Operations Management

Assignment on

Manzana Insurance

Submitted by:
EPGP (2019-2020) Group 6
Puneet Agarwal (1914002)
Rahul Singh Bist (1914014)
Neha Kaushik (1914035)
Siddharth Singh (1914064)
Ramarajan Yogeswaran (1914077)
Image from : https://www.fundstiger.com/property-insurance-benefits-coverage/

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Company Background
Manzana Insurance, founded in Sebastopol, California, in 1902, originally specialized in orchard and
farm insurance. In 1944, anticipating the boom in homeownership in California, company purchased
Santa Ana Underwriting, Casualty and Escrow Company. By 1953, Manzana had become the second
largest home and commercial property insurer in California. In 1970s company was facing stiff
competition from a new entrant named Golden Gate Casualty which was backed by a parent with
deep pockets.

Organizational Structure
Manzana operated through a network of relatively autonomous branch offices. The insurer provided
services to its clients through a sales force of 2000 independent agents who also represented
competing insurers. In the 1990s, subsequent to an acquisition by Banque du Soleil, Manzana
reorganized its operations on a geographic basis. Each originating agent was assigned a specific
underwriting team (underwriter + technical assistant). At Fruitvale, a smaller branch of Manzana, 3
underwriting teams, each responsible for one geographic territory, supported 76 agents. Fruitvale
handled only property underwriting.

Problem Statements:
Fruitvale’s branch manager John Lombard received a mail from Manzana’s SVP Tom Jacobs. Tom
expressed his concern on why the performance of Fruitvale is deteriorating continuously on certain
parameters. The backlog of policies had increased since 1989 and the situation had gotten worse since
Jan 1991 and in the last 2 quarters, Fruitvale reported losses. Fruitvale branch is heading towards a
financial crisis due to operational inefficiencies and suboptimal operational flow. The problems Bill
Pippin, newly joined Assistant Manager, must address are:

a) Lengthy Turn-Around-Time - Average turnaround time (TAT) has increased from 5 days to 6
days this year. With this Fruitvale can’t compete with Golden Gate which has TAT of 2 days
and has promised to reduce it to 1 day. Due to the poor TAT, many agents may defect to
Golden Gate.
b) Retention of existing business/Non-focus on RERUNs - High Renewal Loss rate of 47 %.
Fruitvale is receiving a lot of complaints about delay in renewal. However, the company is
liable to cover the insured during the delayed period.
c) Uneven work distribution among underwriting staff: Uneven underwriting staff workload is
indicated in the workings we present later and from the letter of SVP Tom Jacobs. One day
underwriter might be stretched to the limit; a week later he may be idle.
d) Uneven salary component – Only underwriters compensated fairly whereas policy writers,
raters are not so much mentioned anywhere in terms of retention.
e) Inconsistent practices across departments - Unaligned missions and goals causing different
working practices in departments, possibly increasing turn-around-time.

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 Operations Flow

Underwriting Team 1
1 Underwriter, 1
Technical Assistant

Originating Distribution Underwriting Team 2 Rating 8 Policy writing

Agent 4 clerks 1 Underwriter, 1 Raters
Technical Assistant 5 writers

Underwriting Team 3
1 Underwriter, 1
Technical Assistant

Abbreviations: Table-1

DC Distribution Clerk
95 % SCT 95th percentile of the Standard Completion Time
TAT Turn Around Time for a new request
UT Underwriting Team
RT Rater
PW Policy Writer
RUN Request for Underwriting
RAP Request for Price
RAIN Request for Additional Insurance
RERUN Request for Renewal

Analysis of Operating Activities, Problem Statements and Recommendations

a) Turnaround Time (TAT)
Using Exhibit-3:

WIP (Requests in Process) = 82 requests

Throughput = 39 requests / day
By Little’s Law: TAT = 82/39 = 2.1 days

Conclusion: Fruitvale is calculating TAT of 8.2 days. This is because Fruitvale is using ‘95 percentile
Standard Completion Time’ values to calculate TAT. Using this method overstates the TAT values. It is
a common practice amongst agents to call and check for estimates of turnaround time. Quoting higher
incorrect estimates sends the wrong signal to the agents about the performance.

