Adding to the recommendations of Stephanie's solution, argue for offering the 1-day guarantee to match State Ranch.

To: Leslie Lovett From: Stephanie Geisler / Division Manager Date: June 11 Subject: [Affiliak] Recommendations for Positive Profit Trends and Improved Turnaround Times Where we are today As you are already aware, profits are on a downward trend, expenses are on an upward trend, suggesting that we have some serious issues to address. In addition, revenue trends for renewals (RERUNs) were positive until the first quarter of 2006, at which point the trend turned distinctively negative. (See Exhibit 1A for details.) Causes for Downward Trends There are three main causes of the negative trends listed above. First, we have a bottleneck in the underwriting department that is causing our service levels to suffer, which is having a significant negative impact on our ability to process policies (exhibit 2). Second, we have wrongly assumed that working to secure new policies (RUNs) is the most efficient use of time and resources when retaining existing policy accounts (RERUNs) is actually the most profitable (exhibit 3). Third, we have implemented an incentive program (Plus Program) based on that inaccurate assumption which incentivizes our underwriters to secure new policies at the expense of retaining existing policies when a more profit maximizing approach would be to do just the opposite. Steps To Positive Profit Trend and Significant Improvement in Turnaround Times After careful analysis, I recommend the following: 1. The Bottleneck Identification and Relief (See exhibit 2 for detailed analysis) We currently have a bottleneck in the underwriting department. This utilization of this department is at 88%. While this may sound adequate, the variation in both arrival of orders and variation in processing times causes this utilization level to be too high, creating a queue in this department. This bottleneck must be relieved. I first recommend doing away with the current process of assigning territories and instead allow all the underwriting teams to process the next claim in line (pooling our resources). After pooling has been in effect for several weeks, I recommend calculating the utilization of the underwriters again to determine if we need to hire additional underwriters. Because underwriters are the most expensive part of our process, it is appropriate that the underwriting department be the most highly utilized of the processes, although we need to increase throughput at this bottleneck significantly to reduce our inventory and increase our profits. 2. New Incentive Program To Support Financial Performance (See exhibit 3 for detailed analysis) My analysis reveals that our Plus Program is actually hurting rather than helping our profitability and our overall turnaround times. The Plus Program incentivizes our Senior Underwriters and the former District Manager to focus on processing new policies at the expense of maintaining existing policies. It is much more costly to obtain a new policy, especially when you factor in that 85% of our PRERUNS dont generate any revenue at all since they dont become new policies. I recommend implementing a new incentive program that incentivizes profits across all types of policy activities. I recommend customer service training to show all employees how profitable RERUNS are, as well as a special growing bonus incentive when policies are retained for certain benchmark periods (3 years, 5 years, etc). 3. Process Refinement Some simple steps (See exhibit 4 for detailed analysis) Process refinement is an ongoing pursuit. My analysis revealed several simple steps that we can implement immediately to improve turnaround times: Release the RERUN request to the distribution clerks ten days before the due date rather than one day before the due date. This will provide a buffer for the variation in arrival of other jobs. Set the system to release RERUNS even earlier than the ten day mark if there is a period of relative slowness in incoming requests for RUNS and PRERUNS. Reduce the amount of time spent on a portion of our PRERUNS. Too much time is being spent on policy work that never results in any revenue. We must reduce the time spent in providing quotes. (See exhibit 4 for additional details.) I am ready to begin implementation of these recommendations pending your approval. Geisler 2 2 Exhibit 1 Where We Are Now And Causes E1 A Profits are on a downward trend. The most significant downward trend began when the Plus Program was introduced. The Plus Program incentivized our underwriters to place a higher priority on RUNs (a less profitable activity) and a lower priority on RERUNs (a more profitable activity). The Plus Program also required that additional bonuses be paid out, increasing expenses. E1 B While premiums are going up slightly, the underwriting results after commissions, losses, and expenses are trending down. This is based primarily on an increase in losses, although expenses and commissions are both trending up as well. The question to ask is why? This can be traced back to the Plus Program incentives. These incentives encourage PRERUNS and RUNS to be given priority. Because a small percentage of PRERUNS result in new policies actually being sold (15%), much of the work being done on PRERUNS is not generating any revenue. The trend in additional losses is a little more complicated and is addressed below. $(500) $- $500 $1,000 $1,500 $2,000 $2,500 0 5 10 15 Profit Quarters Profit by Quarter Profit (Loss) Linear (Profit (Loss)) $- $500 $1,000 $1,500 $2,000 $2,500 0 2 4 6 8 10 12 New Policies (RUNS) New Policies (RUNS) Linear (New Policies (RUNS)) Geisler 3 3 E1 C We are losing renewals at an alarming rate. We need to arrest this trend immediately! Renewals are our most valuable product - although the premiums are slightly less than a new policy, renewals are 2.45 