Expert Commentary

Deming's Point #12 as Applied to the Insurance Industry

Dr. Edwards Deming applies his twelfth point to management, to those on salary, as well as to those who are hourly workers—in other words, to everyone!


Continuous Performance Improvement
January 2007

Dr. Deming's point (or admonition) #12.

It may seem that "workmanship" is in the context of industries—unlike insurance—with a tangible product. And it is. However, the barriers he's talking about are equally applicable to "knowledge workers" found in insurance offices, as characterized by Peter Drucker.

Here is a partial list of such barriers described by Dr. Deming [Bracketed comments are mine]:

  • Inadequate training in technology. [It's continually a challenge not only to "keep up" with new technologies but also to maximize use of technologies already "at our finger tips" to their full capacity!]
  • Inadequate documentation on how to do the job. [For example, process maps are needed for knowledge workers in insurance. Most narratives tend to confuse rather than enlighten.]
  • Rush jobs (bad planning). [We see these as eleventh-hour quotes on commercial and industrial accounts.]
  • No lines of communication between [workers] and management. [The insurance industry has come a long way on this point, but I suspect there's still room for improvement.]
  • Merit rating is a farce. [Many organizations have abolished performance reviews because such systems ultimately prove to be counterproductive with negative outcomes. More on this below.]

The biggest barrier or obstacle, in the opinion of many, is the annual merit review or performance review. According to William J. Latzko and David M. Saunders in their book, Four Days with Dr. Deming (Addison-Wesley Publishing Co., 1995):

Appraisals and merit reviews prevent workers from having pride of workmanship. We suppose that the use of the annual merit review gets the best from workers. As Dr. Deming says, "The result is precisely the opposite. You get the worst out of people. You don't get what you pay for."

Appraisals create fear, reduce cooperation between workers (and managers), and focus on visible results only. Frequently managers use appraisals as a salary administration tool. They use them to reward and punish. Appraisals are subjective. They commonly do not reflect the actual performance or potential of the appraised person. Appraisals are a lie.

That's fairly strong language. Yet, books upon books have been written to validate this assertion—and to offer more constructive alternatives. We'll not belabor those efforts here. Suffice it to say that many organizations have abolished their appraisal systems—and other barriers to pride in our work—for highly valid reasons.

Someone in a seminar audience asked Dr. Deming, "If we eliminate performance appraisals, as you suggest, what do we do instead?" Dr. Deming's response was, "Whatever Peter Scholtes says."

Mr. Scholtes has authored many books on leadership. One is The Leader's Handbook—A Guide to Inspiring Your People and Managing the Daily Workflow (McGraw-Hill, 1998). In this book, Chapter 9 is entitled, "Performance without Appraisal." Mr. Scholtes comments, as part of an extensive dissertation on this topic, that the three faults common to all variations of performance appraisal are:

  1. It doesn't work.
  2. It focuses mostly on individuals, sometimes on groups. Either one is the wrong target.
  3. It is judgment, not feedback.

He expands on these and other points and concludes on successful alternatives to performance appraisal. This is highly recommended reading!

A True American Idol: Bernie Daenzer

Up to this point in this 14-part series, I've been writing about the more formal approach to quality as practiced, and preached, by W. Edwards Deming, PhD. His words are clearly words of wisdom from which each of us can benefit—even in light of today's emphasis on newer variations of the same principles we now call "Six Sigma" (to minimize variation) or "Lean" (to minimize waste).

However, we've been incredibly fortunate to have had in our midst during the past 50 years someone who not only has advocated similar principles, albeit more informally, but someone who put them into practice to the great benefit of all in our industry.

To put it in the words of Carolyn I. Furlong, CPCU, CLU, CEBS, CPIW:

It is the genius of such individuals as Bernard Daenzer (Bernie, to all of us) that has brought about most of the change for good in the insurance industry in my lifetime and yours.

Ms. Furlong made this rather bold statement in the concluding paragraph of the forward to her 2006 book, The Daenzer Story, a biography of Bernard J. Daenzer, JD, CPCU, who has been my insurance industry idol and hero since the late 1950s. That admiration continues to this day.

