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Operational Excellence for
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Operational Excellence for Insurance Professionals Table of Contents | CONT.1
Contents
Preface .................................................................................................... PREF.1

Introduction......................................................................................... INTRO.1
Module 1: People and Purpose (Chapters 1 – 3)
Chapter 1: The Insurance Company and Operations Management .... 1.1

Objectives ...................................................................................................... .......1.2
Outline ............................................................................................................ .......1.3
Insurance Company Operations .................................................................... ......1.4
Stakeholders ................................................................................................. 1.4
Operations Management .............................................................................. 1.6
Functions of Operational Employees ............................................................ 1.8
The Value Chain ............................................................................................ .......1.12
Enterprise Risk Management (ERM) ............................................................ .......1.17
The ERM Process ....................................................................................... 1.18
ERM Evaluation .......................................................................................... 1.20
The Changing Operating Environment ........................................................ .......1.22
Technology and Operations ........................................................................ 1.23
New Market Competitors ............................................................................ 1.25
Insurance Fraud and Cybersecurity ............................................................ 1.27
The Workforce ............................................................................................ 1.28
Regulatory Uncertainty ............................................................................... 1.30
Economic Environment ............................................................................... 1.31
Key Terms ...................................................................................................... .......1.33
Practice Questions ........................................................................................ .......1.34
Chapter 2: Aligning Operations with Corporate Strategies ......... ....... 2.1

Objectives ...................................................................................................... .......2.2
Outline ............................................................................................................ .......2.3
The Four Functions of Management ............................................................. ......2.5
Strategic Management .................................................................................. 2.5
Operations Management .............................................................................. 2.8
Control Systems ...................................................................................................2.11
Performance Standards................................................................................2.13
Steering Controls ........................................................................................ 2.13
Concurrent Controls .................................................................................... 2.14
Feedback Controls ...................................................................................... 2.16
A Strategically Aligned Company ................................................................ ......2.18
The Potential for Misalignment.................................................................... 2.19
Copyright © 2019 LL Global, Inc. All rights reserved. www.loma.org
The Strategic Alignment Matrix ................................................................... 2.20

Correcting Misalignment ............................................................................. 2.22
The Environment of Strategy ....................................................................... ......2.25
The Market .................................................................................................. 2.25
Market Share .............................................................................................. 2.27
Industry Competitiveness ............................................................................ 2.28
Innovation Strategy...............................................................................................2.33
Key Terms....... ............................................................................................... .......2.35
Practice Questions ........................................................................................ .......2.37
Chapter 3: Creating a Culture of Excellence......................................... 3.1

Objectives...................................................................................................... ..3.2
Outline ........................................................................................................... ..3.3
Effective Leaders ............................................................................................ 3.5
Trust ............................................................................................................. 3.5
Power............................................................................................................ 3.7
Behavior Modification .................................................................................... 3.9
Influence Tactics ........................................................................................... 3.9
Eight Practices of Effective Leaders.............................................................3.11
Managing Antecedents and Consequences.................................................3.12
Motivation Theories ...................................................................................... 3.16
Self-Determination Theory .......................................................................... 3.17
Expectancy Theory ..................................................................................... 3.18
Motivating Through Evaluation and Compensation .................................. 3.21
Performance Evaluation.............................................................................. 3.21
Compensation............................................................................................. 3.25
Motivating Through Job Design .................................................................. 3.32
Approaches to Job Design .......................................................................... 3.33
Nontraditional Work Arrangements ............................................................. 3.34
Group Dynamics ........................................................................................... 3.37
Cohesiveness ............................................................................................. 3.37
Group Development .................................................................................... 3.39
Organizational Values .................................................................................. 3.42
Employee Engagement............................................................................... 3.42
The Work Environment ............................................................................... 3.44
Key Terms ..................................................................................................... 3.47
Practice Questions ....................................................................................... 3.50

Module 2: Business Processes (Chapters 4 – 6)
Chapter 4: Business Process Excellence ............................................. 4.1

Objectives........................................................................................................ 4.2
Outline ............................................................................................................. 4.3
Process Basics ............................................................................................... 4.7
Steps of Process Improvement.....................................................................4.10
Defining a Process........................................................................................4.10
Process Mapping..........................................................................................4.11
Process Analysis and Control ..................................................................... 4.14
Methods of Process Improvement .............................................................. 4.22
Process Review .......................................................................................... 4.29
Business Process Reengineering ............................................................... 4.32
Process Automation ..................................................................................... 4.35
Cybersecurity .............................................................................................. 4.35
Integrated Business Process Management ................................................ 4.37
Artificial Intelligence .................................................................................... 4.38
Key Terms........................................................................................................4.41
Practice Questions.........................................................................................4.44
Chapter 5: Project Management............................................................. 5.1

Objectives........................................................................................................ 5.2
Outline ............................................................................................................. 5.3
Project Management Basics .......................................................................... 5.6
Characteristics of a Project ........................................................................... 5.6
The Project Manager’s Role ......................................................................... 5.7
The Project Lifecycle......................................................................................5.11
Project Initiation............................................................................................5.12
Project Planning .......................................................................................... 5.21
Project Execution ........................................................................................ 5.43
Project Closure ........................................................................................... 5.49
Project Portfolio Management ..................................................................... .....5.53
Key Terms........................................................................................................5.55
Practice Questions.........................................................................................5.58
Chapter 6: Quality Management ............................................................6.1

Objectives........................................................................................................ .....6.2
Outline ............................................................................................................. .....6.3
Quality Management Basics .......................................................................... .....6.4
What Is Quality? ........................................................................................... 6.4
Quality Management Principles .................................................................... 6.5
The Quality Control Cycle .............................................................................. ...6.10
Quality Planning............................................................................................6.11
Quality Monitoring ....................................................................................... 6.16
Quality Analysis .......................................................................................... 6.23
Quality Improvement ................................................................................... 6.30
Quality Management Approaches ............................................................... .....6.32
Beyond Quality.............................................................................................. .....6.35
Key Terms.............................................................................................................6.37
Practice Questions...............................................................................................6.39
Module 3: Decision Making (Chapters 7 – 10)
Chapter 7: The Decision-Making Process ............................................7.1

Objectives........................................................................................................ .....7.2
Outline ............................................................................................................. .....7.3
Organizational Effects on Decision Making ................................................. .....7.5
The ABCDs of Decision Making .................................................................... .....7.9
Ad Hoc Decisions ......................................................................................... 7.9
Big-Bet Decisions..........................................................................................7.10
Cross-Cutting Decisions................................................................................7.11
Delegated Decisions.....................................................................................7.11
The Decision-Making Process........................................................................ ....7.13
Framing the Decision Correctly ................................................................... 7.16
Evaluating Decision Alternatives ................................................................. 7.17
Dealing with Conflict ................................................................................... 7.18
Analysis Paralysis ....................................................................................... 7.20
Choosing a Decision Alternative ................................................................. 7.21
Decision Implementation and Feedback ..................................................... 7.25
Key Terms ........................................................................................................ ....7.27
Practice Questions .......................................................................................... ....7.28
Chapter 8: Analysis and Modeling ........................................................8.1

