Manzana Insurance

The business problem:

Profits are down. Why?
Operating Profit Variances
Revenues

2Q '89
$
Gross Premiums
8,218
Comm. + Exp.
933
Net Rev.
7,285

%
100.0%
11.4%
88.6%

2Q '91
$
8,901
1,126
7,775

%
100.0%
12.7%
87.3%

Variances
$
%
683
193
1.3%
490
-1.3%

Losses
Gross Profit

4,273
3,012

52.0%
36.7%

6,453
1,322

72.5%
14.9%

2,180
(1,690)

20.5%
-21.8%

Operating Expenses
Operating Profit

1,244
1,768

15.1%
21.5%

1,443
(121)

16.2%
-1.4%

199
(1,889)

1.1%
-22.9%

18.5%
1.4%
80.1%

2,172
133
6598

24.4%
1.5%
74.1%

Gross Premium Breakdown

New Policies
Endorsements
Renewals

1,523
113
6582

* Plus Program accounts for $97 of operating expense increase.

Essentially flat revenues (but increasing % from new policies)

Increased losses
Increased commissions & expenses
Increased operating expenses

649
20
16

5.9%
0.1%
-6.0%

Some hypotheses & observations

Increased losses may be due to shift in mix to

newer policies

Adverse selection: new policies may be initiated by

clients anticipating a loss
To get PLUS bonus, the underwriters may be too lenient
in their assessment of risk.
Due to poor service, Manzana may be getting only the
new policies that other insurers dont want !

Old policies have a higher contribution net of

commissions and expenses.

Policy Margins ('91)

Gross Premium
Commision
Gross Margin

%
100%
25%
75%

Old
$
6,205
434
5,771

%
100%
7%
93%

And old policies take less time to process!

RUN
RERUN

New
$
6,724
1,681
5,043

Dist.
68.5
28.0

UW
43.6
18.7

Rating Writing
75.5
71.0
75.5
50.1

Conclusion: Old policies are the most profitable

and least costly to serve, so the high renewal loss
rate is driving Manzanas profits down!

Why the poor turnaround time?

Look at utilization: Basic input data

Arrival Rates
('91 6 months)

RUNS
no. request
%
#days
rate (#/day)

350
7.5%
120
2.92

rate(#/min)

0.00648

RAPS convert.
RAPS*
RAINS
RERUNS to RUNS
1798
451
2081
274
38.4%
9.6%
44.5%
120
120
120
120
14.98
3.76
17.34
2.28
0.03330

0.00835

0.03854

0.00507

Mean Processing Times (min.)

Distribution Clerks
Underwriting
Raters
Policy Writers

RUNS
RAPS
RAINS
RERUNS
68.5
50.0
43.5
28.0
43.6
38.0
22.6
18.7
75.5
64.7
65.5
75.5
71.0
na
54.0
50.1

Utilizations
Distribution
(4 clerks)
Underwriting Teams
Territory 1
no. request
rate (#/min)
Utilization
Territory 2
no. request
rate (#/min)
Utilization
Territory 3
no. request
rate (#/min)
Utilization
Rating
(8 clerks)

Policy Writing*
(5 writers)

RUNS
11.1%

RAPS
41.6%

RAINS RERUNS
9.1%
27.0%

RUNS

RAPS

RAINS

TOTAL
88.8%

RERUNS TOTAL

162
0.0030
13.1%

761
0.0141
53.6%

196
0.0036
8.2%

636
0.0118
22.0%

96.9%

100
0.0019
8.1%

513
0.0095
36.1%

125
0.0023
5.2%

840
0.0156
29.1%

78.5%

88
0.0016
7.1%

524
0.0097
36.9%

130
0.0024
5.4%

605
0.0112
21.0%

70.4%

6.1%

26.9%

6.8%

36.4%

TOTAL
76.3%

RAPS conv.
RUNS to RUNS
9.2%
7.2%

RAINS RERUNS TOTAL

64.0%
9.0%
38.6%

* The 274 RAPS converted to RUNS used for Policy Writing utilization.
NOTES:
1) Based on Exhibit 7, '91 number of requests
2) Assumes 4 wks/month, 5 days/week, 7.5 hrs/day operation
3) If you assumed the same 28.4 min. weighted avg. processing time in each territory,
then the utilizations for territory 1,2 and 3 are (resp.) 92.3%, 83.0% and 70.8%.
The above method is more accurate since it accounts for variations in mix across
territories.

Observations

High utilization in distribution (89%) and

underwriting (70%-97%)

Unbalanced utilization in underwriting makes

things worse

Territory 1 has 97% utilization, which is dangerously high

Division of territories on geographical lines

eliminates the economy-of-scale benefits of
pooling

Economy of scale advantages

50
Separate
territories

40

Wq

30

20

Waiting time is
lower in pooled
system at any
given utilization.

s=1
s=2
s=3

Pooled
territories

10

0
0.80

0.85

0.90
Utilization ( )

0.95

1.00

Priority and release rules

RUNS/RAPS/RAINS given priority in underwriting

RERUNS delayed even more than they would be under

FCFS
Makes a bad situation worse at underwriting for RERUNS

RERUNS released only 1 day in advance

Ostensibly to get best information to reevaluate risks,

but how much more information is gained in a few days
on a policy that has been in force for a year or more?
No chance to be on time
This leadtime is completely controllable, unlike the
RUN/RAP/RAIN leadtime.

Problems with the current quotation policy

Double counting
Example:
5 jobs

3 jobs

Question: If each job takes one minute to complete at each station,

how much time does it take to clear the system?

Standard completion time (SCT) too conservative (95th

percentile of processing time)
The 95th percentile of the sum of 5 random times is MUCH
less than the sum of the 95th percentile of each time
(statistical averaging)

Manzana is quoting itself out of business!

A reasonable course of action

Pool underwriting teams to take advantage of

economies of scale

Keep RERUNS low priority, but release them a

week or so in advance so they have a chance of
being on time (exact leadtime requires analysis)

RUNS/RAPS and RAINS are time-sensitive work and

cannot be delayed
RERUNS are not time sensitive if they are released far
enough in advance (background work)

Develop a realistic TAT quotation policy.

Some simulation results: FIFO, no pooling

RUNS

RERUNS

Simulation results: FIFO with pooling

RUNS

RERUNS

Simulation results: Priority for RUNS with pooling

RUNS
1-Day turnaround time
is actually feasible!

RERUNS

Releasing RERUNS 4
days prior to due date
is more than enough to
guarantee 100% ontime!

Manzana Insurance: Key Lessons

Diagnose profitability by customer segment ..

contribution margin (commissions)

acquisition costs (PLUS program)
indirect costs (e.g. insured losses)
workload (e.g. processing time)

Often, repeat customers are the most profitable! (Zero Defections)

Most managers do not understand the causes and effects of

queuing, and this can lead to very bad decisions

staffing for maximum utilization

ignorance of pooling economies (geographic organization)
wrong priorities (time-sensitivity vs. profitability as basis for
priorities, e.g. RUNS vs. RERUNS)
release policies (RERUNS) & due date setting (TAT calculation)

A simple analysis of utilization + knowledge of queues can go a

long way toward diagnosing and solving leadtime performance
problems.