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 Calculating TAT using mean time: Table-2

Throughput
No of requests to be processed Days
RUNs RAPs RAINs RERUNs
Steps
1 Distribution (4 clerks)
Total at DCs 1 3 1 11
To be processed 1 3 1 11
Average per DC 0.25 0.75 0.25 2.75
Mean Time per Request 68.5 50 43.5 28
Total minutes 17.13 37.50 10.88 77.00 0.32

2 Underwriting (3 teams)
Total at DCs 1 3 1 11
Total at UTs 3 7 6 36
To be processed 4 10 7 47
Average per UT 1.33 3.33 2.33 15.67
Mean time per request 43.6 38 22.6 18.7
Total minutes 58.13 126.67 52.73 292.97 1.18

3 Rating (8 raters)
Total at DCs 1 3 1 11
Total at UTs 3 7 6 36
Total at RTs 1 2 1 7
To be processed 5 12 8 54
Average per UT 0.63 1.50 1.00 6.75
Mean time per request 75.5 64.7 65.5 75.5
Total minutes 47.19 97.05 65.50 509.63 1.60

4 Policy Writing (5 writers)

Total at DCs 1 3 1 11
Total at UTs 3 7 6 36
Total at RTs 1 2 1 7
Total at PWs 0 N/A 1 2
To be processed 5 9 56
Average per UT 1.00 1.80 11.20
Meantime per request 71 54 50.1
Total minutes 71.00 97.20 561.12 1.62

Throughput days = 0.32+1.18+1.6+1.62 = 4.72 days. Out of which 3.2 days is for RERUNs alone.

Calculating TAT using the minimum time for Rating and Policy Writing: Table-3

It is mentioned in the case that with the advent of desktop computers the rating job is no more
technical and computational and is purely mechanical now. We can thus use the minimum time for it.

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 Similarly, for policy writing, few policies now require actual writing so for that also we can take
minimum time.
Throughput
No of requests to be processed Days
RUNs RAPs RAINs RERUNs
Steps
1 Distribution (4 clerks)
Total at DCs 1 3 1 11
To be processed 1 3 1 11
Average per DC 0.25 0.75 0.25 2.75
Mean Time per Request 68.5 50 43.5 28
Total minutes 17.13 37.50 10.88 77.00 0.32

2 Underwriting (3 teams)
Total at DCs 1 3 1 11
Total at UTs 3 7 6 36
To be processed 4 10 7 47
Average per UT 1.33 3.33 2.33 15.67
Mean time per request 43.6 38 22.6 18.7
Total minutes 58.13 126.67 52.73 292.97 1.18

3 Rating (8 raters)
Total at DCs 1 3 1 11
Total at UTs 3 7 6 36
Total at RTs 1 2 1 7
To be processed 5 12 8 54
Average per UT 0.63 1.50 1.00 6.75
Minimum time per request 7 8 15 7
Total minutes 4.38 12.00 15.00 47.25 0.17

4 Policy Writing (5 writers)

Total at DCs 1 3 1 11
Total at UTs 3 7 6 36
Total at RTs 1 2 1 7
Total at PWs 0 N/A 1 2
To be processed 5 9 56
Average per UT 1.00 1.80 11.20
Minimum time per request 39.5 30 39
Total minutes 39.50 54.00 436.80 1.18

Throughput days = 0.32+1.18+0.17+1.18 = 2.85 days. Out of which 1.90 days is for RERUNs alone.

The reason why TAT of 2.85 calculated this way is still more than TAT from Little’s Law is that the
Rating and Policy Writing times are given of the year 1986. Little’s Law values are of the Year 1991. In
5 years due to technology improvement and automation, the rating and policy writing times might
have come down more but since we don’t have data, there is no way to quantify it.

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 Recommendations to Improve TAT

We propose a few changes, critically analyzing their possible consequences as well to depict our
thought process well and to arrive at a feasible solution. Following changes are proposed to improve
the TAT so what Fruitvale stays competitive with Golden Gate:

1) Increase working day hours from 7.5 to 8 hours.

Pros: May give more time to process proposals.
Cons: Retaining senior underwriters is already an issue, there is a chance for defect of
employees not paid on hourly basis too then.
2) No. of raters reduced from 8 to 2
Analysis: Instead of a pros and cons approach, here the point Fruitvale could consider is
whether these raters can be diverted to other departments where there is a backlog.
Apart from actuarial function in insurance which requires specialization, people can be
trained and utilized across departments.
From our workings mentioned above, we see a lot of scopes to move our raters across
departments which is what we are proposing.
3) No. of Underwriter teams increased from 3 to 7.
4) No. of policy writers increased from 5 to 7
5) It is assumed that in 1991 the desktop computers can reduce the rating time to 7 min flat
across all policy types.
6) It is assumed that policy writing time will drop to 10 min flat across all policy types by
using the standard format policy copies.

