Continuous Performance Improvement

Why Risk Management and Quality Management Must Converge

John Pryor | June 14, 2014

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A rid die that says low risk, no risk, and high risk on each side

You're no doubt familiar with the metaphor of people who demonstrate a very human propensity to each stay within their own separate silo—and miss multiple opportunities for profit and increased revenue by not using cross-functional communication and collaboration. It's not unique to risk management practitioners, of course. It happens in every industry and profession. The value of lost opportunities is incalculable.

Where cross-functional potential for the convergence of risk management and quality management is concerned, the insurance industry has made noble efforts to help reverse this propensity. For example:

  • The Institutes has long offered an excellent course in quality management in its AIS-25 curriculum called "Delivering Insurance Services." It includes the fundamental principles and best practices of Deming, Juran, Crosby (then of ITT-Hartford), and others. Yet, it's still offered in its own "silo" as a freestanding course of study without integration into The Institutes' other risk management (Associate in Risk Management—ARM) and insurance (Chartered Property Casualty Underwriter plus many other) offerings. As a 9-year member of The Institutes Board of Trustees until recently, I know the good work accomplished by their staff and leadership; however, this is integration still needs attention.
  • In the 1990s, the Quality Insurance Congress (QIC) was formed thanks to visionary leadership of national broker Willis Group—then Willis Carroon—and its quality specialist, Jay Deragon. It brought together many contemporary quality management gurus such as Brian Joiner, William Scherkenbach, Charlotte Roberts, and others to national conferences with insurance practitioners—including then Hanover Chief Executive Officer William J. O'Brien. I attended and was greatly impressed. Very positive change began to occur in offices of insurers, brokers, and others. The Risk and Insurance Management Society introduced its excellent Quality Scorecard in 1998 and 1999 based on quality principles and best practices of insurers, brokers, and third-party administrators. Unfortunately, some didn't fare well in this grading system and ultimately withdrew financial support of QIC—causing QIC to disintegrate despite its excellent work.
  • The Independent Insurance Agents and Brokers of America (IIABA) (then the Independent Insurance Agents of America) created a Presidential Commission to Enhance Agency Value—all based on these same quality management principles and best practices. (I served on that commission, which ultimately evolved into IIABA's excellent "Best Practices" program.)
  • At California State University Bakersfield, I recently taught a course, "Quality Risk Management," as an adjunct professor. It was well received by regular students, business owners, and safety professionals (American Society of Safety Engineers members) in the community. A custom textbook was provided by The Institutes from their texts on ARM and quality management (Associate in Insurance Services) programs. It seemed to work very well. Other universities may want to consider this convergence in their curricula.
  • We're beginning to see a convergence from the other direction—by quality management professionals—predominately professional engineers. They clearly see the value of this convergence. Their focus seems to be more in the realm of the Insurance Services Office, Inc., 31000 and enterprise risk management (ERM). ERM works with risks that are both pure and speculative. This is a very important discipline, especially for Fortune 500 and other large, global firms that usually have a chief risk officer in their "executive suite." However, most brokers, agents, business owners, and other smaller entities use the more traditional form of risk management in which only pure risks are addressed—those risks that can produce only a loss.

In 2004, I wrote of series of Expert Commentaries for IRMI on continuous performance improvement using Dr. Edwards Deming's "14 Points for Management" as applied to the insurance industry. They are still valid today. They are 14 broad strategic steps to consider in viewing our industry (or any industry) from 30,000 feet.

Operational Examples

What follows in this commentary are more operational (or tactical) examples than the strategic focus of my earlier commentaries on Deming's 14 points. With this historical backdrop in mind, let's now discuss the value of this convergence to traditional risk managers, brokers, and business owners.

First and foremost are the tools used by quality professionals whether they're "old school" total quality management or nouveau quality disciplines called "Six Sigma" or "Lean Six Sigma"—as observed in just about any industry today—other than insurance. To be fair, there are indeed "pockets" of practitioners of quality disciplines in our profession. Some are intentional and intense. Others are unintentional yet still of value. This is because most people want to:

  • do things right the first time;
  • focus on their customers;
  • continuously improve how they do what they do;
  • engage their people in professional development; and
  • lower costs (and increase profits) in all they do without reducing the quality of what they do.

In case you're wondering, you don't have to be certified as a Six Sigma Black Belt (at a cost of several thousand dollars) or even the lower-level Green Belt (at a cost of several hundred dollars). You may want to do what I've done—that is, experience the half-day training to become a White Belt—intended principally for executives, not operational people who do the work "on the ground"—to better understand quality principles and its leadership tools.

Back to Basics

Doing the above is not essential. Just go to your local public library and check out Six Sigma for Dummies or something similar. Or Google the term "Six Sigma" and you'll readily see how much data are available for your edification.

Now you must be asking, what are the quality tools we can "cross-functionally" use in our risk management practices that otherwise tend to be confined to the quality management silo?