Objectives........................................................................................................ .....8.2
Outline ............................................................................................................. .....8.3
Statistical Analysis ......................................................................................... .....8.5
Descriptive Statistics ..................................................................................... 8.5
Inferential Statistics ..................................................................................... 8.17
Modeling ........................................................................................................ .....8.29
Decision Alternatives and States of Nature ................................................. 8.29
Forecasting Models..................................................................................... 8.34
Casual Models..............................................................................................8.39
Financial Models...........................................................................................8.40
Limitations................................................................................................... 8.46
Key Terms ....................................................................................................... ...8.49
Practice Questions ......................................................................................... ...8.52
Chapter 9: Data for Decision Making ....................................................9.1

Objectives........................................................................................................ .....9.2
Outline ............................................................................................................. .....9.3
Data Acquisition ............................................................................................. .....9.6
Quantitative Research ............................................................................. .....9.6
Qualitative Research..................................................................................... 9.7
Data Storage................................................................................................. 9.8
Data Quality..................................................................................................9.10
Data Analytics ............................................................................................... .....9.14
Descriptive Analytics ................................................................................... 9.15
Predictive Analytics ..................................................................................... 9.17
Prescriptive Analytics .................................................................................. 9.18
Data Visualization ......................................................................................... .....9.23
Tables ......................................................................................................... 9.24
Charts ......................................................................................................... 9.25
Infographics ................................................................................................ 9.31
Using the Data............................................................................................... .....9.34
Key Terms ....................................................................................................... ...9.35
Practice Questions ......................................................................................... ...9.37
Chapter 10: Innovation and Innovative Thinking ...............................10.1

Objectives........................................................................................................ ...10.2
Outline ............................................................................................................. ...10.3
Understanding Innovation ........................................................................... .....10.5
Business Objectives ................................................................................... 10.5
Level of Novelty .......................................................................................... 10.6
The Innovative Thinking Process ................................................................ ....10.11
Execution of Innovation ...................................................................................10.18
Model S—Small Projects ...........................................................................10.18
Model R—Repeatable Projects ..................................................................10.18
Model C—Custom Projects........................................................................10.18
Innovation Biases and Constraints .................................................................10.21
Cognitive Biases ........................................................................................10.21
Constraints.................................................................................................10.22
Innovation Management ...................................................................................10.24
Conclusion..........................................................................................................10.31
Key Terms...........................................................................................................10.32
Practice Questions .......................................................................................... ..10.33
Figure and Video Descriptions..............................................................DESC.1

Endnotes...................................................................................................END.1
Glossary................................................................................................ GLOSS.1
Answers Key............................................................................................. KEY.1

Operational Excellence for Insurance Professionals Ch 7: The Decision-Making Process | 7.1
Chapter 7
The Decision-Making Process

Objectives
After studying this chapter, you should be able to
7 A Explain how an organization’s structure affects decision making
7 B Identify and describe heuristics and the four primary types of decisions
7 C Describe framing in decision making and biases that can occur during
decision making
7 D Describe enterprise-wide reporting of business information
7 E Distinguish between cooperative and competitive conflict and describe
the role of the devil’s advocate in decision making
7 F Explain the role of analysis paralysis in choosing a decision alternative
7 G Describe certainty in decision making and distinguish among risks in four
levels of uncertainty
7 H Describe the role of feedback in improving decision making

Outline
Organizational Effects on Decision Making
The ABCDs of Decision Making
Ad Hoc Decisions
Big-Bet Decisions
Cross-Cutting Decisions
Delegated Decisions
Framing the Decision Correctly
Evaluating Decision Alternatives
Dealing with Conflict
Analysis Paralysis
Choosing a Decision Alternative
Decision Implementation and Feedback
Insurance company operations require employees to make many small and large
decisions every day. Whether you are a senior executive responsible for the strategic
direction of your company or a professional responsible for only your own
performance, success in your role depends on how effectively you make decisions. A
decision is a choice about a future action.

Which of the following are examples of decisions made in insurance

companies?
A. Whether to enter a new market
B. How many staff members to assign to a new project
C. How much to spend on a company celebration
D. Whether to make a call or send an email

Organizational Effects on Decision

Making
Different types of decisions are made at different levels of an organization. Insurance
company decisions can be categorized according to a company’s organizational
structure, as shown in Figure 7.1.
Figure 7.1 The Organizational Hierarchy of Decisions
Figure 7-1 Description
Decisions made at each level of management—corporate, business, or operational

—reflect the primary focus for that level of management. In small, simple
organizational structures where information flows naturally among levels, having the
majority of decisions made at the top or corporate level might work well.

EXAMPLE
Decisions in Small Organizations
The Wilden Company consists of 40 employees organized into three divisions: a
call center, a sales center, and administration. All divisions work within the same
building, and the president of the company talks formally or informally with
division heads every day. In this situation, the president knows exactly how
business strategies and operational strategies are working and can make
strategic decisions based on accurate and up-to-date information. She can also
easily approve decisions by management at the business and operational levels.
In this situation, the president retains ultimate authority and responsibility for
decisions of any importance.
The larger and more complex the organizational structure, the more difficult it is
to centralize decision making at the corporate level. As a company grows, the number
of management levels increases so that information no longer flows freely across an
organization. Instead, organizational information flows upwards or downward through
management levels. When the need to communicate information up to decision
makers takes too long, or the process is too complicated, the decision-making process
and thus resulting outcomes suffer.
Larger companies are often organized into divisions based on geography,
function, customer, or product. Such divisions create operational efficiencies because
a division can specialize in one type of activity, which works well in stable and slow-to-
change business environments. However, such organizational structures complicate
the strategic decision-making process. In a rapidly changing business environment,
the need for access to fast, comprehensive, company-wide information is critical.
Without a centralized repository of usable and current data from all company
divisions, the time needed to gather information and the potential for
miscommunications and bad decisions increase.