Our recommendation would be to modify the operational flow based on a combination of all the
options described above: Table-4

Throughput
No of requests to be processed Days
RUNs RAPs RAINs RERUNs
Steps
1 Distribution (4 clerks)
Total at DCs 1 3 1 11
To be processed 1 3 1 11
Average per DC 0.25 0.75 0.25 2.75
Mean Time per Request 68.5 50 43.5 28
Total minutes 17.13 37.50 10.88 77.00 0.30

2 Underwriting (7 teams)
Total at DCs 1 3 1 11
Total at UTs 3 7 6 36
To be processed 4 10 7 47
Average per UT 0.57 1.43 1.00 6.71
Mean time per request 43.6 38 22.6 18.7
Total minutes 24.91 54.29 22.60 125.56 0.47

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3 Rating (2 raters)
Total at DCs 1 3 1 11
Total at UTs 3 7 6 36
Total at RTs 1 2 1 7
To be processed 5 12 8 54
Average per UT 2.50 6.00 4.00 27.00
Minimum time per request 7 7 7 7
Total minutes 17.50 42.00 28.00 189.00 0.58

4 Policy Writing (7 writers)

Total at DCs 1 3 1 11
Total at UTs 3 7 6 36
Total at RTs 1 2 1 7
Total at PWs 0 N/A 1 2
To be processed 5 9 56
Average per UT 0.71 1.29 8.00
Minimum time per request 10 10 10
Total minutes 7.14 12.86 80.00 0.21

Total throughput time comes to 0.3+0.47+0.58+0.21 = 1.55 days which is a significant improvement
and better than Golden Gate’s current TAT of 2 days and very competitive in comparison to GGs claim
of 1 min. Further to counter Golden Gate’s plan of 1-day TAT, Fruitvale can hire more employees in
bottleneck stages (highlighted in yellow in table) to further reduce the throughput time, but their
senior management already thinks they are overstaffed. They might not agree with the proposal. In
that scenario, efficiency will have to be managed with the existing resources. It may be beneficial here,
to study Golden Gate’s operational flow and structure to understand what the basis of their shorter
TAT claim is if it true at all.

b) Renewal Loss Rate

Fruitvale suffers from a high renewal loss due to a couple of reasons:

1) Waiting till last day to release the RERUNs: The reason given behind is that the company
wants to collect as much information as it can and the latest information on the individual
risk. However, the company already has information for one year and taking the
information of the last 1-2 days is not going to make any difference. If there is any change
in the risk, the same can be incorporated through an endorsement. Moreover, agents
expect a renewed contract before the expiry of the old policy, and they don’t hesitate to
move to another insurer who can provide policy quickly. So, it is advisable to release the
renewed policies 2-3 days before the due date.
For effective risk management, they can utilize common insurance clauses such as one
which state that in case of a material change in nature of risk, the same should be
conveyed to the insurer immediately. Failing to do so will render the policy contract null
and void. This is called the principle of utmost faith which is the foundation of insurance.

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 c) Uneven work distribution among underwriting staff

The solution to this problem is also hinted at in the solution working of problem statement
dealing with turnaround time. We agree based on case facts that the work distribution is
uneven. Territory 1 team is more heavily loaded in terms of a number of proposals as
compared to territory 3. It is also given in the case that Fruitvale is an autonomous branch.
Given these facts, we would recommend that there should be a diversion of staff where it is
needed. Geographic and function distribution is embedded in the organizational structure. As
a manager, if we are running an autonomous branch, we would focus on developing our
human resource to multitask. We want our staff to be content and avoid the potential
dissatisfaction amongst the staff due to uneven workload. There is a need to inculcate a work
culture where one can call upon the staff across departments to work where need be. As was
mentioned earlier, unless it is an actuarial or highly technical function, the cross-department
movement of staff gives them learning and an opportunity to grow. As a manager, it gives us
a valuable source to build a competitive advantage using which the branch can counter Golden
Gate’s aggressive turnaround time strategy.

Working to show the Underwriting Staff Workload: Table-6

Territory 1 Territory 2 Territory 3

Weighted Average Processing 28.4 28.4 28.4
Time per Request (min)
No of requests processed in 6 1755 1578 1347
months of 1991
No of requests processed per 14.63 13.15 11.23
day
Capacity to process per day (60/28.4)*7.5 = (60/28.4)*7.5 = (60/28.4)*7.5
15.85 15.85 = 15.85
Capacity Utilization (%) 14.63/15.85 = 13.15/15.85 = 11.23/15.85
92.30% 82.97% = 70.85%

Territory 1 is working close to its capacity while Territory 3 is being underutilized. While staff in
Territory 1 will be burned out, staff in territory 3 is costly for Fruitvale. To solve this issue Fruitvale
should do away with the current practice of geographic segregation of Underwriting staff and form
one team which is responsible for the complete market.

If one combined team is formed:

Total requested processed per day = 14.63+13.15+11.23 = 39.01

Total Capacity to process per day = 15.85 x 3 = 47.55

Capacity Utilization = 39.01/47.55 = 82.04% which will be uniform for all three teams.

