ACC Corporation is a general casualty insurance company, with its primary business in automobile, homeowner and personal property insurance. The casualty insurance industry has been under severe profit pressure in recent years due to increasing claims. Political pressure has kept the industry from passing on the full cost of high damage settlements as quickly or completely as the industry would like. In addition, ABS is a relatively small company in an industry dominated by several larger companies, some of which are controlled by major Canadian financial conglomerates. Its relatively minor position makes it more difficult to maintain a wide agent base and to advertise effectively. Therefore, there is much pressure to make the internal operations of the company more efficient without making costly errors.

The recently appointed general manager of the corporation, Jennifer North, has been hired to help the company to regain profitability after several years of near-break-even operations. Concerns over the efficiency and the effectiveness of operations were cited at major reasons for the low profitability. Recognizing the importance of a well-designed management control system to aid and coordinate the process of making decisions and motivating individuals through the organization to work together, she felt there was a need to evaluate the current control system to ensure that it monitors not only the efficiency but also the effectiveness of the operations. This, she felt, was necessary to turn return the organization to profitability.

Currently, the organization had attempted to plan and control operations through a fixed master budget for the company as a whole. The executive committee, which consists of the President, Vice-President of Finance and the General Manager, set the annual master budget after reviewing the past performance and making adjustments or any foreseeable changes in the product offering. The budget was then divided up and assigned to each department. Most of the responsibity centres in ACC are cost centres. Departmental managers are evaluated on the basis of variances from the fixed budget, on a line-by-line basis. The exception was the Marketing and Sales department that was set up as a revenue centre. That department manager was evaluated on meeting the budgeted revenue targets for revenue from automobile, homeowner and personal property insurance.. In addition to the Revenue budget, the department manager was responsible a fixed cost budget for operating expenses incurred in that department. A description of the management control system for several key departments is provided below.

The underwriting division is responsible for compiling the new initial files and drawing up the insurance contracts for new clients, including assessing the premium. It also maintains the client base by monitoring client performance and drawing up renewal policies and premiums based on the client's performance. The premiums (per $1,000 of coverage) are assessed on the basis of various factors for each client, depending on the nature of the policy. For example, fire insurance premiums on buildings are determined by factors such as type of construction, use of premises, contents of premises, quality of fire protection and detection, distance from hydrants, accessibility by firefighting equipment, and so forth. It is the responsibility of the underwriting division to assess experience factors and to recommend to the Executive committee increases and decreases in premiums at least once every six months. The underwriting division does not have responsibility for sales.

The direct costs of the underwriting division are largely staff costs. There are several departments within the division and each department has a departmental manager. One such section is theinvestigation section, which assesses new insurance applications and recommends approval or rejections of coverage. Response time is very important both for competitive reasons and because the company is liable for coverage as soon as the insurance agent accepts the applications. When surges in the volume of new policies occur, the manager of the department will contract will contract out the investigations to independent investigators in order to avoid delays. The additional costs of contracting out to independent investigators are not charged back to the investigating section but are treated as service cost charged to corporate general administration.

Another section is theprocessing section. This group does the actual policy preparation, including the building and maintenance of customer's computer file and the preparation of premium notices and renewals. Inputting the correct information is critical. The work in this area is very routine and there is high turnover in this department. Except for the initial inputting of the application information and sending the application to the investigation section, time constraints are not severe. In busy periods, the lag in the paper work and computer file maintenance will get larger, but without significant adverse consequences.

A third section of theunderwritingdepartment is the actuarial staff. The actuaries and their support staff are responsible for the monitoring and analysis of underwriting and claims experience in order to recommend new premium levels. Since the analysis underlying their recommendations is computerized, the level of activity in this section is not responsive to changes in underwriting volume.

The underwriting department makes extensive use of ACC computer facilities in all aspects of its work. Many staff members work directly at computer terminals that can also function as stand-alone workstations for routine tasks such as letter-writing. The mainframe computer itself is operated and maintained by the Information Technology department.In the past there has been no charge made to user departments for the services of the data processing department, however, the manager of the department has indicated concern about the many processing department service calls resulting from employees not understanding how to use the programs.

Required:

As a management consultant, prepare a report for the Jennifer North that includes an evaluation of the current management control system. In your report include your assessment of the strengths and weaknesses of the current system with respect to the impact of the current system on goal congruency. Your report should provide recommendations for improving the ACC management control system.