Continental Insurance Company has a process for making payments on insurance cla
ID: 2559753 • Letter: C
Question
Continental Insurance Company has a process for making payments on insurance claims as follows:
An activity analysis revealed that the cost of these activities was as follows:
1
Receiving claim
$45,900.00
2
Adjusting claim
178,200.00
3
Paying claim
45,900.00
4
Total
$270,000.00
This process includes only the cost of processing the claim payments, not the actual amount of the claim payments. The adjusting activity involves verifying and estimating the amount of the claim and is variable to the number of claims adjusted.
The process received, adjusted, and paid 3,000 claims during the period. All claims were treated identically in this process.
To improve the cost of this process, management has determined that claims should be segregated into two categories: claims under $1,000 and claims greater than $1,000. Claims under $1,000 would not be adjusted but would be accepted upon the insured’s evidence of claim. Claims above $1,000 would be adjusted. It is estimated that 60% of the claims are under $1,000 and would thus be paid without adjustment. It is also estimated that the additional effort to segregate claims would add 20% to the “receiving claim” activity cost.
Required:
A.
Develop a table showing the percent of individual activity cost to the total process cost.
B.
Determine the average total process cost per claim payment, assuming 3,000 total claims.
C.
Prepare a table showing the changes in the activity costs as a result of the changes proposed by management. For those boxes in which you must enter subtracted or negative numbers use a minus sign. If an amount is zero, enter "0".
D.
Estimate the average cost per claim payment, assuming that the changes proposed by management are enacted for 3,000 total claims.
A. Develop a table showing the percent of individual activity cost to the total process cost.
Continental Insurance Company
Individual Activity Cost as a Percentage of Total Process Cost
1
Activity
Cost
Percent of Total Process
2
Receiving claims
$45,900.00
3
Adjusting claim
178,200.00
4
Paying claim
45,900.00
5
Total
$270,000.00
B. Determine the average total process cost per claim payment, assuming 3,000 total claims.
per paid claim
C. Prepare a table showing the changes in the activity costs as a result of the changes proposed by management. For those boxes in which you must enter subtracted or negative numbers use a minus sign. If an amount is zero, enter "0".
Continental Insurance Company
Changes in Activity Costs
1
Activity
Activity Cost Prior to Improvement
Activity Cost After Improvement
Activity Cost Savings (Cost)
2
Receiving claims
$45,900.00
3
Adjusting claim
178,200.00
4
Paying claim
45,900.00
5
Total
$270,000.00
D. Estimate the average cost per claim payment, assuming that the changes proposed by management are enacted for 3,000 total claims.
per paid clai
Explanation / Answer
A Continental Insurance Company Individual Activity Cost as a Percentage of Total Process Cost 1 Activity Cost Percent of Total Process 2 Receiving claims 45900 17 3 Adjusting claim 1,78,200.00 66 4 Paying claim 45,900.00 17 5 Total 270000 100 B The average total process cost per claim payment, assuming 3,000 total claims. per paid claim =270000/3000 claims = 90 C Table showing the changes in the activity costs as a result of the changes proposed by management. For those boxes in which you must enter subtracted or negative numbers use a minus sign. If an amount is zero, enter "0". Continental Insurance Company Changes in Activity Costs 1 Activity Activity Cost Prior to Improvement Activity Cost After Improvement Activity Cost Savings (Cost) 2 Receiving claims 45900 55080 -9180 3 Adjusting claim 1,78,200.00 71280 106920 4 Paying claim 45,900.00 45900 0 5 Total 270000 172260 97740 D The average cost per claim payment, assuming that the changes proposed by management are enacted for 3,000 total claims. per paid claim =172260/3000 claims 57.42
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