The underwriting process in the industry

In the 1970s Golden Gate Casualty enters the market putting Manzana with fierce price competition and intensive marketing activities under pressure. The underwriting process in the industry usually functions as follows. Independent agents interact directly with the client whereas functional underwriting teams are occupied with the underwriting process. At Manzana a typical policy is passed on by the agent to a distribution clerk (DC) who transfers it to a geographically organized “Underwriting Team” (UT). These Teams evaluate, classify and price the requests, then being passed on to “Rating” (RT) and “Policy Writing” (PW).

The key performance indicator is the turnaround time of an insurance policy, which at Fruitvale has increased to 8. 2 days recently. Hence, the company constantly loses customers and needs to improve its TAT immediately. Analysis Fruitvale’s key problems originate from its Underwriting Process. The turnaround time, especially for renewing policies (RERUNs) is too long which ruins operating performance. Agents complain about high TATs, the percentage late figure is too high and significant renewal business is lost.

Out of the 39 requests daily inflow, 22 fall into the new policy (RUN), endorsement (RAIN) or price quote (RAP) category. RERUNs amount to 17. The processing of requests is done through a FIFO system with internal prioritization of RUNs & RAPs over RAINs & RERUNs. The TAT is said to be 8. 2 days with a steadily increasing backlog, currently 82. This holds against a claim of Golden Gate to serve all clients within 1 working day. The backlog is caused by assuming an out-dated Standard Completion Time (SCT) which does not take technological advances into account.

In structural terms, we can analyze the organizational supply chain by performing an MMc Queue calculation, based on the figures from the last 120 working days, a 7,5h working day and weighted averages of operating times. This data yields the service rate which is combined with an arrival rate of 39 to calculate the throughput time. One has to consider that the arrival rate in the PW step is lower than in the other processes because only 15% of RAPs are converted into RUNs and reach this step. The cumulated throughput times yield our TAT, which in this case, falls into a range of 0. 94 – 1. 394 days. Hence, the underwriting process itself seems to be efficient and the difference has to have its main roots in qualitative and organizational defects. However, structural improvement is possible. The three geographically split UTs can be merged into a single unit, making up for different workloads which result in backlogs. Throughput times of the UTs can be decreased by up to 82,5%. On the qualitative side we could identify three key performance drivers. Firstly, the prioritization within the FIFO process does not seem to reflect the fair value of requests.

Clearly RUNs contribute the highest value per request (6. 724 $) followed by RERUNs (6. 205 $) and RAINs (645 $). In terms of current priority RAPs are valued equal to RUNs. As only 15% of them are converted into RUNs they should only be valued with 6. 724 $* 0,15 = 1. 008 $. Thus RERUNs are clearly undervalued. Also, they make up roughly 74% of gross premiums. Though RAPs are overvalued in monetary terms RUNs originating as RAPs constitute 43,9% of total RUNs processed. Therefore, neglecting RAPs could lead to significant decrease in the number of RUNs processed.

Thus we advise Fruitvale to run a modified FIFO with a prioritization on RUNs, RERUNs and RAPs first and RAINs second. Secondly, we have to reconsider the incentive structures in place. Agents are given a 25% commission on new policies and a 7% commission on renewals. As shown, RERUNs make up for a significant amount of revenues, while their handling constitutes a key flaw in lost policies. Thus it is sensible to increase incentives for RERUNs. We therefore propose an incentive scheme granting a flat commission of 11,4%. In terms of internal incentives, changes in the underwriting process are to be considered.

RT and PW have become increasingly mechanical. Thus incentives could keep the pace of work on a high level and eradicate backlogs. We also propose to extend the salary plus scheme to all divisions and to every type of insurance in order to make processing RERUNs attractive. Additionally we would advise to bring RERUNs into the process earlier in order to make sure that they arrive with the agents in time. This would decrease backlog and also decrease the probability that the agents receive policies late and lure away clients to competitors. Conclusion

Manzana Fruitvale had significant profit losses due in essence to increasing turnaround times of policies. These originated in structural deficits, wrong prioritization, inefficient incentive structures and failures in policy renewals. These problems can be solved by introducing a FIFO process with prioritization on RUNs and RERUNs, merging the underwriting teams, incentivizing rating, policy writing and the treatment of RERUNs as well as starting their processing earlier. All these measures combined lead to a reduction in total throughput time of up to 91% and a possible elimination of renewals losses and backlog.