times faster to process, making them more profitable (Exhibit 3 - A). Renewals also have half the variability of new policies, meaning they can be relied on to flow through the system more reliably without causing bottlenecks. $8,100 $8,200 $8,300 $8,400 $8,500 $8,600 $8,700 $8,800 $8,900 $9,000 0 2 4 6 8 10 12 Total Premiums Total Premiums Linear (Total Premiums) $- $500 $1,000 $1,500 $2,000 $2,500 $3,000 $3,500 0 2 4 6 8 10 12 Gross Underwriting Results Gross Underwriting Results Linear (Gross Underwriting Results) Geisler 4 4 E1 D The trend in additional losses is a little more complicated, although likely results from the new Plus Program incentive based on the rise coinciding with the implementation of the new incentive. It is less risky to retain policies than to attempt to get new ones, but the Plus Program is encouraging Senior Underwriters and the District Manager toward behaviors that will result in more RUNS and away from behaviors that result in policies being retained, thus increasing risk, which increases losses. 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% 0 5 10 15 % Renewals Lost % renewals lost Linear (% renewals lost) 0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 0 5 10 15 Ordinary Insured Losses Ordinary Insured Losses Linear (Ordinary Insured Losses) Geisler 5 5 Exhibit 2 Bottleneck In the Underwriting Department We have a serious bottleneck in the Underwriting Department. We are receiving 40 daily policy requests, which at the average processing time of 30 minutes each, would take 20 hours to process. Our current capacity in the Underwriting Department is 22.5 hours each day, making our utilization 0.88. If arrivals had no variation, then this capacity would be adequate. Because arrivals are random and the variability in underwriting processing times is high, the time in queue is 3.93 hours. (See exhibit 3 - C for further discussion.) Time In Queue at Underwriting part 1 0.167 part 2 15.23 u square root of 8 square root of 8 - 1 1-u 0.88 2.828 1.828 0.12 part 3 CVa sqrd CVp sqrd CVa sqrd + CVp sqrd 1 0.5476 1.5476 Time in Queue: 3.93 Variation in processing times is highest in the underwriting step. Variation is random for arrivals. This combined variation makes pooling an appropriate option. All three of our underwriting teams can process all types of policies. Rather than assign our underwriting teams to particular regions, we will implement a FIFO process where each underwriting team will take the next task in line. This pooling will reduce our time in queue. With our current processes, the time in queue is 3.93 hours. Exhibit 3 RUNs vs RERUNs 0 20 40 60 80 100 120 140 160 180 200 0 2,000 4,000 6,000 8,000 Extraordinary Losses Extraordinary Losses Linear (Extraordinary Losses) Geisler 6 6 E3 A - When the Plus Program was introduced, RUNs began taking priority over RERUNs, as shown in the charts below: E3 B We are losing renewals at an alarming rate. We need to arrest this trend immediately! Renewals are our most valuable product - although the premiums are slightly less than a new policy, renewals are 2.45 times faster to process, making them more profitable (Exhibit 3 - A). Renewals also have half the variability of new policies, meaning they can be relied on to flow through the system more reliably without causing bottlenecks. E3 C In three of the four steps, RUNs take significantly more time than RERUNs. At our bottleneck (underwriting), RUNs take 2 1/3 times longer than RERUNs. We need to shift our focus to RERUNS to reduce inventory and bring in more revenue. RUNs (including PRERUNs that become RUNs) take 54% of the total processing time, while RERUNs only require 22% of total processing time (see chart below). RERUNs require 33% less processing time than RUNs and generate revenue at 125% of RUNs. RUNs PRERUNs RUNONs RERUNs Total Mean Processing Time - All Departments 258.6 152.7 185.6 172.3 Percent of Total Processing Time: 34% 20% 24% 22% 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% 0 2 4 6 8 10 12 % Renewals Lost % renewals lost Linear (% renewals lost) Geisler 7 7 Mean Processing Time - RUNs to RERUNs Utilization RUNs RERUNs RUNs to 1 RERUN Distribution 68.5 28.0 2.45 0.92 Underwriting 43.6 18.7 2.33 0.88 Rating 75.5 75.5 1.00 0.75 Policy Writing 71.0 50.1 1.42 0.62 Underwriting Team* RUNs PRERUNs RUNONs RERUNs Mean 43.6 38.0 22.6 18.7 30.73 Average Mean / All Types Coef. of variation (std. dev. / mean) 0.73 0.64 0.52 1.06 0.74 Average Coef of Var / All Types 95% SCT (standard completion time) 107.2 87.5 49.4 62.8 E3 D RERUNs generate highest topline revenue per policy. They also dont require the Plus Program bonus to be paid. Per Policy Revenue (thousands) New Policies (RUNS) in $ $ 1,714 $ 6.09 New Policies (RUNS) in # 281.4 Endorsements (RUNONS) in $ $ 123 $ 0.58 Endorsements (RUNONS) in # 212.3 Renewals (RERUNS) in $ $ 6,749 $ 7.72 Renewals (RERUNS) in # 874.2 Total Premiums in $ $ 9,079 $ 6.64 Total Policys in # 1367.9 Exhibit 4 PRERUNs PRERUNs are taking a significant amount of processing time, but only yield revenue in 15% of the cases. I recommend implementing a process of identifying the top 20% of policy leads (those that have the highest likelihood of becoming RUNs). These top 20% would be sent through the current system. The additional 80% would be sent through an expedited process, handled primarily by the underwriter assistants, which would yield a more general quote, which could then be approved or rejected by the customer. If approved, the general quote would be taken through the additional underwriting to be fine-tuned and then given to the customer for final approval. This plan would eliminate a significant portion of the PRERUN activities that don't result in revenues. PRERUNs - Processing Time per average PRERUN that yields no revenue (in hours) Distribution 42.50 Underwriting 32.30 Rating 55.00 Policy Writing NA Total 129.80