Overall Performance of Manzana-Fruitvale:
The Fruitvale branch of Manzana Insurance is struggling right now. “Branch profitability was declining. The backlog policies had increases since 1989, and the number of new policies and endorsements appeared to be stagnating.” To make matters even worse their main competitor, Golden Gate, had no problem taking business away from Manzana while they were struggling. Exhibit 1 shows some of the key metrics for Manzana the past two years and for Golden Gate this year. This shows just how bad of shape Manzana-Fruitvale is in right now. Their renewals are decreasing and they have an extremely high renewals late number (44%). This has led to a very high renewal loss rate (47%) while Golden Gate’s is at just 15%. Even though renewals are the least profitable program for them, losing half of your current business each year is a major problem. Something has to be done to fix this. The current practice at Manzana was to do the new policies (RUNs and RAPs) first. These represented the highest value to the company and employee but doing this has greatly hurt the renewals (RERUNS). When employees get to work in the morning they sift through their work pile for RUNs and RAPs to do first. This practice was not considered company policy but it seems the underwriters were encouraged to do it. In the end, giving priority to new policies pushed renewals to the back of the line and is the main reason that Manzana is seeing ever increasing late and lost renewals. If the company wants the employees to focus on the more profitable new policies they must understand that renewals are going to suffer. Although renewals do not present the same initial value of new policies, losing renewals still represents a significant loss of business. In addition to the poor renewal numbers, Manzana’s turnaround time is much longer than Golden Gate. Golden gate currently has a turnaround time of 2 days (with a promise for 1 day turnaround in the future). On the other hand, Manzana saw their turnaround increase over the past year to 6 days. This is a huge competitive disadvantage for Manzana when agents typically steer their clients to the company with the lowest turnaround time. Turnaround time (TAT) is a key metric in the insurance industry. It can simply be defined as the number of days between the receipt of a new policy and the issuance of a final policy. Agents work mostly on commission so they will naturally lean towards a company with a low TAT. A lower turnaround time means they will get their commission sooner and will be able to sell more policies. “It is not uncommon for an agent to call an insurer for an estimate of the company’s TAT and then refer business elsewhere if issuing a new policy would take too long.” By having such a long TAT (compared to Golden Gate) Manzana is just handing policies over to Golden Gate. This combined with their huge renewal loss rate points to the fact that Manzana is in deep trouble. To make matters worse, Golden Gate has announced that they will implement a guaranteed turnaround time of 1 day. Meanwhile Manzana is currently sitting at a TAT of 6 days. Drastic changes need to be made at Manzana if they want to stay in business. Theoretical TAT:
The actual TAT at Manzana is currently 6 days. This means that the average policy takes 6 days to create. However, there is also a theoretical TAT. This is the TAT they should be able to achieve if everything is normally done. Exhibit 2 shows the first way to find theoretical TAT. Typically Fruitvale receives 40 requests per day. This can be a rough estimate for the flow rate for an average day. R=40/day. We also know that for the week ending 6 September 1991 they had 82 requests in process. This means that the inventory is 82. I=82. Using Little’s Law, which is T=I/R we find that the flow time for an average policy is 2.05 days. This is the theoretical turnaround time for Manzana-Fruitvale and...
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