per hour. Total department excluding copy clerks: 9 people in staff. Rating department consist out of 8 employees with the same working hours.

    By reducing the total administration department with one employee and by reducing the rating department with one employee as well the new situation arises. By reducing two employees from the two departments the utilization increases, however the new utilization still provides room for fluctuations in demand. Furthermore the demand can go up by approximately 5 requests per day in the rating department. This decrease in staff will result in an reduction of cost and a more cost effective production. Alignment of motivations and priorities within the departments

    Alignment of SOP’ s (Standard Operating Procedures) will improve the current system due to the fact that all teams have their own way of working at this moment and it therefore will not be efficient in the future if the three teams will directly start to work together with their own procedures, priorities and incentives. It therefore could be wise to train them so they will all start on the same level. To do so, the FIFO system should be integrated organization wide. This means that the different type of products all should be dealt with via the FIFO principle.

    By doing so the efficiency of the organization will be expected to increase. First of all the number of backlogs of one particular product; the RERUNs will be reduced. This will improve the backlog en the percentage loss rate of RERUN’s. To elaborate: in the current system the priorities and incentives are not aligned. There is an incentive to process RUN’s and RAP’s before RERUN’s en RAIN’s. However, this measure is not optimal. This because of the time needed to complete a RERUN compared to the time needed for a RUN. The needed time for a RUN is more than the time needed for a RERUN.

    Furthermore, the expected average margin on a RUN is approximately: $6100. – dollar and the approximately margin on a RERUN is $5,600. – However, because of the time needed for a RERUN is only 66 percent of the time needed for a RUN. Therefore based on proportions the priority should be focused on the RERUN. However the advice is to have a general priority on all products and change incentive according to it.

    Is it fair to say that Manzana Insurance – Fruitvale Branch is not doing well? Current Organizational problems that Manzana is facing resulting from the information that is given in the case study in order of priority: The average turnaround time Average Turnaround Time (TAT) is too long? in order to help customers choose an insurance company that fits their wants and needs it is useful to have the turnaround time which is an important pointer in service quality.?

    As can be seen in the case study, Manzana has a large competitor namely Golden Gate which guaranteed a one day TAT instead of a 8. 2 day TAT that Manzana is offering at the moment of the case study. Besides, Manzana is already working at a faster rate than the Standard Completion Time (SCT) of 95%, which is used to compute the TAT, see exhibit 4. These result in overplaying their TAT, which hurt Manzana’s changes to win market share.? Manzana’s goal is to modify the system in order to decrease the TAT. Large number of late renewals

    At this moment the RERUN’s are being held aside until the day before the due date of the policy (so the policy writing dept. is too late) due to the fact that the agents expect orders to be fulfilled before the actual expiration date of the old policy. Besides, all departments have their own priorities at this moment and their own financial incentives. Now you can see that late renewals cause a large loss, which is a considerable portion of the total loss of the business. Large Backlog of policies to be processed Large backlog of policies to be processed?

    The Rating dept. has a large backlog due to the fact that the Underwriting dept. constantly has late RERUN’s. Also in this case it has to do with different priorities per department that results into downstream problems. Inefficient operational workflow Inefficient operational workflow? Manzana currently has an inefficient operational workflow due to the fact that the utilization and distribution of all employees/ staff is not optimal. Unclear Standard Operating procedures None of the departments has clear Standard Operating Procedures (SOP’s).?

    All departments use the procedures they find best and most efficient within their working environment. However, due to misalignment of procedures not all departments are at the same level with respect to company procedures and policies. Salaries and bonuses do not match Salaries and bonuses do not match with success. The so called ‘Salary Plus’ bonus program rewards managers for every new policy written, which can damage the quality of these policies as some employees will focus on quantity instead of quality. The focus than will be on the new policies instead of the renewals that yield less for the business.

    As can be seen on page 5 of the case study it says that issuing new commercial policies are considered the most profitable as they commanded the highest premiums. Question 6. What plan of action would you, as Bill Pippen, recommend to John Lombard when he gets back into the office in a week? How would your plans resolve the problems? How hard is it to implement your plans? First we would recommend John Lombard to decrease the TAT, by modifying the system. A modified system will streamline most of the tasks and therefore management and staff can track the status of processing of each request.

    This change will result in operational efficiency and therefore will decrease the TAT. Furthermore, it is wise to reflect the processing status more often so potential flaws will be indentified accurately. Secondly, the priorities of handling request have to be monitored with respect to one system. Therefore we advice to use the FIFO approach in order to deliver RERUN’s to the agents within time and with adequate time before the due date. Also with this implementation the management is able to monitor the process in order to act directly in case of alerts or when processing falls behind schedule.

    In addition, the modification of the system will automatically assign priorities to every request that comes into the system and will also automatically compute the due date of every request. This will help the company to streamline processes management and standardize procedures and priorities. As discussed in question 4 we find it wise to make changes in the organizational design by creating an additional Administration department responsible for the distribution, overall assistance and policy writing so that the total efficiency could be improved.

    The formation of this new business unit, along with dealing the efficiency issues, can also create an environment which is favorable for the formation of new standardization processes. This should not be hard to implement given the relative small portfolio of products offered. In order to make policy happen, the salary plus system also needs to be changed. By changing the commission paid to the agents, the incentive can be shifted towards RERUN’s rather than RUN’s. In conclusion given the above reasoning, we can assume that John Lombard can implement the substantial changes fairly easy with positive economic impact on the company.

    At the moment of the case the departments do not adhere to documented procedures. When updating all procedures along with the modified system and provide all employees with an adequate training program the emphasize lies on the importance of maintaining a well structured organization. In order to realize this environment in an efficient manner the company should come up with proper and standardized procedures and observe the quality once in a while, make adjustments if required and maintain the procedures.

    Finally, we have identified the fact that salaries and bonuses associated with profitability and therefore recommend to provide the company’s management with a profitability analysis of the new situation in processing RUN’s and RERUN’s. This will clearly show that the emphasis needs to be shifted to a new rewarding system in order to have all staff motivated rather than only on one specific policy type which is now the case.

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