EXAMPLE
Decisions in Large Organizations
The True Life Insurance Company has 2000 employees organized into two
divisions: Life and Annuities and Property and Casualty. Each division has a vice
president who reports to the president and then several layers of management
under the vice president. It is impossible for the president or even the vice
presidents of the divisions to know about or approve all decisions made at lower
organizational levels. However, True Life has an easy-to-use company-wide
database for managers at all levels to use to inform decision making.
In efficient and effective organizations, decision makers at the business and

operational levels are empowered—in other words, they have the necessary authority
and responsibility—to make decisions appropriate for their level in the company.
Organizations have policies in place to help decision makers know when they should
or must escalate a decision up to the next management level. Decisions that will affect
several organizational divisions require cross-functional decision-making groups.
Taking a structured organizational approach to decision making can help ensure that
decisions are well informed, effective, and timely in a rapidly changing business
environment.

Operational decisions focus on the day-to-day implementation of

business-level strategies.
A. True
B. False
Decision making is not affected by the size of an organization.

A. True
B. False

The ABCDs of Decision Making

Creating a structured approach to organizational decision making requires looking at
different types of decisions and the processes needed for each type of decision.
Understanding which category a decision falls into can help decision makers at all
levels discern how best to handle a decision. Experts at McKinsey & Company
categorize decisions into four distinct types: ad hoc decisions, big-bet decisions, cross-
cutting decisions, and delegated decisions, as shown in Figure 7.2.
Figure 7.2 The ABCDs of Categorizing Decisions
Source: “Untangling Your Organization’s Decision Making,” June 2017, McKinsey &
Company, www.mckinsey.com. Copyright © 2018 McKinsey & Company. All rights
reserved. Reprinted by permission.
Ad Hoc Decisions
Ad hoc decisions are infrequent decisions that can be made quickly at an individual
level because the risks involved with these decisions are relatively small. Informing and

empowering employees to make such decisions as they arise, rather than escalating
the decision up to the next level of management, improves operational efficiency.
When employees do not feel empowered and are afraid to act independently,
management must make every decision, regardless of how small, wasting time that
could be spent on more productive activities.
EXAMPLE
Ad Hoc Decision
Mary is responsible for ordering office supplies. The office is out of pens because
her supplier did not have the pens she ordered in stock. Mary decides to go to a
local office supply store and buy pens for the office rather than waiting until the
next week when the supplier will have the pens in stock. Mary made this decision
without consulting her manager because she knew that her manager would want
her to handle such a small problem herself.
Big-Bet Decisions
Big-bet decisions are infrequent, unfamiliar decisions that can have a profound effect
on a company’s operations and future success. A merger or an acquisition, a major
shift in corporate strategy, and a major capital purchase are examples of big-bet
decisions.
EXAMPLE
Big-Bet Decision
EndiFirst’s decision to develop a new self-service portal for its customers requires
the participation of all company divisions, including extensive involvement by IT.
Big-bet decisions are risky and often depart from a company’s usual way of doing
business. All major stakeholders should be involved in the decision-making process,
and identifying and evaluating risks are critical steps.
Cross-Cutting Decisions
Cross-cutting decisions are familiar decisions that can have broad organizational
impact. Creating a new version of an existing product is one example of a cross-cutting
decision.
EXAMPLE
Cross-Cutting Decision
EndiFirst’s product development team includes representatives from the
company’s marketing, underwriting, contract administration, actuarial,
investments, information technology, customer service, legal, and accounting
areas. This cross-functional team is considering creating a new life insurance
product that will require extensive collaboration to get to market in a timely and
profitable way.
Cross-cutting decisions require effective collaboration among many different parts

of an organization. As a result, companies often establish permanent cross-functional
teams for making cross-cutting decisions. A cross-functional team ensures that
different parts of the organization share common goals and that each organizational
unit is aware of another’s activities in the affected areas. Decision makers typically use
project management processes for cross-cutting decisions.
Delegated Decisions
Like ad hoc decisions, delegated decisions are typically low risk but they involve
familiar and frequent decisions. Management can implement manual or automated
procedures to guide employees in delegated decision making. Any frequent process
or definable task with identified decision points and determinable outcomes is
suitable for either partial or full automation. Automating routine tasks can simplify
and improve an employee’s job and potentially improve the customer experience.
Effective employee training on procedures or automated systems contributes to
successful delegated decisions.

EXAMPLE
Delegated Decision
Tom has been trained to follow customer service procedures for responding to
customers’ insurance policy requests. Tom knows how to use the automated
system to deliver the appropriate information in almost all customer service
situations without any involvement from management.
In the ABCD categories of decisions, a low-risk decision that is made

frequently is known as
A. An ad hoc decision
B. A big-bet decision
C. A cross-cutting decision
D. A delegated decision
In the ABCD categories of decisions, cross-cutting decisions are decisions

that (choose all that are correct)
A. Involve many areas of an organization
B. Typically use project management processes
C. Are broad in scope and can greatly impact an organization


The goal of any decision, whether an ad hoc or a big-bet decision, is to select a course
of action that results in a desirable outcome. Many everyday decisions do not require
a formal decision-making process to arrive at a desirable outcome. Instead, people
use heuristics—general rules appropriate for certain situations. For example, not all
snakes are harmful to people, but most people need additional information to
distinguish between poisonous and nonpoisonous snakes. Since people rarely have
the time to stop and do research when they encounter a snake, avoiding all snakes is a
good heuristic for most people. As illustrated in this example, not following the
heuristic often carries greater risk than following it.
Heuristics are sometimes appropriate and useful in business operations, in
particular for ad hoc decisions that are low risk and low occurrence. Knowing that a
similar situation was encountered previously and handled successfully allows people
to use the same process in future situations without wasting time going through a
formal decision process. However, just because something was handled in a particular
way before is not a good reason to continue using the same method indefinitely.
Occasionally, challenging such decisions is good management practice.
Although no standard approach for making decisions exists, we can identify some
general steps. Figure 7.3 outlines the basic steps of the decision-making process.

Figure 7.3 Basic Steps of the Decision Making Process
One of the most difficult aspects of decision making is identifying the problem or
need. During this first step, decision makers create and refine a statement of the
issues to be resolved during further investigation. Essential to this task is asking the
right questions so that the decision maker has relevant information. Figure 7.4 offers
some examples of business questions that often initiate the decision-making process.

Figure 7.4 Examples of Business Questions
Good business questions relate to the five Ws (who, what, when, where, and why)
and also answer the question “how.” Questions like these call for answers that are
empirical, meaning verifiable or evidence-based. A strong business question provides
direction for a specific plan of action.

