Product_Costs_in_an_Insurance_Company_Case - ISSN 1940-204X...

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INTRODUCTIONGreg McAndrews has recently been hired as Vice Presidentfor Expense Management at a large insurance company. Hisresponsibilities include the process for allocating expenses toproducts. Through discussions with his staff, he has learnedthat there is a great deal of discontent with the expenseallocation process. He decided that one of his top prioritieswill be to analyze the product costing process and makenecessary corrections.Greg is a CMA®(Certified Management Accountant) andCPA (Certified Public Accountant) with an undergraduatedegree in accounting and a Master of Business Administration(MBA). Although he has worked in various roles withprogressing responsibilities throughout his 12-year career, Greghas never been directly responsible for expense allocations.He has read numerous articles on the current applications ofcost accounting techniques in service industries, includingactivity-based costing (ABC). He believes that he has a goodunderstanding of cost accounting techniques and is eager for histeam to improve the expense allocation process.COMPANY OVERVIEWAXE Life Insurance Company is among the leading lifeinsurance companies in the United States. AXE Lifeemploys more than 5,000 people and has assets in excessof $17 billion and annual premiums (“revenue”) in excessof $10 billion. The company is well established with a longsuccessful history.AXE Life sells individual life insurance products,individual annuities, and group annuities. The individualproducts, both life and annuity, are sold through insuranceagents. The group annuity products are sold by banksand brokerage firms. The group business representsapproximately 40% of total sales, and the individual businessrepresents the remainder. The company continuallydevelops new products, both life and annuity, typicallybringing one or two new products to market each year.The company currently has 17 different life and annuityinsurance products.AXE Life has a functional organization structure withSales, Marketing, Finance, IT, and Service departmentsrepresenting a functional discipline. The Service departmenthas a joint management team but has separate functions toservice annuity products and life insurance products. Allother departments provide support to both life and annuityproducts. Because of the size of the functional departmentsand their annual expense budgets, there are financialsupport roles in each department. The financial supportstaffs provide budgeting and financial analysis support to thedepartments.LIFE INSURANCE TERMS, PRODUCTS, ANDPROCESSESThe two primary types of products sold and serviced bylife insurance companies are life insurance and annuities.These two products have different characteristics. In general,life insurance is used for financial protection and annuitiesIMA EDUCATIONAL CASE JOURNALVOL. 7, NO. 3, ART. 1, SEPTEMBER 20141ISSN 1940-204XProduct Costs: Application in an Insurance CompanyScott McGregorWestern Connecticut State University

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