Lynda Carson is the recently appointed general manager of Crichton General Assurance Corporation (CGAC). She has been appointed to help the company regain profitability after several years of near-breakeven operations. CGAC is a general casualty insurance company, with its primary business in automobile, homeowner, and personal property insurance. The casualty insurance industry has been under severe profit pressure in recent years due to increasing claims. Political pressure has kept the industry from passing on the full cost of high damage settlements as quickly or completely as the industry would like. In addition, CGAC is a relatively small company in an industry dominated by several larger companies, some of which are controlled by major Canadian financial conglomerates. Its relatively minor position makes it more difficult to maintain a wide agent base and to advertise effectively. Therefore, there is much pressure on Lynda to make the internal operations of the company more efficient. One of the many areas that Lynda has been exploring to increase efficiency is that of budgeting. In the past, the company has attempted to plan and control operations by means of a fixed master budget for the company as a whole. Most of the administrative responsibility centres are cost centres, and departmental managers have been evaluated on the basis of variance from budget, on a line-by-line basis. Lynda is considering using other means and bases of budgeting, including, but not restricted to, flexible budgets, performance budgets, and zero-based budgeting. In particular, she would like to have budgets that help her to better evaluate departmental efficiency. She has engaged you as a consultant to advise her on what the most appropriate budgeting approach(es) may be and has asked that you formulate your recommendations on the basis of the underwriting department. 

The underwriting department is responsible for compiling the new initial files and drawing up the insurance contracts for new clients, including assessing the premium. It also maintains the client base by monitoring client performance and drawing up renewal policies and premiums based on the client’s performance. The premiums (per $1,000 of coverage) are assessed on the basis of various factors for each client, depending on the nature of the policy. For example, fire insurance premiums on buildings are determined by factors such as type of construction, use of premises, contents of premises, quality of fire protection and detection, distance from hydrants, accessibility by firefighting equipment, and so forth. It is the responsibility of the underwriting department to assess experience factors and to recommend to the CGAC executive committee increases and decreases in premiums at least once every six months. The underwriting department does not have responsibility for sales; the sales department is a separate revenue centre. The direct costs of the underwriting department are largely staff costs. There are several components or sections within the department. One such section is the investigation section, which assesses new insurance applications and recommends approval or rejection of coverage. Response time is very important both for competitive reasons and because the company is liable for coverage as soon as the insurance agent accepts the application. When surges in the volume of new policies occur, some of the policy investigation is contracted out to independent investigators in order to avoid delays. 

Another section is the processing section. This group does the actual policy preparation, including the building and maintenance of the customer’s computer file and the preparation of premium notices and renewals. Except for the initial inputting of the application information and sending the application to the investigation section, time constraints are not severe. In busy periods, the lag in the paperwork and computer file maintenance will get larger, but without significant adverse consequences. A third section of the underwriting department is the actuarial staff. The actuaries and their support staff are responsible for the monitoring and analysis of underwriting and claims experience in order to recommend new premium levels. Since the analysis underlying their recommendations is computerized, the level of activity in this section is not responsive to changes in underwriting volume. 

The underwriting department makes extensive use of CGAC computer facilities in all aspects of its work. Many staff members work directly at computer terminals that can also function as stand-alone work stations for routine tasks such as letter-writing. The mainframe computer itself is operated and maintained by the data processing department, which is part of general administration and not a part of the underwriting department. Batch processing tasks such as premium reminder and renewal notices are performed by the data processing department and then routed through printers located in the underwriting department. In the past, there has been no charge made to user departments for the services of the data processing department. 

Required 

Write a report to Lynda Carson in which you discuss the specific budget approach(es) that seems to be the most appropriate for the underwriting department and explain why it is appropriate. Also, briefly indicate the general circumstances in which the recommended approach(es) may not be appropriate for other departments in the company.