For example, assume that a claim manager has received survey results indicating
that customer satisfaction with the claims process has declined since the last survey.
What are the relevant questions for the claims manager to ask? The most obvious
question is, “Why are customers dissatisfied?” The claims manager needs data to
answer this question. Assume that she looks at call data indicating that hold times
have been above benchmark levels for several consecutive weeks. With this
information, the claims manager assumes that long wait times for the previous month
have increased customer dissatisfaction levels. The claims manager also notes that
call volume per representative has been greater than average during this period. In
this situation, the claims manager might decide that hiring more representatives will
improve customer satisfaction.
However, good decision makers explore all relevant aspects of a situation before
making a decision. What if several representatives were sick and working inefficiently
during this period, or perhaps the claim verification process now takes longer for each
representative to complete because of increased fraudulent claim activity? Exploring
all aspects of a situation is essential to good decision making.
Framing the Decision Correctly

The first step of the decision-making process is often subject to framing errors. Franck
Schuurmans, noted expert on decision making, states that people may identify and
define a problem too narrowly because they assume they know what the issue is.
Decision alternativesare the options a decision maker considers before selecting a
future course of action. In some cases, this step requires substantial information
gathering. In other situations, the decision alternatives are more obvious because the
problem or need has occurred previously.
However, relying on what has happened in the past to determine relevant decision
alternatives may lead to poor results. For example, referring back to our claims
example, if customer dissatisfaction was caused by long call wait times previously, the
claims manager naturally assumes that long wait times are the cause of the current
dissatisfaction. However, if customer dissatisfaction is the result of customers wanting
their claims paid faster, hiring more representatives to answer calls will not lessen
customer dissatisfaction. Schuurmans suggests gathering input from a diverse team
within the company to make sure that all relevant factors are more likely to be
considered before identifying a problem.

Schuurmans also cautions against biases in decision framing. Confirmation bias is

the human tendency to seek, interpret, and remember information that confirms
preexisting beliefs. Confirmation bias provides support for all of the other types of
cognitive bias described in this text. For example, a manager who is subject to
negativity bias when doing a performance evaluation already has a poor opinion of the
employee and focuses on information that confirms that opinion. Continuing with our
previous example, because the claims manager thinks long call wait times are the
cause of customer dissatisfaction, she immediately reviews the call data and, seeing
that it is higher than usual, finds confirmation for her assumptions. Decision makers
who understand their susceptibility to confirmation bias can take steps to avoid it.
Evaluating Decision Alternatives

Small ad hoc and delegated decisions typically require little information gathering, but
cross-functional and big-bet decisions require substantial research and information
gathering. Data refers to unprocessed facts. Without some context, data is
meaningless. For example, if a call center receives 80 customer calls in one day, it is a
fact that the call center has had 80 callers. But what does that mean? No one knows
without additional context. If the decision maker knows that the call center typically
receives 50 calls a day, the fact that a day’s call volume was 80 calls becomes
information the decision maker can use for staffing or operations decisions.
Information is a collection of data that is converted into a form that is meaningful or
useful for the accomplishment of some objective.
The quality of a decision is based, in part, on acquiring the right data and
converting the data into relevant information. Decision makers may think that two or
more business conditions are related, or that some factor is driving a certain
behavior, but to make good decisions they need information proving such
relationships. Chapters 8 and 9 describe ways to acquire and use the right information
for decision making.
In general, organizations try to make relevant information available for decision
making through enterprise-wide reporting , which is the use of knowledge
management systems and informative updates across operations such that
employees at every level of an organization can access the information that is relevant
and necessary for their roles. Enterprise-wide reporting should be complete, accurate,
and accessible to those needing the information.

EXAMPLE
Amir, a compliance specialist at EndiFirst, is researching security regulations, and
frequently contacts the IT department for insight into recurring IT issues. An
enterprise-wide reporting system would empower Amir to locate much of the
information he needs without contacting the IT department, making both Amir
and the IT department more productive.
Companies often use dashboard systems that include values, projections, or

analysis to help employees perform successfully for enterprise-wide reporting.
Beyond software, decision makers can contribute to knowledge sharing within an
organization by conducting update meetings, sending notices to employees about
new and crucial company information, and strategically placing need-to-know visuals
in the office.
Dealing with Conflict

During the framing and evaluation stages of the decision-making process, obtaining
diverse viewpoints can help avoid confirmation bias. Such information may be
presented either cooperatively or competitively by members of the decision-making
group. Social psychologist Morton Deutsch states that cooperative group styles have
positively interdependent goals, which means that a group’s goals are clearly tied
together so that the chance of any one faction within the group attaining its goal is
increased by the probability of other factions within the group also attaining their
goals. Negatively interdependent goals lead to competition among the group members.
In such situations, contested issues turn into a power struggle, with each side seeking
to “win” and have the group accept its view as the right view. Figure 7.5 provides a
comparison of group characteristics that will lead to either cooperative or competitive
conflict.

Figure 7.5 Group Characteristics and Conflict
Cooperative conflict requires an organizational culture that values diversity in

opinions and fosters trust that will allow for dissenting opinions. Sometimes groups
take specific steps to incorporate a diversity of opinions into the decision-making
process. When making big-bet decisions, dissenting opinions are crucial because of
the high costs of making a bad decision. As a result, big-bet decisions often include a
formal position known as a devil’s advocate. A devil’s advocate is a person assigned to
make a case against a decision-making team’s proposal. The devil’s advocate should
operate independently of the group and have no personal stake in the ultimate
outcome of the group’s decision. Members of the decision-making team should
understand that the role of the devil’s advocate is to make them focus on negative
information and to help them develop and present the strongest possible case for
proceeding with a particular decision. Another approach for gathering dissenting
opinions is to require that a decision-making team prepare a minority report that
presents contrarian opinions and facts.
EXAMPLE
Cooperative Conflict in Decision Making
The Fine Life Insurance Company’s strategic management team was considering
whether to budget funds for an innovative new project that would require cutting
the budget for current products and operations. Product division heads argued
against the new project believing that the money would be better spent on
current products and operations. The innovation team argued that the new
project was necessary for the company’s future profitability.
The company president stopped the discussion when the head of the innovation
team accused one of the division heads of “always wanting to kill new ideas.” The
president appointed a devil’s advocate to objectively evaluate the risk-return
tradeoffs of the new project. The decision-making group reviewed the innovation
project team’s report and the devil’s advocate report before the next in-person
group meeting. At the next meeting, group members were able to discuss more
collaboratively and constructively the pros and cons of the new project.
Analysis Paralysis
In the evaluation and analysis stage of decision making, teams may become subject to
analysis paralysis—spending excessive time and energy in gathering information. In
such cases, the decision-making group waits to receive the latest figures or one more
report before making a decision. Analysis paralysis is more common in big-bet

decisions where the costs of a wrong decision are high. No one wants to make the
wrong decision, but decision makers must also realize that decision delays often have
negative consequences, including
The company can lose a competitive advantage; for example, a delay in
introducing a new service feature could put a company behind competitors in
service quality
One or more of the decision alternatives could disappear; for example, a
preferred job candidate could take a job offer with another company
One or more of the decision’s criteria could change; for example, stakeholder
preferences could change
Low-risk decisions can be made quickly because a bad decision involves little cost
to the organization. Higher-risk decisions will obviously take longer and include more
extensive analysis, but they must also include a decision deadline. If a decision cannot
be made by a certain date, then the group needs to present valid reasons for
extending the deadline or realize that the decision of the group is not to make a
decision at all.
Choosing a Decision Alternative