For decades, we've effectively used tools such as the Prouty matrix to help us determine which risk management techniques are most appropriate to use, including:

  • total avoidance of the risk concerned or
  • total assumption of that risk plus
  • risk reduction and control (safety, security, fire prevention, cybercrime prevention, business continuity planning, etc.) and
  • non-insurance risk transfers to others plus
  • risk finance alternatives ranging from conventional commercial insurance to captives, retrospective rating plans, formal self-insurance, etc.
  • Finally, all risk management costs—not solely insurance premiums—are tabulated to calculate an organization's total cost of risk (TCOR).

No matter what may be happening in any quality management "silo," these traditional steps in the risk management process remain unchanged. Yet with the convergence of quality management, we will have more powerful tools to use to make these traditional steps even more effective!

So who in their risk management efforts needs quality management tools? The answer is clear: all of us!

Moreover, as Peter Senge advocates in his classic book, The Fifth Discipline (about systems thinking), the overall objective is to bring all of these processes together into a practical and effective system throughout the corporate culture of your organization. That notion cannot be understated or underemphasized. Inculcating a risk management system into your organizational culture is of major importance.

Available Tools

Here are some of the easier-to-use tools:

  • Pareto Charts. Vilfredo Pareto was an Italian engineer, economist, and philosopher who discovered what we today frequently refer to as "the 80–20 rule" in which 80 percent of outcomes (or problems) typically are the result of (or caused by) 20 percent of their sources. In safety, for example, this tool enables a risk manager to identify the 20 percent of losses that cause 80 percent of loss costs. Allocation of resources then can focus principally on that 20 percent to effectively lower overall loss costs. It is usually in "bar chart" format.
  • Histogram. This is a similar chart; however, instead of a "snapshot" (like a balance sheet), it illustrates outcomes over time (like a series of profit and loss statements). This graphic has multiple uses—for example, to chart year-to-year workers compensation experience modifications or to track/monitor your TCOR from month to month and from year to year. This tool can be especially helpful when a bright red goal line extends across the histogram to easily illustrate a goal—and if it has been accomplished.
  • Process Map. This tool helps identify continuous improvement ("Kaizen") opportunities in all that we do, including safety, security, and other loss prevention processes. Each begins with an "input" and concludes with an "output"—with all intermediate steps clearly shown. It's these intermediate steps where opportunities to reduce losses, lower costs, and reduce cycle time, etc., are found.
  • Root Cause Analysis. This tool is of major importance when a risk manager wants to be certain basic loss causes are addressed. It's easier to apply than most quality management tools. Usually, drilling deeper and deeper is accomplished by asking "five whys" to dig down to identify the fundamental cause. All too often, we treat only surface symptoms and wonder why losses still persist!
  • Run Chart. This tool illustrates performance results and trends (or claims reported or amounts reserved, for example) as they each occur over time. Each data point is entered—without aggregation. It suggests changes needed in processes performed every day. It is similar to a histogram; however, it is charted with data points rather than as a bar chart. It is also useful as the first step in creating a control chart.
  • Control Chart. A run chart can be converted to a control chart. This chart proves valuable in helping you know which processes are still under control—and need not be addressed—in contrast with those not under control that must be improved if losses are to be prevented or claims averted. The basic premise is that all processes show some level of variation. The key is to be able to differentiate one from another. Each chart includes the upper control limit (UCL) and the lower control limit (LCL) lines to readily display whether an event is "common cause" or "special cause" variation. The formula for calculations to set UCL and LCL lines can be manual—or software programs are available to accomplish the same calculations with ease.

Although other quality management tools are available (Ishikawa fishbone diagrams, regression charts, scatter diagrams, etc.), the above simpler examples should help any risk manager or insurance broker begin use quickly and effectively.

Six Sigma Storyboard—or Dashboard

What usually works best is for these tools to be displayed in what quality professionals call a "Six Sigma Storyboard"—or "Dashboard." It's important to keep these kinds of charts on display to all employees. This helps build a risk management culture that will "pay dividends" in the form of a lower TCOR over time.

Finally, I want to describe a quality tool used at multiple levels within any organization—overall, at the division level, at the department level, or even for the risk management segment of operations at any or all of these levels. Its virtues are many:

  • It brings together all elements of risk management (or quality management) into a single sheet of paper—not the more common voluminous books of data and key performance indicators (KPIs).
  • It clusters together all of the critical elements of quality management—that is, customer focus, continuous process improvement, and professional development.
  • If these three elements are "balanced"—in terms of resources allocated and objectives defined—the "secret" of this balanced scorecard is that financial outcomes will be greatly enhanced, if not ensured! (See IRMI article of December 2013, "Insurance Innovation—Balanced Scorecard," for more details.)
  • Its format usually provides for tracking of KPIs from period to period during the current years as well as year to year over time.

The overriding point of this convergence of risk management and quality management disciplines is it will help agents, brokers, consultants, business owners, nonprofit directors, and public entity executives accomplish the two long-term goals of every risk manager:

  1. continually lower an organization's TCOR and, most importantly,
  2. ensure those with risk management responsibility "a quiet night's sleep."

The quality management disciplines, best practices, and effective tools described in this article will be more specifically demonstrated and illustrated in a book soon to be published by IRMI, Quality Risk Management Fieldbook, also written by John Pryor. This is a practical and immediately usable guide for business owners, nonprofit directors, and public entity executives.

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