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Manzana

In: Business and Management

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A. Get the Big Picture:

At Manzana the new policies (RUNs) are believed to be more profitable because they “commanded the highest premiums” and also because they considered that costumers would renew their policies anyway so they didn’t need to pay as much attention to the RERUNs. Nevertheless, we consider that these are not the most profitable policies and for instance they should not be given high priority.

Table 1: Manzana Profit for 2nd quarters

Looking at the profits we can see that there has been a gradual decrease in profitability, from a 21.51% in 1989 to -1.36% in 1991.
We made a table including the 2nd quarters or the last 3 years, and we say that there has been an increase of 1.23% in the commission & other expenses over gross premiums, which is related to the policy as agents get 25 % instead of 7%.
While new policies profit increased a 5.9%, the renewal policies decreased the same amount. However, this change has brought as result that of a total of 3900 (including processed within TAT, out TAT and loses) total Renew requests in the 2nd quarter of 1991, there were 926 loses, taking us to 23.74% loses and 23% processed after TAT.
As the RUN and RAP method were being emphasized, there was loss of renewals according to the data provided.
The RAPs are converted into RUNs in 10 days and then 3-5 days in getting completed. The SCT is less for RERUNs. So we can conclude that RERUNs also takes less time to get completed.

Table 2: Volume 2nd Quarter

Table 3: Commission Analysis

The commission paid to agents for completing a RUN and RERUN is 25% and 7% respectively. They get more money if they complete RUNs and RAPs. This encourages them to prioritize their work by addressing RUNs and RAPs first, which just delays the RERUNs further. Even though renewals did not have the same initial value of new policies but losing renewals still represents a significant loss of business. Also, as seen on the above table, the contribution made to gross premiums by new policies is less and higher in expenses (commissions). The ratio of % contribution made to gross premium to % contribution in commissions is lower is lower for new policies than renewals. Please refer the tab ‘commission’ for more clarity on the ratio.-
What other factors impact Manzana profitability?
Apart from the already mentioned valuation method (prioritize RUNs and RANs over ReRuns instead of using FIFO as intended) leading to renewal policy loses (and for instance clients) and also the Commisions, we found that:
TAT: Service takes 5 to 6 days and some of the SLAs are not reached
Competitors: Like Golden Gate has a TAT of 2 days (with a promise for 1 day turnaround in the future). As the notice was sent on the last day to the agents, agents preferred to recommend to their clients other insurance firms
B. Analyze Operational Performance:

3) Manzana has an average TAT of around 6 days (Exhibit 6 – last row last column). This means that the average policy takes six days to create. There are a few factors that contribute to such a long TAT. Firstly, the customized FIFO policy that Manzana uses; giving priority to RUNs and RAPs over RERUNs, results in increasingly late RERUNs. The custom FIFO also creates waste by creating waiting time because employees are sorting through all the policies trying to find RUNs. Secondly, the priority Manzana gives to RAPs over RERUNs is also a factor which contributes to such a long TAT. RAPs only result in RUNs 15% of the time, while RERUNs almost certainly lead to consistent sales for several years. Furthermore, the fact that only 15% of the RAPs become RUNs is a source of variability in the system that can cause congestion and increase the average flow time and thus the TAT. Thirdly, Manzana knows the due date for RERUNs a month in advance. However, RERUNs are only being sent to the DC one day in advance. This policy is only adding to the late RERUNs and the loss of RERUNs. Furthermore, waiting for the last day makes the process less flexible and can also lead to a higher variability in the system that can cause congestion and increase the average flow time and thus the TAT. Fourthly, Manzana assumes a series operation while calculating the TAT. In an ideal situation, work should be done simultaneously by the units. Working simultaniousely will reduce the TAT. Lastly, the way Manzana calculates TAT is also a factor which contributes to such a long TAT. In calculating the turnaround time, Manzana uses the 95% SCT. This SCT was calculated in 1986, before the development of computerized rating, policy writing, et cetera. The SCT is outdated and overstated. Furthermore, using the SCT is a very conservative estimate and not useful for the business Manzana is in. Manzana should use the mean process time. The mean process already accounts for time required for non-productive work. Using the mean process time will reduce the TAT. C. Make Recommendations:

4) We would recommend the following action plans to solve Manzana’s operational problems and improve its financial performance.

Firstly, Manzana should follow the FIFO policy without her own customs. These customs are causing problems. By giving priority to RUNs, other policies are late and they eventually lose RERUNs which causes loss of profit. The custom FIFO also creates waste by creating waiting time because employees are sorting through all the policies trying to find RUNs.

Secondly, Manzana should give RERUNs priority over RAPs because only 15% of RAPs become RUNs. The extra revenues that RAPs may generate do not compensate for the fall in premiums due to loss RERUNs.

Thirdly, Manzana needs to modify the procedure for handling RERUNs. Her renewal loss rate is too high, mostly due to being late. This is unacceptable, especially because Manzana knows the due dates a month in advance. An alternative is to form a dedicated team for serving only RERUNs so that losses are reduced.

Lastly, Manzana should revise her salary plan. The salary/plus employees currently receive a bonus for every new policy written. This promotes their customized FIFO policy. This is counterproductive. Furthermore, the salary/plus program has also added approximately 10% to expenses with no significant increase in the number of new policies written.

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