Almost all decisions involve some level of risk, but some decisions involve more risk
than others. Certainty is a probability of occurrence with no (or negligible) potential
for deviation from the expected outcome; in other words, the outcome of a decision is
known based on available information. Although certainty does exist in the business
world, decision makers spend most of their time making decisions in conditions of risk
and uncertainty. Decision makers view risk and uncertainty on a continuum. The least
risky situations are when a decision maker has incomplete but reliable information
and is able to assign a reliable individual probability to each possibility. At the other
end of the continuum is true uncertainty, where little or no reliable information is
available, and the decision maker is unable to assign individual probabilities because
one or more outcomes are unknown.
Reasons for Uncertainty

Decision makers encounter uncertainty for a variety of reasons. The following is a list
of just some of the reasons for decision uncertainty in insurance companies.
The external environment is unpredictable because of business and regulatory
fluctuations.
Companies do not know how important a decision will be to the overall

corporate strategy.
Companies do not have access to nonpublic information about their
competitors, suppliers, and customers.
A company new to a given market has not collected its own data observations
about that new market.
A company loses data in an IT system conversion and needs to estimate some
data values from the lost records.
A company may need information about a new product but does not have
known performance characteristics for an extensive period of time.
A company has not consistently stored certain data elements over time.
Some data is impossible to acquire at a fine level of detail. For example, the
amount of time a single customer spends trying to navigate an insurance
website can be fairly difficult to track. Customers sometimes leave in the middle
of the purchase process, work on other tasks, experience problems with
internet connectivity, or pass the purchase process on to other people in the
room.
Some data reflect black-market activities that another party is purposely hiding.
For example, groups engaging in fraudulent activity constitute an underground
economy that is difficult to observe.
A company has no data available because no one else has explored the product
idea or business question.

Four Levels of Uncertainty

McKinsey & Company have described four levels of uncertainty, depicted in Figure 7.6.
Figure 7.6 The Four Levels of Uncertainty
Source: “Strategy Under Uncertainty,” McKinsey Quarterly, June 2000,

www.mckinsey.com. Copyright © 2018 McKinsey & Company. All rights reserved.
Reprinted by permission.
A Level 1 decision is relatively straightforward. Relevant data is available for reliably

predicting a future outcome. At Level 2, the future can accurately be predicted to be
one of a few scenarios, but decision makers cannot identify which outcome will
definitely occur. Probabilities can be assigned to different outcomes, and decision
makers focus on the risks and returns of the different scenarios during the decision-
making process.

EXAMPLE
Level 2 Decision
Regulatory authorities are considering implementing a new rule for fiduciary
responsibilities in the sale of insurance and financial products. The new rule will
either be implemented as proposed, revised and implemented, or rejected and
not implemented. Insurance companies know that one of these three alternatives
will happen, but cannot predict with certainty the one that regulatory authorities
will implement. Companies develop an expanded corporate strategy for the most
likely scenario and lesser-developed strategies in case another option occurs.
At Level 3, a manager faces a range of possible outcomes and cannot reliably limit
the options to a small set of scenarios because the outcome might lie anywhere in the
range of possibilities.
EXAMPLE
Level 3 Decision
An insurance company is planning to invest in an emerging technology that has
not been fully implemented in any other insurance company. The benefits and
risks are not fully known, but just as in Level 2 decisions, decision makers must
identify a set of scenarios. Decision makers identify extreme scenarios at either
end of a range of possibilities from the technology being a complete failure to the
technology revolutionizing the way the company does business. Assigning
probabilities to middle of the range scenarios is difficult and requires that
decision makers focus on broad risk strategies for the range of probabilities.
Level 4 indicates so many potential outcomes that it is nearly impossible to identify

relevant variables or construct viable scenarios. Level 4 uncertainty is rare, but when it
occurs, decision makers will focus on gathering new information as it becomes
available. Potential outcomes tend to become clearer after further analysis, and at
some point in the future, the uncertainty may move to a more manageable Level 3 or
Level 2.
Decision Implementation and Feedback

After implementation, decision makers assess the decision outcomes in comparison
to expected outcomes. Decision expert Schuurmans notes that feedback about the
process itself is an often overlooked part of the decision-making process. If a decision
accomplishes what it was intended to accomplish, the decision-making process is seen
as successful without considering what role luck might have played in the outcome. He
suggests looking at the decision process separately from the decision’s outcome to
determine if anything should have been done differently. Evaluating decisions without
assessing blame allows for learning from mistakes and makes for better future
decisions.
Schuurmans suggests that a big decision is actually a series of smaller decisions
that lead to the big decision. Keeping a decision log that lists the names of all who
have participated in the decision-making process and their views and comments
throughout the process is helpful in evaluating a decision. For example, a decision log
would include
What was decided at each step
Why that decision was made
Whether the group was unanimous in its support, or if not, what the dissenters
wanted to do instead
Because big decisions may take years to accomplish, a decision log will help the
group keep track of the various aspects of decisions that will be impossible to
remember over time. A decision log can also reduce hindsight bias—the tendency of
decision makers to believe, after a decision is implemented and a certain result
occurs, that they knew during the decision-making process that a certain decision
would result in that outcome.

All decisions require information gathering and evaluation.

A. True
B. False
Decision making may involve cooperative or competitive conflict.

Cooperative conflict is characterized by (choose all that apply)
A. Negatively interdependent goals
B. Effective group communication and trust
C. Shared values and beliefs
According to McKinsey & Company, the difference between a Level 2

decision and a Level 3 decision is that
A. A Level 2 decision has a smaller range of decision alternatives than a
Level 3 decision
B. A manager can assign probabilities to the outcomes in a Level 2
decision but cannot even determine relevant variables or construct
viable scenarios for probabilities in a Level 3 decision.

