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Continuous Performance Improvement

Deming's Points #2 and #3 as They Apply to the Insurance Industry

John Pryor | June 1, 2004

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"Adopt the new philosophy," and "Cease dependence on mass inspection" are two principles espoused by Dr. W. Edwards Deming with great relevance to the insurance industry. Real-world examples from INA, Zurich, and Employer's Re show how well they can work when applied correctly.

In this article, I will address two points because you'd think there's not a lot to be said about Point #2—adopt the new philosophy—except, absent commitment to the other points articulated by Dr. W. Edwards Deming, none is relevant or valuable.

Point #2: Adopt the New Philosophy

Dr. Deming wouldn't present his 4-day seminar on quality to an organization unless and until the organization's CEO was involved. He wouldn't even talk to anyone within an organization without first talking with the CEO. It was obvious to Dr. Deming that his philosophy wouldn't "fly" within any organization unless and until support was obvious "at the top."

Dr. Deming used another operative term—one that happens to be a favorite of mine because of its implications—"transformation." Mere change isn't sufficient. Philosophical adoption is required but still not the total answer. Commitment is critical. Yet the ultimate outcome must be transformation of an organization.

"To transform" means to substitute one configuration into another—or to change completely in composition or structure ... or in character or condition. Many would say that "transformation" can be synonymous with "innovation." I'd agree.

In the insurance industry, we've seen a few examples of transformation/innovation.

  • The earliest I can recall is INA's transformation of a series of separate personal policies (dwelling, contents, personal theft, personal liability, et al.) into a single homeowners "package" policy. This was highly innovative at the time.
  • Obviously, the businessowners policy (BOP) and other business/farm package policies followed INA's lead.
  • More recently, Zurich and other companies have transformed underwriting, rating, proposal production, and policy writing from strictly manual processes to highly effective systems on the Internet—with shared authority to some extent with agents and brokers "at the point of sale."

Others have adopted the Deming philosophy and transformed their corporate philosophy to the extent that continuous process improvement is a requisite of virtually every employee and part of the organization's corporate culture. In this manner, they are positioned for innovative solutions and ideas to compete more effectively and enhance profitability at the same time.

Employer's Re, when it became a subsidiary of General Electric, "inherited" the culture of GE under its leadership by Jack Welch, who was CEO at the time. Processes as well as overall systems were continually improved. In fact, I'm told each employee is responsible for improving two processes each year—processes in which the employee is involved (i.e., had "ownership")—with full consideration of how the output would meet or exceed customer expectations.

I once asked an Air Force general from Edwards Air Force Base in California—where their people are a major part of our country's space exploration program—what it is they need to do to assure quality disciplines are followed. His response was quick and convincing. He said these disciplines are so ingrained in all they do as an organization that they "just happen." Quality is completely inculcated in their organizational culture. All of Dr. Deming's 14 points evidently are followed—points we'll continue to explore within the context of insurance organizations. In other words, Dr. Deming's disciplines become second nature. Now that's transformation.

Point #3: Cease Dependence on Mass Inspection

This point is fascinating. Advocates of "command and control" leadership historically have depended on this methodology to assure quality in products, services, and other outcomes. Dr. Deming has clearly demonstrated that "inspection to improve quality is too late, ineffective, costly ... Quality comes not from inspection, but from improvement of the production process." That's Point #3 in a nutshell.

Dr. Deming went on to say, "Inspection, scrap, downgrading, and rework are not corrective action on the process. Rework raises costs." What he implies but doesn't expressly state—at least at this particular point—is quality actually lowers costs. It does so by improving processes, avoiding rework, error correction, and other costly outcomes.

One issue continually rankled Dr. Deming. Management perceived that higher quality justified higher pricing. Dr. Deming, of course, argued that quality not only lowers costs, it should lower pricing as well. Competition accomplished the balance of his assertion.

As a 1994 study by (then) Willis Corroon proved, policy issuance required 20 separate and distinct steps when changes are needed. Their process map for policy issuance "as it should be"—i.e., with no changes, no inspection—requires only 5 steps. The Willis process maps are highly convincing in their contrasts and are available in the Institutes' AIS-25 education program in Quality entitled "Delivering Insurance Services."

So, if you don't inspect, what do you do? As indicated above, Dr. Deming advocates "improvement of the production process." A system is composed of interrelated processes. Continuous process improvement is the better alternative to inspection. The tools of process improvement include, but are not limited to the following.

  • Pareto charts (the widely accepted and acknowledged 80-20 rule)
  • Control charts (where you learn about common cause variation and special cause variation, and what to do about each)
  • Ishikawa charts (cause and effect) to get to the root cause of a problem

Every employee of a GE insurance subsidiary was provided a shirt-pocket sized booklet called The Memory Jogger (published by GOAL/QPC, Methuen, MA). It included all of the above tools (and many more) to help employees continuously improve processes in which they were involved on a day-to-day basis. Software packages are also available to assist.

More recently, high-tech advances have created the ability to inspect tangible products without human intervention. This makes some inspection more cost-effective than before; however, it doesn't counter Dr. Deming's admonition in any manner. By far, the better solution still is to design systems and processes so defects are minimized if not eliminated, and variation is within controllable limits ... what is called "common cause variation." More on variation—"common cause" or "special cause"—in future columns.

We'll also describe how control charts can help monitor processes in an insurance organization in a way that helps you distinguish between system problems and people problems. Control charts are probably the most underutilized tool of Dr. Deming's disciplines for quality outcomes. They're probably one of the most helpful.

Stay tuned.

If you want to learn more about quality and its applications in the insurance industry, contact the Institutes (American Institute for CPCU and Insurance Institute of America) for data on their program Delivering Insurance Services (AIS-25). The Institutes' contact, Marty Frappolli, can be reached at [email protected].

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