Case: Forecasting Techniques

National Casualty Insurance Company

Introduction

National Casualty Insurance Company is a wholly-owned subsidiary of National Mutual Automobile Insurance Company. National Mutual was founded in 1924 to underwrite automobile insurance. In 1930 it organized National Casualty to underwrite homeowners and boat owners insurance, and two years later it organized National Mutual Life Insurance Company to underwrite life insurance.

The National Mutual Companies have been enormously successful. They are among the world's largest writers of automobile insurance, and the other companies are growing very rapidly. Much of their success can be attributed to the company's dedication to low cost and high service. The main criterion of efficiency is the ratio of operating cost to number of policies served. The extensive sales network throughout the United States is responsible for generating growth in total policies, while each division within the company is charged with reducing operating costs as much as possible. Because of this emphasis National Mutual is the industry leader in operating cost per policy. This philosophy has served the company well in enabling them to weather the bad times, such as when inflation has soared, while other companies have struggled to remain in business.

The National Mutual group also enjoys very good relations with its employees. In the early years of the company there was a conscious decision made to locate company offices outside of major urban centers. As a result, none of the company's more than 30,000 office employees or 14,000 salesmen belong to a union.

Financially National Mutual has done very well over the years. The companies continue to grow rapidly in volume (see Exhibit 1). In only two years of the past 15 has the company failed to make an operating profit (exclusive of investment income). One of those years was in a period of rapid inflation, when all insurance companies experienced trouble with skyrocketing claims. In the other year the company had accepted too much business, some of which was substandard and contributed to unexpected losses. As mentioned, though, National Mutual's emphasis on operating efficiency has allowed it to survive and to prosper while other companies have foundered. This efficiency is necessary if the company is to continue generating the large volume of policies needed by maintaining reasonable premiums.

All companies in the National Mutual group have a common president. This serves to provide control over and coordination between the companies in the group. Below the corporate level the company is quite decentralized with 25 regional offices spread throughout the United States. Each of these offices operates as an autonomous unit and constitutes a profit center. Divisions within the regional offices are also considered profit centers, each responsible for its Over the last 20 years National Mutual has moved more and more to sophisticated computer systems to handle their growing business efficiently. However, much of the work still involves handling and preparing documents. While the internal system can be highly computerized, customers still must interact with the company by means of paper documents. Thus, the efficient handling and preparation of these documents is crucial to the profitable operation of the division.

James Hopwood has felt increasing pressure to maintain operating profits each year. When a damaging frost occurred in Phoenix last year, the division showed losses in two quarters. Hopwood was subtly reminded by the Regional Vice President that each division was expected to maintain an operating profit. Therefore, he is very interested in running his division with the smallest number of workers possible. He doesn't want to cut the staff to the point where workers feel overburdened and morale suffers, but he doesn't want a lot of idle time, either.

In order to do a good job planning his future staffing needs, Hopwood realizes that he needs a good forecast of the number of documents that need to be handled in his division. Given this number, he has a pretty good feel for the time required to process the various documents. In particular, he needs to know the number of new policies to expect each quarter. Regardless of their type and content, new policies each require a certain amount of document handling. Other sources of document handling, such as cancellations, renewals, and billings, can be predicted fairly well a quarter in advance by knowing the number of policies currently in effect. However, new policies depend a great deal on economic conditions, efforts by the salesmen, etc., and are much harder to predict.

Hopwood uses a rule of thumb that says that approximately \(50 \%\) of the clerical work is due to new policies, while about \(90 \%\) of the underwriting time is spent on new policies. Previous time studies show that the standard time for clerical work on new policies (total for all departments) is 18 minutes, while the standard underwriting time on new policies is 5 minutes. Also, Hopwood knows that a typical quarter consists of 60 working days, each with 8 hours of time available.

Currently, forecasts of new policies are made by collecting forecasts of individual salesmen during the previous quarter. As shown in Exhibit 2, these forecasts are generally rather optimistic and if used as they are will lead to wasteful overstaffing. James Hopwood needs some better method of forecasting in order to maintain efficient operations.

Points For Analysis

1. Graph the actual number of new policies and the salesmen's forecasts by quarter for the last five years. Do you notice any trends?
2. Calculate the average error (MAD) for the salesmen's forecasts.
3. Use time series forecasting techniques that are appropriate for the kind of pattern that you observed. Evaluate them on the basis of their MAD and compare the results to the salesmen's MAD.
4. Are there any other techniques (such as correlational analysis) that could be tried to forecast new policies? What data would you need in order to do such an analysis?
5. Choose the technique you would recommend to the company and use it to forecast the new policies in each quarter of year 6 .
6. (Optional) Use your forecasts for year 6 to determine the number of clerical workers needed each quarter based on the rules of thumb and time estimates given in the case.
7. What suggestions do you have for the company in implementing your recommended technique and in planning for the future?

Price: $36.08

Solution: The downloadable solution consists of 15 pages, 2108 words and 4 charts.
Deliverable: Word Document