Key Terms
decision
ad hoc decision
big-bet decision
cross-cutting decision
delegated decision
heuristics
decision alternatives
confirmation bias
data
information
enterprise-wide reporting
devil’s advocate
analysis paralysis
certainty
hindsight bias

LEARNING OBJECTIVES &

PRACTICE QUESTIONS Chapter Seven
Learning Objective: 7A. Explain how an organization’s structure affects decision making.
1. The following statement(s) can correctly be made about a company’s structure and decision-making
in the insurance industry:
A. In small, simple organizational structures where information flows naturally among levels, having
the majority of decisions made at the top or corporate level might work well.
B. Larger companies do not require a centralized repository of usable and current data from all
company divisions in order to make effective decisions.
(1) Both A and B
(2) A only
(3) B only
(4) Neither A nor B
Learning Objective: 7B. Identify and describe heuristics and the four primary types of decisions.
2. Experts at McKinsey & Company categorize decisions into four distinct types: ad hoc decisions, big-
bet decisions, cross-cutting decisions, and delegated decisions. Creating a new version of an existing
product is an example of
(1) an ad hoc decision
(2) a big-bet decision
(3) a cross-cutting decision
(4) a delegated decision
Learning Objective: 7C. Describe framing in decision making and biases that can occur during
decision making.
3. By definition, when an individual identifies or defines a problem too narrowly because he assumes
he knows what the issue is, the individual is
(1) choosing decision alternative
(2) committing a framing error
(3) subject to confirmation bias
(4) using heuristics
Learning Objective: 7D. Describe enterprise-wide reporting of business information.
4. The Dogwood Insurance Company uses knowledge management systems and informative updates
across operations such that employees at every level of the company can access the information that
is relevant and necessary for their roles. By definition, this information indicates that Dogwood
engages in
(1) quality analysis
(2) enterprise-wide reporting
(3) control limits
(4) quality assurance

Learning Objective: 7E. Distinguish between cooperative and competitive conflict and describe
the role of the devil’s advocate in decision making.
5. Two types of conflict that can arise in a decision-making group are cooperative conflict and
competitive conflict. One group characteristic that will lead to competitive conflict is that the group
(1) has effective group communication and trust
(2) has shared values and beliefs
(3) prefers decision failure over loss in power struggles
(4) recognizes the legitimacy of others’ interests
Learning Objective: 7F. Explain the role of analysis paralysis in choosing a decision alternative.
6. Analysis paralysis occurs when a team spends excessive time and energy in gathering information.
The following statements are about analysis paralysis:
A. Analysis paralysis is most common in ad hoc decisions.
B. Higher-risk decisions should include a decision deadline to reduce the risk of analysis paralysis.
(1) Both A and B
(2) A only
(3) B only
(4) Neither A nor B
Learning Objective: 7G. Describe certainty in decision making and distinguish among risks in four
levels of uncertainty.
7. McKinsey & Company, a global management consulting firm, categorizes uncertainty into four
levels. Level 1 of uncertainty means that a decision maker
(1) has relevant data available for reliably predicting a future outcome
(2) faces a range of possible future outcomes and cannot reliably limit the options to a small set of
scenarios
(3) can accurately predict the future to be one of a few scenarios but cannot identify which
outcome will definitely occur
(4) faces so many potential outcomes that it is nearly impossible to identify relevant variables or
construct viable scenarios
Learning Objective: 7H. Describe the role of feedback in improving decision making.
8. After implementation, decision makers assess the decision outcomes in comparison to expected
outcomes. Decision expert Franck Schuurmans suggests
A. looking at the decision process separately from the decision’s outcome to determine if anything
should have been done differently
B. keeping a decision log that lists the names of all who have participated in the decision-making
process and their views and comments throughout the process
(1) both A and B
(2) A only
(3) B only
(4) neither A nor B


Operational Excellence for Insurance Professionals Ch 8: Analysis and Modeling | 8.1
Chapter 8
Analysis and Modeling

Objectives
8 A Calculate measures of central tendency and dispersion
8 B Distinguish between descriptive and inferential statistics
8 C Describe the importance of the law of large numbers to inferential
statistics
8 D Describe random sampling and distinguish between random and
nonrandom sampling
8 E Explain decision criteria, decision constraints, and states of nature and
provide examples of each
8 F Describe forecasting models and give examples of types of forecasting
models
8 G Describe how inputs, outputs, point estimates, and range estimates are
used in financial models
8 H Explain payoffs and describe how a company uses payoff tables to
conduct payoff analysis
8 I Evaluate the limitations of modeling in business

Outline
Statistical Analysis
Descriptive Statistics
Inferential Statistics
Modeling
Decision Alternatives and States of Nature
Forecasting Models
Limitations
Insurers gather data across a variety of operational areas. Big data is a term used
to describe large amounts of unprocessed information gathered from various
sources, in various formats, and at a rapid speed. Used correctly, data can inform
decision makers’ understandings of the conditions that affect the decision.
Improving available information decreases the level of uncertainty in a decision
environment. A decision environment is the collection of information, alternatives,
values, and preferences available to a decision maker at the time of a decision. In this
chapter, we cover two mathematical approaches to improving the available
information: statistical analysis and modeling.

In order to refine EndiFirst's mobile strategy, company analysts want to

determine which population of customers is most likely to purchase
insurance through its mobile app. Which of the following actions could
provide EndiFirst with the data it needs?
A. Reviewing all mobile app purchase data since the app’s launch
B. Surveying a sample of mobile app users to determine their genders,
ages, and how they purchased insurance
C. Identifying which customers use the mobile app most frequently

Statistical Analysis
Statistical analysis is the use of mathematical techniques for collecting, organizing,
describing, analyzing, and interpreting numerical data—called statistics—to support
decisions. Statistical analysis helps decision makers condense large amounts of data
into information that’s manageable enough to guide decisions. Decision makers can
use two types of statistical analysis to draw conclusions: descriptive statistics and
inferential statistics.
Descriptive Statistics
A population is a set of all items that share a specified characteristic. In statistics, a
population can include any number of quantifiable items that a researcher has
defined for observation, such as people, objects, events, measurements, and ratings.
Populations can vary in level of specificity depending on the goal of the researcher. In
our survey example, the population includes every customer’s numerical rating for
each question of the customer satisfaction survey.
EXAMPLES
Populations in Statistics
All people in the United States
All customers in Region A between the ages of 40 and 60
All households with four or more family members
All life insurance claims over the past year
All mobile app purchases since the app’s launch
All mobile app purchases during the month of February
All answers to question #5 on a life insurance application
Statistics that summarize a population of data are descriptive statistics.

Descriptive statistics use measures of central tendency and measures of dispersion.