If we analyze this option critically, we find that there is also a possibility to divert the officers from
Territory 3 to Territory 1. Changing the company structure because it is not working for Fruitvale may
not be a practical solution. We don’t know if it’s working in other geographic areas of Manzana. The
data is specific to Fruitvale. Moreover, the agents may be finding it convenient to deal with a team
specially dedicated to their territory. It gives them a feeling of being important and having a dedicated
team working on their proposals. Emphasizing on the autonomy of Fruitvale, we recommend that they

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should capitalize on this geographical segregation. The flexibility in the movement of staff among
territories provides a feasible solution to this capacity utilization problem.

d) Salary plus program: The assumption behind salary plus program is that since RUNs and RAPs
are more profitable there should be an incentive for pushing these products. However, this
assumption is wrong as shown in the table below:

Table-5

Average Processing Time Revenue Agent

Distribution Underwriting Rating Writing Total per policy Commission
RUN 68.5 43.6 75.5 71 258.6 $6724 25%
RERUN 28 18.7 75.5 50.1 172.3 $6205 7%

It’s clear that RERUN processing time is 33.3% less than that of RUN. At the same time, the revenue it
generates is only 7.7% less than that of RUN policy. Finally, the commission paid to the agent is also
more on the RUN policy. Due to all these reasons, we can conclude that the RERUN policy is more
profitable for Fruitvale. It also helps them have a firm ground in the markets. The agents usually have
long-standing relationships with clients. A client places multiple policy with an insurer, a single client
may have car insurance, householder policy, shopkeeper policy and may as well be an owner of a
factory/school in which case he places mega risk policies as well. Now, we can say that Salary plus
program is misplaced and it should incentivize RERUN policies. Fruitvale should present a compelling
case to higher management to rectify the salary plus program.

Fruitvale should also consider the skillset of raters and Policy Writers. A rater is required to have a
thorough understanding of the underwriter’s work, only then can she provide proper rating and only
then can Policy Writer select appropriate pages for each individual policy which is tantamount to
customizing a policy. The finished package is the final product which has serious implications for claims
lodged under the policy. In short, terms of service to be provided depends on the skillset of raters and
Policy Writers because the computers only reduce the timing of typing and provide a standardized
format (which may not be enough to have quality policy contracts).

e) Inconsistent work practices across departments (Selective application of FIFO

program)
Even though Fruitvale policy was to go by FIFO system at each stage of the underwriting process,
in practice RUNs and RAPs were given priority over RERUNs and RAINs due to which the TAT for
RERUNs suffered. Fruitvale must do away with this selective application and apply this uniformly
without fail. If the work culture builds up inconsistent work practices across departments, this
becomes a bottleneck. In this case, departments are not aligning goals, do not optimize the timing
of processing and are not liaising well.

Apart from the above recommendations, we have some more observations through which Fruitvale
can resolve the problems:

- On conversion of RAPs – Low conversion of RAPs in new policies (only 15%) despite the
departments prioritizing work around them is an area of concern. There should be a specific
focus on increasing the conversion rate of RAPs. This is a viable source of new business. If the
conversion rate remains low, then the productivity of the staff reduces even though they will
be utilized to their full potential. Giving signal of reduced TAT will help to improve the financial

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 performance for Fruitvale. Fruitvale should also do a comparative pricing check on quotes
released. They may be quoting higher than the competitor. In 1988, Manzana fought back by
lowering prices, it may well be the time to review pricing again.
- Better relationship with agents must be maintained. In this setting, where an agent represents
multiple companies, direct interaction with agents (and not through distributors) is essential.
Branch Manager could hold monthly meets with agents to understand the market better, to
address their concerns.
- John Lombard’s reaction (“… it is impossible..”) indicates that he is underestimating the
competitor instead of assessing how can Golden Gate do it. Studying the Golden gate’s
operation flow may help Fruitvale as operational efficiencies are imitable. What should be
considered is the fact that if it is imitated, it should be done so in a customized manner to suit
the present organizational structure of Manzana.
- The aim is to optimize the operational efficiency at Fruitvale in alignment with Manzana’s
overall organizational structure. Since Fruitvale is autonomous, it should innovate. It covers
the insured even if the proposal is delayed. While addressing this bottleneck, it should assure
the agents that their clients’ interest would be protected no matter what. This may help
establish the trust that even in the face of delay, Fruitvale continues to serve the best interests
of its clients. It may help them retain their renewals even in case of delays. Since nothing
improves overnight, this, in turn, gives Fruitvale time to improve their operational flow.

CONCLUSION

Fruitvale’s problems are largely rooted in operational inefficiencies. However, in a business setting,
we believe the problems are resolved in a holistic manner with a good mix of operational, marketing
and human resource strategies. Consequently, we have identified and addressed the operational
issues in our workings, but our solutions also have a rich mix of marketing and human resource
components which coupled with efforts to maximize operational efficiency would resolve the issues
of Fruitvale in a sustainable manner.

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