Question
Bounce Back Insurance Company carries three major lines of insurance: auto, workers' compensation, and homeowners. The company has prepared the following report: Bounce Back Insurance
Bounce Back Insurance Company carries three major lines of insurance: auto, workers' compensation, and homeowners. The company has prepared the following report:
Bounce Back Insurance Company Product Profitability Report For the Year Ended December 31 | |||||
Auto | Workers' Compensation | Homeowners | |||
Premium revenue | $5,800,000 | $6,250,000 | $8,200,000 | ||
Estimated claims | (4,060,000) | (4,375,000) | (5,740,000) | ||
Underwriting income | $1,740,000 | $1,875,000 | $2,460,000 | ||
Underwriting income as a percent of premium revenue | 30% | 30% | 30% |
Management is concerned that the administrative expenses may make some of the insurance lines unprofitable. However, the administrative expenses have not been allocated to the insurance lines. The controller has suggested that the administrative expenses could be assigned to the insurance lines using activity-based costing. The administrative expenses are comprised of five activities. The activities and their rates are as follows:
Activity | Activity Rates |
New policy processing | $110 per new policy |
Cancellation processing | $180 per cancellation |
Claim audits | $330 per claim audit |
Claim disbursements processing | $100 per disbursement |
Premium collection processing | $25 per premium collected |
Activity-base usage data for each line of insurance were retrieved from the corporate records as follows:
Auto | Workers' Compensation | Homeowners | ||||||
Number of new policies | 1,330 | 1,400 | 4,100 | |||||
Number of canceled policies | 490 | 300 | 2,200 | |||||
Number of audited claims | 390 | 110 | 950 | |||||
Number of claim disbursements | 470 | 220 | 850 | |||||
Number of premiums collected | 8,500 | 1,900 | 15,200 |
a. Complete the product profitability report through the administrative activities. Determine the operating income as a percent of premium revenue. Rounded to the nearest whole percent.
Bounce Back Insurance Company | |||
Product Profitability Report | |||
For the Year Ended December 31 | |||
Auto | Workers' Comp. | Homeowners | |
Premium revenue | $fill in the blank 898f0908bfd2062_1 | $fill in the blank 898f0908bfd2062_2 | $fill in the blank 898f0908bfd2062_3 |
Estimated claims | fill in the blank 898f0908bfd2062_4 | fill in the blank 898f0908bfd2062_5 | fill in the blank 898f0908bfd2062_6 |
Underwriting income | $fill in the blank 898f0908bfd2062_7 | $fill in the blank 898f0908bfd2062_8 | $fill in the blank 898f0908bfd2062_9 |
Administrative activities: | |||
New policy processing | $fill in the blank 898f0908bfd2062_10 | $fill in the blank 898f0908bfd2062_11 | $fill in the blank 898f0908bfd2062_12 |
Cancellation processing | fill in the blank 898f0908bfd2062_13 | fill in the blank 898f0908bfd2062_14 | fill in the blank 898f0908bfd2062_15 |
Claim audits | fill in the blank 898f0908bfd2062_16 | fill in the blank 898f0908bfd2062_17 | fill in the blank 898f0908bfd2062_18 |
Claim disbursements processing | fill in the blank 898f0908bfd2062_19 | fill in the blank 898f0908bfd2062_20 | fill in the blank 898f0908bfd2062_21 |
Premium collection processing | fill in the blank 898f0908bfd2062_22 | fill in the blank 898f0908bfd2062_23 | fill in the blank 898f0908bfd2062_24 |
Total administrative expenses | $fill in the blank 898f0908bfd2062_25 | $fill in the blank 898f0908bfd2062_26 | $fill in the blank 898f0908bfd2062_27 |
Operating income | $fill in the blank 898f0908bfd2062_28 | $fill in the blank 898f0908bfd2062_29 | $fill in the blank 898f0908bfd2062_30 |
Operating income as a percent of premium revenue | fill in the blank 898f0908bfd2062_31% | fill in the blank 898f0908bfd2062_32% | fill in the blank 898f0908bfd2062_33% |
b. Interpret the report.
All three insurance lines have percentage of underwriting income to premium revenue. The differences among the insurance lines are in the way they consume activities. The insurance line has the profitability because it has and frequent claims that require more auditing and disbursement processing than do the other two lines. In addition, the Homeowners line has a much higher rate of cancellation relative to the other two lines (over 50% of new policies). Lastly, the Homeowners line has more premium collections compared to the other two lines. Possibly, the Homeowners line is collected in smaller amounts from more customers than the other two lines. In contrast, the line consumes the administrative activities, causing it to be very profitable. The Auto line is in between these two.
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