Measures of central tendency are representative values that describe the values in
the middle of a population. They allow decision makers to reduce large amounts of
raw data into single representative values. For example, an analyst at EndiFirst could
give managers the mean value for each item on the customer satisfaction survey to
highlight each aspect’s overall performance. The three most common measures of
central tendency are the mean, median, and mode.
Mean
The mean refers to the numerical average of a series of values. Knowing the mean
value of a large number of observations can be a valuable tool. For example, knowing
the mean number of claims processed in a typical month can help determine how
many claim analysts an insurer needs.
EXAMPLE
Mean Value of Yearly Life Claims Processed
Six years ago, EndiFirst expanded its offerings to a new region. Satish, the claims
manager, wants to examine claims data since that time. He looks at the number of
claims for each of the past six years.
Year 1: 2,820
Year 2: 2,820
Year 3: 3,690
Year 4: 4,010
Year 5: 4,050
Year 6: 6,580
Total Claims: 23,970

To calculate the mean number of claims processed over the past six years, Satish
takes the total of all claims received and divides that total by the number of years.
Mean = Total number of claims ÷ Number of years

= 23,970 ÷ 6
= 3,995
Although the mean is easy to calculate, its accuracy as a measure of central

tendency can be limited if the population includes outliers—extremely high or low
values that are not representative of other values—like Year 6, in which almost 6,600
claims were processed.
Median
To gain insights about a dataset’s outliers, Satish might want to calculate the median.
The median is the middle value in a set of values arranged in numerical order. The
median can describe economic characteristics, such as median family income, median
household size, or median education level. The median is useful when making
decisions influenced by population characteristics, such as decisions about marketing
materials.
To find the median, (1) arrange the values in the population in numerical order,
and (2) count the number of values. If the population contains an odd number of
values, then the median is the middle value and has an equal number of values above
and below it. If the population has an even number of values, the median is
determined by calculating the average of the two middle values.

EXAMPLE
Median
Satish wants to know the median value of claims for the past six years. Note that
the values in the population are already arranged in numerical order.
Year 1: 2,820
Year 2: 2,820
Year 3: 3,690 ◄
Year 4: 4,010 ◄
Year 5: 4,050
Year 6: 6,580
In this case, the population has six values—one for each year. Because six is an
even number, Satish needs to find the average of the two middle values—3,690
and 4,010.
The average of these two values is 3,850 (3,690 + 4,010 = 7,700; 7,700 ÷ 2 = 3,850).
Therefore, the median value of the population is 3,850
Unlike the mean, the median is not an arithmetic average of all the values in a
population; it is simply the value that falls in the middle. The primary drawback of
using the median as a measure of central tendency is that it ignores all the other
values. If the population contains outliers or values are not evenly distributed, the
median won’t accurately represent all the values.
Mode
Sometimes it’s more helpful to know the most common value in a population rather
than the mean or median value. The statistical measure that identifies the value that
appears most often in a population is the mode. Finding the mode is easier with the
population values listed in numerical order.
The mode can help to identify baseline values. For example, an insurer might want
to know the most common amount of coverage its life insurance policies provide.
Knowing this information could make it easier for the insurer to focus its marketing
efforts on the types of products most likely to generate new business. An insurer

might also want to know, for example, the most common time of day when people
make claims in order to anticipate daily staffing needs.
Using our example, it’s easy to see that 2,820 appears more often than any other
value:
EXAMPLE
Mode
Year 1: 2,820 ◄
Year 2: 2,820 ◄
Year 3: 3,690
Year 4: 4,010
Year 5: 4,050
Year 6: 6,580
However, the value 2,820 represents only the first two years and offers no
information about the values in the middle or at the high end of the population.
Therefore, this mode is not a useful measure for decision making.
It’s possible to have no mode if no number appears more than once. It’s also
possible to have more than one mode if more than one number appears at the same
higher frequency (say, if three numbers appear twice, while all other numbers appear
once). Too many modes or no mode at all make the mode a less useful value for
decision making. Figure 8.1 provides a summary of these three measures of central
tendency.

Figure 8.1 The Three Measures of Central Tendency
If Satish bases staffing decisions solely on measures of central tendency, the

department would often be under- or overstaffed. Satish can reduce this risk by
looking at more than one measure of central tendency or by evaluating measures of
dispersion in addition to measures of central tendency.

Measures of Dispersion
Measures of dispersion are representative values that describe the distribution of
data around specified central values. The three most common measures of dispersion
are the range, variance, and standard deviation.
Range
The simplest measure of dispersion is the range, which is the difference between the
highest and lowest values in a particular population. Consider EndiFirst’s claim data.
Because values in the dataset are listed in numerical order from lowest to highest, it’s
easy to calculate the range: simply subtract the lowest number from the highest
number.
EXAMPLE
Range
Year 1: 2,820 ◄
Year 2: 2,820
Year 3: 3,690
Year 4: 4,010
Year 5: 4,050
Year 6: 6,580 ◄
6,580 – 2,820 = 3,760
If Satish knows how many claims a single analyst can process each day, he could
use the range to make decisions about lower and upper staffing limits. However,
because the range varies considerably from year to year, even that information isn’t
very helpful. In addition, it doesn’t indicate whether there are outliers or whether
values are clustered at one or more points within the range. The range also doesn’t
indicate data patterns.
Variance
We can use the variance to get a better understanding of how values are dispersed.
The variance is the average squared distance between the population mean and each
individual item in the population. Steps for finding the variance are as follows:

1. Calculate the mean.

2. Find the distance between each item of the population and the mean and then
square each distance.
3. Add all the squared values.
4. Divide the total by the number of items in the population.
The results of variance calculations for these numbers are summarized in the
table below. Negative numbers in the center column indicate values that are below the
mean; positive numbers indicate values above the mean.
Item Value Distance from Mean Squared Distance

2,820 –1,175 (2,820 – 3,995) 1,380,625
2,820 –1,175 (2,820 – 3,995) 1,380,625
3,690 -305 (3,690 – 3,995) 93,025
4,010 +15 (4,010 – 3,995) 225
4,050 +55 (4,050 – 3,995) 3,025
6,580 +2,585 (6,580 – 3,995) 6,682,225
Total of squared distances = 9,539,750
Variance (9,539,750 ÷ 6) = 1,589,958
EXAMPLE
Satish can get a picture of how claims numbers for each year relate to the mean
and to each other. While calculating the variance, Satish discovers that the values
range from 1,175 claims fewer than the mean to 2,585 claims more than the
mean.
In general, larger variances indicate that the values in a population are further
from the mean and more dispersed. Smaller variances indicate that values in a
population are closer to the mean and less dispersed. Variance isn’t the most
accurate measure of dispersion, however. Because the variance is based on squared

distances, it isn’t on the same numerical scale as the raw data. Therefore, the variance
doesn’t provide information about the actual distance between different data items or
between individual data values and the mean. After calculating the variance, Satish
should determine the standard deviation, which will resolve the problem of numerical
scale.
Standard Deviation
The standard deviation of a population is the square root of the variance. The square
root of a number is the value that, when multiplied by itself, produces the number. For
example, the square root of 25 is 5, because 5 x 5 = 25. In effect, calculating the
standard deviation of a population reverses the process used to calculate the variance
and thus puts the results back in the same numerical scale as the raw data, providing
a more intuitive picture of variation.
EXAMPLE
For the population Satish is examining, the standard deviation is
or 1,261, rounded to the nearest whole number.

