Company Background

Manzana Insurance, founded in Sebastopol, California, in 1902, originally specialized in orchard and
farm insurance. In 1944, anticipating the boom in home ownership 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 a parent with deep
pockets.

Organizational Structure
Manzana operated through a network of relatively autonomous branch offices. Like many other
insurance companies, Manzana did not deal directly with public but had a sales force of independent
agents who represented Manzana and other insurers. In 1990s Manzana reorganized its underwriting
staff and each originating agent was assigned a specific underwriting team (underwriter + assistant).
For a small branch like Fruitvale 76 agents were supported by 3 underwriting teams, each responsible
for one geographic territory. Moreover, Fruitvale’s focus was on property insurance segment of the
insurance business of Manzana.

Recent Performance
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 situation had gotten worse since
Jan 1991 and in last 2 quarters Fruitvale reported losses. Company is in a financial crisis and
operational mess due to following reasons:

a) 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 are expected to defect to Golden Gate.
b) High Renewal Loss rate of 47 %. Fruitvale is receiving a lot of complaints about delay in
renewal. Renewal Loss rate for Golden Gate is only 15 %
c) Uneven underwriting staff workload. One day underwriter might be stretched to the limit; a
week later he may be idle

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 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
But 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 and sends
wrong signal to the agents about the performance.

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
Mean time 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 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 minimum time for it.
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 year 1986. Little’s Law values are of 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.

Proposal to Improve TAT: Table-4

Following changes have been proposed to improve the TAT so what Fruitvale stays competitive with
Golden Gate:
1) Increase working day hours from 7.5 to 8 hours
2) No. of raters reduced from 8 to 2
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.

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

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 1.55 days which is a significant improvement and very competitive
comparing to Golden Gate’s 2 days. Further to counter Golden Gate’s plan of 1 day TAT, Fruitvale can
hire more employees in bottleneck stages to further reduce the throughput time.

b) Renewal Loss Rate

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

1) Waiting till last day to release the RERUNs: The reason given behind is that company
wants to collect as much information as it can and the latest information on the individual
risk. However, company already has information for one year and taking information of
last 1-2 days is not going to make any difference. Moreover, agents expect a renewed
contract before the expiry of 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 due date.
 2) 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 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 agent is also more
on RUN policy. Due to all these reasons we can conclude that RERUN policy is more profitable for
Fruitvale. Now, we can say that Salary plus program is misplaced and it should incentivize RERUN
policies.

3) Selective application of FIFO program: Even though Fruitvale policy was to go by FIFO
system at each stage of 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.

c) Underwriting Staff Workload: Table-6

Territory 1 Territory 2 Territory 3
Weighted Average Processing Time per Request 28.4 28.4 28.4
(min)
No of requests processed in 6 months of 1991 1755 1578 1347
No of requests processed per day 14.63 13.15 11.23
Capacity to process per day (60/28.4)*7.5 = 15.85 (60/28.4)*7.5 = 15.85 (60/28.4)*7.5 = 15.85
Capacity Utilization (%) 14.63/15.85 = 92.30% 13.15/15.85 = 82.97% 11.23/15.85 = 70.85%

Territory 1 is working close to its capacity while Territory 3 is being underutilized. While staff in
Territory 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 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.