Deming's Point #6 as Applied to the Insurance Industry

New Employee Training

The Institutes have a vast array of training programs for new employees. Beginning with their very basic course entitled "Insurance Essentials," the Institutes offer the following "Intro" courses.

• Introduction to Property and Liability Insurance
• Introduction to Underwriting
• Introduction to Claims
• Introduction to Risk Management

These are highly appropriate for new employees with little or no background in insurance and risk management.

Management Training

What's especially fascinating about Dr. Deming's description of training is his emphasis on management training. Here's how he characterizes this need:

Management needs training to learn about the company, all the way from incoming material to customer. A central problem is need for appreciation of variation. [More on this later.] … Training for a job must teach the customer's needs. [Emphasis mine.]

Senior management admittedly needs to be highly strategic—not operational—yet they still need to understand the intricacies of operations. To increase innovation and minimize variation (errors and defects), all 14 of Dr. Deming's principles need to be employed. That's one reason some refer to his teachings as Total Quality Management (even though Deming himself did not use this term).

What is also fascinating about his emphasis on training at the management level is the current episode of alleged ethical breaches and illegal practices of a few within our industry. Some will question where ethical training to avoid this kind of outcome should take place—in our home, church/synagogue, school, or place of work.

No one will debate the importance of ethics training as part of our upbringing in our individual families. However, that's not to say such training should not also be part and parcel of management training and new employee training. Principles of ethical and customer-focused practices should be integral elements of an organization's culture.

If the notion of customer focus were fully integrated into an organization's culture as well as in its systems and processes, it would be much less likely that bid rigging and account steering practices would occur—even by a few "bad apples."

I have to ask: Where were the "whistle blowers"? Perhaps these breaches were so isolated that whistle blowing isn't a reasonable expectation. Or perhaps it's a situation similar to that of a safety director of a multistate irrigation company I met with recently. He previously was with an energy company in the southeast where he "refused to revise the numbers," as he put it. To avoid ethical problems—or worse—he simply resigned and joined his current employer in California where integrity and ethical practices are highly visible—and an overt part of their corporate culture.

But as current Geico auto insurance ads on TV and radio about eliminating the middleman—me and my broker/agent colleagues—comment, "I digress." Back to the basic issue of management training.

The executive training programs of the Institutes at the Wharton School in Philadelphia represent an outstanding opportunity for management education; however, they do not address what it is Dr. Deming is describing. He uses a Japanese example to illustrate what American managers need:

A person in Japanese management starts his career with a long internship (4 to 12 years) on the factory floor and in other duties in the company. [S]he knows the problems of production … works in procurement, accounting, distribution, sales.

I suspect this broad-based practice in management training is more prevalent in U.S. business today—including in the insurance industry—than when Dr. Deming originally penned this observation. Yet I also suspect there's still room for "continuous improvement."

The Value of Measuring Variation

Appreciation for variation is a simple, yet complex, notion. The current popular version of quality practice is what Motorola entitled—and what General Electric (GE) pretty well perfected: "Six Sigma" Quality.

In brief, this means all processes and systems shall be designed to permit only 3.4 defects (variations) per million opportunities. Admittedly, most of our insurers, brokers, and others are not producing policies, paying claims, auditing payroll, etc., at this near-perfect level of performance.

Even GE insurance subsidiaries are reported only to be at Four Sigma (6,210 defects per million opportunities). So there's lots of room for continuous improvement (CI is one of the major goals of Deming disciplines).

At the same time, GE people are quick to report that their division building aircraft engines is operating at "Seven or Eight Sigma"—as close to "zero defects" as anyone can be. They wanted us to be comfortable on our flights home from the CPCU seminar at which this report was made by a GE executive.

Speaking of "zero defects," this notion was the "clarion call" of Phil Crosby while he was part of IIT/Hartford Insurance Group and their efforts to continuously improve the quality of their organizations' output, processes, and systems. His positive impact on our industry is still felt even though he departed this world a few years ago.

Variation tracking is usually in the form of control charts. I'm sure there are some in use within the insurance industry—I've just not found any evidence to that effect. If readers have examples from within our industry of this simple yet effective extension of a "run chart," they will be highly welcome for future editions of this series.

The ability to distinguish "common cause variation" from "special cause variation" is critical to any organization. There is always going to be some degree of variation in any process or system. The issue is: when should management intervene?

A system is deemed to be "under control" when only common cause variation is detected. It's when special cause variation occurs, i.e., when data points are outside the upper and lower control limits in a control chart, that management need to intervene and take action.

Why more in management don't use this amazing and vital tool is beyond my understanding.

Conclusion

Deming concludes Point #6 with a contribution by Dr. Brian Joiner who participated in a Quality Insurance Congress workshop in San Diego in the early 1990s (where I was initially exposed to these principles). Dr. Joiner says:

Money spent on training, retraining, and education does not show up on the balance sheet; it does not increase the tangible net worth of a company.

Dr. Joiner's implication is clear: Training is an investment. Future returns on that investment are legitimately expected to be very high. However, this investment is expensed rather than capitalized in order to be in compliance with GAAP principles—and probably Sarbanes-Oxley. Nevertheless, that accounting methodology does not deny the reality—and the importance—of this "investment" in training.

For new employees and management trainees, Dr. Deming's vision of their training at the outset of their careers can materially improve their contribution and success as employees and managers/leaders in the future. Whether or not these kinds of training alone will prevent ethical breaches or illegal practices is not the point. But what a great step toward molding and shaping a corporate culture where these kinds of (wrong) choices would be totally out of the question!