Here are a few of his accomplishments over the years—many well before Deming, Juran, Crosby and others were leading the quality movement. Again, to mention but a few:

  • In 1947 he was the 88th insurance professional in the United States to receive the CPCU designation. He took the [then] five CPCU essay examination sections all at one time—and passed! [Excellence personified!]
  • One of his mentors was Dr. Harry Loman, the Institutes' first president, who taught him the key to education is curiosity—and he should always ask why it has to be that way … what is the origin of that rule … is there a better way to accomplish the same thing … is it time for innovative new approaches on the subject? [All of these questions are consistent with Deming's philosophy.]
  • He was the first to merge two companies [Security-Connecticut] into a multiple line company. [Continuous process and system improvement!]
  • He was the first to create the homeowners policy—followed, not proceeded by—INA with their version. [More process improvement.]
  • He was a leader in the practice of paying educational costs of employees wanting to obtain their CPCU designation. [Customer focus—on internal customers.]
  • He initiated a study on the feasibility of group life and health insurance for the CPCU Society—despite opposition from many who thought group insurance detracted from individual insurance programs. [More internal customer focus.]
  • He was involved in the birth of the consolidation of separate general liability coverages into the comprehensive general liability policy. [Process and system improvement.]
  • He overcame political barriers adversely influencing state regulators in several states. [Implementing customer focus and minimizing variation, and avoiding not only barriers but even corruption!]
  • He wrote the first reference work on the excess and surplus lines market. [Deming's Point #13—Encourage education and self-improvement for everyone.]
  • He created the first series of foreign seminars between the CPCU Society and the Chartered Insurance Institute in London, a very early recognition of the global presence of insurance. [Point #13 again.]
  • He coined the phrase, "Taking it off the bottom and putting it on the top" to encourage insurance buyers to couple high deductibles with the money saved to purchase much higher limits of liability. This was revolutionary at the time! [Customer focus.]
  • He strongly advocated the use of "all risk" property policies and umbrella liability policies—despite the historical preference for named peril policies and primary liability limits. [Process improvement with customer focus!]
  • He was a pioneer in the awareness of the need for pollution liability insurance and its availability. [Deming's Point #13.]
  • He helped create the Associate in Risk Management (ARM) professional designation. [Point #13—education for all.]
  • He encouraged meaningful basic research within the insurance industry: "millions for advertising but not one penny for research," he commented about many insurance companies at the time. [Root cause analysis.]
  • He pioneered product recall insurance. [Innovation and process improvement.]

I feel a sense of exhaustion just reading these accomplishments and innovations!

One additional Daenzer innovation was his idea of putting a small limit of life insurance in the MPIRO homeowners form. He said:

The English do this. New York told me the insurance departments had made a decision to keep life insurance out of the property/casualty companies because of the Chicago fire and the California earthquake. I told them Security Insurance Company was one of the five companies who paid all San Francisco earthquake losses in cash instead of script. But New York said they would make no exception. To this day, I think it is a logical extension of mortgage protection to include the mortality of the borrower and should be packaged.

Once an innovator, always an innovator, it seems. That's the genius of Bernard Daenzer, of course.

These efforts to continuously improve processes and systems, with customer focus and positive financial outcomes, within the insurance industry would make Dr. Deming and even (then) ITT Hartford's Phil Crosby smile. Even though their (Deming's and Crosby's) particular practices were not formally followed, the outcomes were essentially the same.

This is but a small component of Bernard Daenzer's life-long accomplishments that have made a permanent and highly positive impact on our industry. I encourage you to purchase Ms. Furlong's book, The Daenzer Story, published in 2006 by Xlibris Corporation (see www.xlibris.com). Royalties are shared by the CPCU-Loman Foundation and the NAIW's Education Foundation.

Innovation is an integral part of Quality. It was clearly a part of Daenzer's strategies and tactics. My concern is: where are the Bernard Daenzers of today to be found? I'm confident they're somewhere in our industry; however, I fear the barriers addressed in Deming's Point #12 may be keeping such major players out of our view. If Deming's more formalized principles are followed, there can be multiple "Daenzers" in our midst.

Innovation marked Daenzer's career, and it marks all of the tools and disciplines of the quality movement. We need to be certain we remove barriers to such innovation.

What a perfect segue to the next segment in this series: Point #13—Encourage education and self-improvement for everyone.

Postscript

One additional contribution by Bernie Daenzer was his ongoing chart of insurance industry cycles, beginning in the 1950s and running through the 1980s at which time he retired. He referred to it as his "snake chart" because in its earlier years, insurance industry cycles would swing from hard to soft almost with regularity and predictability—and looked like a snake. The decade of the 1980s changed all this of course. According to Daenzer, "Pollution has a lot to do with the extended bad record in the '80s."

Here is Daenzer's "snake chart" as it appeared in its final form, reprinted here with permission from Kaplan Financial.

EXHIBIT 1
All Stock Property/Casualty Cos. Underwriting Profit/Loss in Millions since 1953

With apologies to Mr. Daenzer—yet with his written permission to gather data to update his final chart—here is a current version and extension of his snake chart. It is also with thanks to Dr. Edward Tufte, Professor Emeritus at Yale University, who taught me (in a Los Angeles seminar) and inspired me to chart multiple dimensions of a single event or series of data sets. Here's the result.

EXHIBIT 2
Stock Property/Casualty Companies (US)

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