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Gibson Insurance Company Case Solution

Solution Id Length Case Author Case Publisher
2849 1824 Words (10 Pages) Mark E. Haskins, Kristy Lilly, Liz Smith Darden School of Business : UV1113
This solution includes: A Word File A Word File and An Excel File An Excel File

Rebecca Hampton, the capable controller of Gibson Insurance Company, finds herself facing a crucial task at the end of the year: to evaluate the company's financial resources and expenses and bring changes. The ultimate goal is to enhance pricing strategies and allocate resources more effectively such that profitability increases and expenses are minimized. Gibson Insurance is determined to gain clearer insights into profitability, pricing decisions, and compensation for their diligent sales agents. Recent troubling observations by the management team reveal a concerning trend: sales volume has been on the rise while the company's profitability has been declining. This situation raises suspicions that incorrect pricing and uncontrolled costs might be the reasons for this mishap. Therefore, Gibson Insurance must devise a fresh cost allocation method and approach that will enable them to make more informed financial choices and eliminate these problems for good. Rebecca Hampton, with her extensive experience, must find a solution to steer the company towards better financial decision-making and secure a bright future for the Gibson Insurance Company.

Following questions are answered in this case study solution:

  1. Calculate the unit support cost per policy for new and in-force annuity and life insurance policies using the new allocation bases. In addition, calculate the total support costs to be reported by product for each legal business unit entity. Compare to the total support costs reported using the old allocation bases in Exhibit 2 and provide comments on the major differences.

  2. Why would Hampton want to track that information by product (computed above in question 1) even if that level of detail was not required by regulators?

  3. Is there room for improvement in the means by which the corporate support costs are allocated under Hampton’s new approach? Why, or why not?

  4. Estimate the amount of “Customer Service” support costs allocated to the product called “Annuities-New Policies-Midwest” under the old system. Also, estimate the amount of “Customer Service” support costs allocated to same product under the new system. Comment on what is driving the difference.

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Case Study Questions Answers

1. Calculate the unit support cost per policy for new and in-force annuity and life insurance policies using the new allocation bases. In addition, calculate the total support costs to be reported by product for each legal business unit entity. Compare the total support costs reported using the old allocation bases in Exhibit 2 and provide comments on the major differences.

 

 New basis

 Aggregate support cost

 Total Units

 Cost per unit

Policy Acquisition

 Steps

 $ 4,375,000

103,680

 $ 42.20

Customer Service

 Calls

 $ 2,426,000

55,060

 $ 44.06

Sales and Marketing

 No. of sales

 $ 4,552,000

454,400

 $10.02

Corporate Overhead

 AUM

 $ 2,567,000

8,601,700,000

 $ 0.0003

 

 

 

Annuities

 

 

Life Insurance

 

 

 Support cost

 New basis

 New

 

 In-Force

 New

 

 In-Force

Policy Acquisition

 Steps

2

 

0

5

 

0

Customer Service

 Calls

0.5

 

0.2

0.6

 

0.4

Sales and Marketing

 Contacts

10

 

0

20

 

0

Corporate Overhead

 AUM

 $ 50,000

 

 $ 50,000

 $1,500

 

 $ 65,000

 

 

Unit support cost per policy using new allocation bases

 

 

 

 

 

 

 

Annuities

 

Life Insurance

 Support cost

 New basis

 New

 

 In-Force

 New

 

 In-Force

 Policy Acquisition 

 Steps

 $ 84.39

 

0

 $ 210.99

 

 $-  

 Customer Service

 Calls

 $ 22.03

 

 $ 8.81

 $ 26.44

 

 $ 17.62

 Sales and Marketing

 Contacts

 $100.18

 

0

 $ 200.35

 

 $-  

 Corporate Overhead

 AUM

 $14.92

 

 $14.92

 $ 0.45

 

 $ 19.40

Unit support cost per policy

 

 $ 221.52

 

 $ 23.73

 $ 438.22

 

 $ 37.02

 

Total Basis

Annuities

 

Life Insurance

New

In-force

New

 

In-Force

39,680

 

 

 

 

9,920

17,180

7,680

 

20,280

198,400

 

256,000

 

 

992,000,000

4,295,000,000

19,200,000

 

3,295,500,000

 
 

Midwest

Gibson

Compton

Total

Annuities:

 

 

 

 

New Policies

 $ 2,216,300

 $ 1,911,558.75

$ 269,280.45

$ 4,397,139.20

In-Force Policies

 $ 1,071,450

 $ 861,922

$111,907

$ 2,045,279.00

Sub total

 $ 3,287,751

 $ 2,773,480.75

$ 381,187.45

$ 6,442,419.20

Life Insurance:

 

 

 

 

New Policies

$ 547,862.50

$ 1,512,100.50

$ 3,550,149.00

$ 5,610,112.00

In-Force Policies

$ 207,872

$ 501,120

$ 1,172,992.00

$ 1,881,984.00

Subtotal

$ 755,734.50

$ 2,013,220.50

$ 4,723,141.00

$ 7,492,096.00

Total

$ 4,043,485.50

$ 4,786,701.25

$5,104,328.45

$ 13,934,515.20

When the new policies for subsidiaries are analyzed for cost allocation, it is clear that the total costs have increased compared to the prior method, which allocated costs based on the number of policies. The adoption of a new total base system is responsible for this development. A significant amount of the overall basis is assigned to new policies in both annuities and life insurance under the new cost allocation scheme. This allocation plan attempts to guarantee that the expenses related to purchasing additional policies are sufficiently covered. As a result, new policies now account for a bigger share of overall expenditures, while existing policies bear a disproportionately smaller burden.

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