Lean Six Sigma in Insurance

Why apply Lean Six Sigma in Insurance?

The insurance sector is about providing financial protection against losses incurred by an individual or entity under certain conditions which are specified in contracts with the insurance company. When buying an insurance policy, the customer is essentially hedging against certain risks under hypothetical situations of damage to the insured or his/her property or liability for damages or injuries caused to third parties. The insurance products themselves are intangible and the customer receives the “product” in the form of a service only in the event of a claim. There are many types of insurance products, covering wide range in scope and timeframes, for example medical, life, accident, car, house, business, professional indemnity, public liability and travel insurance.

Insurance companies belong to the broader financial services industry. Unlike most service businesses, they have very little contact with customers, typically only three key touch points in the life of a policy: purchase, review/change and claim. In this regard, excellent customer service, and hence loyalty, is very important. Customers expect responsive service to their queries and claims. Today’s generation of always-connected, tech-savvy customers expect ever faster responses and answers to their questions around the clock at their fingertips. LSS can help to reduce wait time in resolving customer issues and reduce claims processing time.

The low interest rates in capital markets put pressure on the profitability of insurance companies. Most of their assets are in fixed-income investments. The negative effects of declining interest rates are an increase in the present value of the insurer’s liabilities and a decrease in investment income, making it more difficult to match outgoing claims payments and cost of guarantees under pensions and other savings products. Historically, insurance companies are more profitable when interest rates rise. In today’s low interest rate environment, insurance companies are forced to improve operational efficiency and reduce costs to maintain or increase profitability.

Lean Six Sigma (LSS) is a customer centric, business improvement methodology founded on a set of principles around data-based decision making. Data gathering and analytical tools are applied systematically to internal processes to serve customers faster, more reliably and more economically.

When the right areas for improvement are targeted in an insurance company, the overall benefits to the business are:

  • Increased profits
  • Higher customer satisfaction / shorter response time
  • Reduced costs
  • Higher productivity
  • Better organised work environment / higher employee engagement

What are the key principles of Lean Six Sigma?

In Lean Six Sigma the customer determines value. In the insurance business, the external customer is the insured. The internal customers are the recipients of the outputs of each operational step in the value chain covering product creation, sales, claims processing and administration.

In the insurance sector, the key principles of LSS may be described as follows:

  • Focus on your customer: Identify and meet the needs and wants of the external customer (the insured). Understand the requirements of the internal customers and deliver consistently with minimal delay.
  • Identify your value stream: Map out your existing value stream, showing every single process step, in the selected area for improvement, from insurance product creation to sales and claims payment.
  • Eliminate waste and/or defects: Remove any non-value adding activities or opportunities for errors in customer profiling, quotations, sales, claims processing and administration.
  • Keep up the momentum: Sustain improvements by communicating and training employees in new standards and practices without delay, having regular feedback sessions and providing visible display of progress towards targets.
  • Create and maintain a culture of continuous improvement: Build a customer centric culture that embraces positive change and flexibility. Employees are empowered to continually streamline processes and eliminate waste and defects, thereby increasing overall business profitability.

How is Lean Six Sigma applied in Insurance?

LSS aims to remove waste, decrease process variation and reduce defects in the processes for customer profiling, matching product to customer profile, quotations, sales, claims processing and administration.

LSS speeds up material and information flow and reduces process complexities with Lean tools and reduces defects or process variation with Six Sigma tools. Value stream mapping determines the waste and value in the existing process. It is done by direct observation and interaction with people working within the process and extracting information from data systems. Waste can manifest as defects (errors), overproduction, waiting for information, document or person, non-utilised talent, transporting of items, inventory, motion of people and extra processing.

In the insurance business, information is being processed, moved around and stored, unlike manufacturing where physical items are involved. Information systems are intangible and invisible, as data are stored electronically on computers. The principles and tools of LSS can still be applied to information processing. The waste is made visible in a value stream map. The waste often takes the form of waiting time, not by an employee who is always busy, but by the piece of information or question being processed, e.g. customer query waiting to be answered, quotation waiting for missing information, order waiting for approval and claims waiting to be processed. The waste could also be time spent looking for missing information and sifting through voluminous emails with huge distribution lists. Time lost cannot be regained and is lost forever.

The key area for improvement using LSS is time wastage (retarding flow) in the information world of insurance. High quality customer service and efficient information processing are equally important. Management targets the areas for improvement for best return on investment and in accordance with the overall business strategy. The areas chosen for improving cost efficiency or service quality should have the greatest impact on the overall business performance.

Some examples of how LSS is applied in insurance are as follow.

  • Minimising waiting time to speak with a customer service person and ensuring phone and internet services are helpful, comprehensive and intuitive
  • Maximising the correct responses (minimising errors) given to customer enquiries in shortest response time
  • Reducing cycle time from initial customer enquiry to contract completion
  • Decreasing claims processing time from claim submission to payment
  • Shorter cycle time in internal processes with minimal errors is perceived by the customer as speedier service, a mark of quality, and therefore increases customer satisfaction
  • Improving process efficiency and employee satisfaction simultaneously by redeploying freed up employees in more customer focused activities and innovation, leading to greater staff longevity and productivity, and higher customer satisfaction.
  • Detecting flaws in processes involving mostly intangible products by LSS Visual Management, which are otherwise hidden from view in computer systems.
  • Uncovering the root causes of weaknesses in existing processes using creative and diagnostic tools of LSS and then redesigning them.

LSS is a methodical approach to problem solving which requires an adequate level of statistical, visualisation, facilitation and project management skills. A competent team of staff members or consultants is needed to make changes and keep up improvements, along with the management’s full commitment. The first step could be creating a core team of in-house change agents or engaging a consultant.

Imagine you now have operational excellence and high customer satisfaction in your insurance business after successfully implementing LSS. How could your improved business grow further? What competitive edge would you have? What if your market share increases? What new markets could you serve?

How can CBIS help you?

Please contact us if you need more details on how our expert team can assist you. We are simply experts in the application of Lean Six Sigma in the insurance sector.

22 Jun 2022
Some of our clients in this industry
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