Manufacturing concepts, like Six Sigma, are being applied to other industries, including insurance. (Photo: Shutterstock/fzd.it)
“Six Sigma” is a term used widely in manufacturing, but little known in the insurance industry. Industries such as medical devices and cellular telephones approach the management of quality—using Six Sigma as a tool—with intensity and focus to drive down error rates and increase operational excellence.
What about the insurance industry? Shouldn’t the insurance industry be focused on quality and operational excellence, too?
My business partner, Harsha Chaturvedi, likes to say: “Ask someone in the insurance industry about error rates and they might say: ‘Oh … It’s about 3 to 4%.’” That’s a very high number, indicating a massive opportunity for improvement in quality.
Such a high error rate means the insurance industry is spending significant time and money doing something wrong the first time—then spending resources to fix the original error plus any side effects.
One reason Six Sigma hasn’t caught on is that it simply isn’t well known. Here are three ways this tool applies to—and can help increase operational excellence for—insurance firms ranging from carriers to brokers.
Use Six Sigma methods for measuring and improving processes
Six Sigma was started by pioneers at Motorola in the mid-1980s and picked up by prominent firms such as General Electric. The name “Six Sigma” refers to statistical modeling in manufacturing—a process in which companies rate their quality statistically. In the world of statistics, “sigma” is the term for one standard deviation from the mean—that is the average—in a normal distribution, known as the “bell curve.” You’re probably most familiar with the bell curve from your college days, when professors often graded on a bell curve.
An objective way of measuring the quality of performance in an organization, Six Sigma is measured in terms of a number from 0 through 6:
- 0 is a low score. It indicates a low quality of work in an organization.
- 6 is a high score. It indicates high quality work in an organization.
Six Sigma processes can be used to measure the timely delivery of either quality work or mistakes. Meeting the Six Sigma standard of quality means that the results of processes are within three standard deviations of the mean (average) with 99.99966% of all opportunities statistically expected to be free of defects.
(Photo: Shutterstock/zhu difeng)
Use Six Sigma methods with insurance processes, which are definable and repeatable
The goal of Six Sigma, as stated on its website, is “to improve a company’s quality to only three defects per million through systematic incremental change in processes and careful statistical measurement of outcomes.” Insurance processes are definable and repeatable, which makes them good candidates for quality improvement.
Transactions such as issuing policies, providing certificates of insurance, and other front-office and back-office processes make up the “manufacturing” of insurance. A wide variety of insurance organizations—including reinsurers, insurance carriers, agents and brokers, and service providers—can benefit by applying the Six Sigma tool to improve processes.
Numbers matter. At an insurance carrier or brokerage firm, for example, a 96.86 percent quality rate will lead to failures 130 times more than that of a Six Sigma level of a 99.97 percent quality rate.
Implement Six Sigma in five steps
According to DMAIC Tools, a provider of Six Sigma training, Six Sigma drives unwanted variation from products and processes. By understanding and controlling underlying root causes, teams fix problems at the source, resulting in the lowest possible cost of quality for a given process.
Six Sigma practitioners use a defined series of five steps. The use of Six Sigma to improve operational excellence in insurance requires:
- Defining standard operating procedures for processes.
- Tracking data (such as the time it takes to provide a deliverable) for these processes.
- Compiling quality and error data for processes.
- Fixing the processes where errors are outside the bounds of Six Sigma.
- Creating a knowledge base of these fixes to increase the level of quality throughout the organization.
In the past five years, Vantage Agora’s Six Sigma operational excellence platform (known as ox zion) has tracked more than five million transactions in a wide range of insurance processes for a number of clients. We have achieved a 5.4 level of quality. But like the insurance industry at large, we should not stand still—but should keep reaching for the Six Sigma level of performance.
Sudhir Achar is CEO and co-founder of Vantage Agora, a firm founded in 2004 that provides insurance process outsourcing and consulting, technology services, and operations software for agents, brokers, managing general agents, program managers and carriers in the property-casualty insurance market. He can be reached at Sudhir.Achar@VantageAgora.com.