Gibson Insurance Company Case

ABSTRACT

Gibson Insurance Company (GIC) faces a challenge during the current year. GIC’s current cost allocation system must be revised to accommodate the implementation of a new management planning and performance management system. The goal is to better allocate GIC’s corporate support-service costs to the business lines and business units in a result of more precise pricing strategies, sales compensation and improved cost control.

We have analyzed GIC’s situation based on the given information, and concluded with a solution to improve the old cost allocation system. The new cost allocation uses adjusted cost bases which better reflects to the actual usage for new and existing policies. More support-service costs are assigned to new policies than existing ones as it requires more resources for implementation.

We have also provided recommendations to improve the new allocation approach. We suggested that GIC use step method and revised allocation bases to effectively control costs, measure performance and reflect actual costs.

INTRODUCTION

GIC is an insurance company that offers two different kinds of financial products: annuities and life insurance. It has full ownership of two subsidiary companies: Compton Insurance Services and Midwest Mutual Insurance Company. Compton and Midwest both sell annuities and life insurance; however, the pricing strategies and the features of these products differ between the companies. Although its subsidiary companies are presented as three separate legal entities, GIC, as the parent company, provides support services for all three companies.

The objectives of this report are:

1. To analyze the current support-service costs allocation method with the given information

2. To