This number tells Satish how much claims volume tends to vary from the mean,
which can help Satish determine the degree of uncertainty he should account for
when looking at incoming call data.
The standard deviation assumes that values are distributed normally (in other
words, evenly dispersed). In general, the larger the standard deviation, the further the
values are from the mean (in other words, the more dispersed the values in the
population). Smaller standard deviations indicate that values in the population are
closer to the mean and less dispersed.
Insurance companies frequently use the standard deviation to evaluate risk
factors such as mortality risk, market risk, interest-rate risk, or customer behavior risk.
For example, insurers can determine their likely claim experience by using the
standard deviation to identify the distribution of customer ages and comparing the
results to information in mortality tables. This can help insurers frame financial
decision-making.
Figure 8.2 provides a summary of the three measures of dispersion discussed
here.
Figure 8.2 The Three Measures of Dispersion

The number of life insurance home office personnel in the United States
has changed over the past five years. Use these numbers to calculate
measures of central tendency and dispersion.
Year 1: 346,700
Year 2: 347,300
Year 3: 340,600
Year 4: 334,400
Year 5: 325,500
What is the mean number of life insurance company employees?

A. 338,900
B. 340,600
C. 347,300
D. None of these choices
What is the median number of life insurance company employees?

A. 325,500
B. 340,600
C. 347,300

What is the mode for the number of life insurance company employees
over these five years?
A. 325,000
B. 334,400
C. 346,700
What is the range for this population?

A. 21,800
B. 24,500
C. 325,500
What is the variance?

A. 347,300
B. 60,840,000
C. 66,820,000
What is the standard deviation in the population of life insurance

company employees over the five years?
A. 147.6
B. 8,174.4
C. 18,278.4

Inferential Statistics
Analyzing an entire population of data isn’t always practical. To gather similar
information based on a smaller number of values, insurers can analyze a sample of the
population. Sampling is a statistical technique used to examine a portion of a given
group in order to develop conclusions about the entire group. Insurers use samples
to perform inferential statistics. Inferential statistics allow a decision maker to draw
conclusions about a large population based on the sample group.
Inferential statistics are not as precise as descriptive statistics, but they can
provide important information using fewer resources. The accuracy of inferential
statistics depends in large part on whether the sample is representative of the
population. The more representative the sample data is of the underlying population
of data, the more accurate the conclusions drawn from sample data are likely to be.
The law of large numbers states that, under normal circumstances, the more
times a person observes a particular event, the more likely the observations will
approximate the “true” probability of the event. A coin toss is a prime example of this
concept. The more times you toss a coin, the more likely you are to see an
approximately equal number of heads and tails.
The law of large numbers has important applications for insurance. Insurance
companies rely on the law of large numbers when they conduct financial audits,
interpret results from customer surveys, or use mortality tables, which present the
number of deaths projected to occur within a given group of people during a specified
period of time.
Random Sampling
To ensure that a sample results in accurate inferences, insurers use random
sampling. Random sampling is a technique in which each item of a population has a
determinable chance, or probability, of selection. Using random sampling enables a
company to ensure that the values included in a sample are representative of all the
values in the population. Common types of random sampling are simple random
sampling, systematic random sampling, and stratified random sampling.
Simple random sampling is a method of random sampling in which every member
of the data population has an equal chance of being included in the sample
population. If a population is well defined and the number of elements needed for a
sample is relatively small, a researcher can perform sampling using a table of random
numbers or random number generating software.

EXAMPLE
Satish is reviewing claims calls from the past month. Although the department
received 1,000 calls about claims during the past month, Satish wants to examine
only 100 of those calls.
1. To generate the sample group, he assigns each call log a number from 0001
to 1,000.
2. Satish uses a random number generator to obtain 100 random numbers
between 1 and 1,000.
3. Satish examines only the 100 records indicated by the random number
generator.

Another way of producing a random sample is to use systematic random

sampling. Systematic random samplinginvolves selecting items from the population
at a uniform interval. Systematic random sampling ensures that every item in the
population has an equal and independent chance of being included in the sample.
EXAMPLE
A claims analyst examines one life insurance claim from each face value
amount.
A call center manager monitors one customer telephone call every 15
minutes.
An auditor examines every fifth record in the underwriting department’s
application file.
Researchers can use any size interval and can start sampling at any point in the
population.
EXAMPLE
Lisa, the assistant claim manager, started reviewing call recordings at the
beginning of the 1,000-item call log and reviewed every 10th call. This means she
selected calls #10, #20, #30, and so on.
When Lisa reached the end of the call log, she had selected all 100 records needed
for her sample (1,000 ÷ 10 = 100).
If the sample size is small relative to the size of the population, then interval size,
starting point, and sequence are important.

EXAMPLE
Suppose Lisa sampled 100 of the 1,000 calls in the log by reviewing every other
recorded call. In this case, Lisa would have selected 100 records when she had
reached only the 200th record (100 × 2 = 200).
If the call logs were in order by date, those at the beginning of the month would
be overrepresented, and those at the end of the month would be ignored. If Lisa
had begun selecting calls near the middle of the log, she would have ignored calls
at the beginning and end of the month.
To increase the likelihood of selecting a representative sample, analysts should (1)

select an appropriate sample size, (2) select a random interval size, (3) choose a
random starting point for sampling, and (4) proceed through the entire population.
Simple random sampling and systematic random sampling are usually most
effective when population elements are homogeneous—that is, when the elements in
the population are similar. Simple and systematic random sampling don’t work as well
if the population is varied or segmented.
EXAMPLE
EndiFirst has 140,000 customers in four regions, as follows:
Region A: 89,500
Region B: 5,000
Region C: 11,500
Region D: 34,000
EndiFirst’s researchers use simple random sampling to administer customer
surveys to 1,000 of these customers. Using this approach, simple chance could
lead to a sample that disproportionately includes Region C opinions. As a result,
the views of Region C customers would be overrepresented in the final data, even
though they don’t necessarily represent the views of the customers from other
regions.

To address the problems created by segmented populations, companies often use

stratified random sampling. Stratified random sampling is a technique in which the
user divides the population into segments, or strata, and then selects a proportional
number of items from each segment at random. Accordingly, a stratified random
sample is one found by dividing the population into a number of distinct segments
and then selecting cases at random and in proportion to the segment size. To
determine the number of items from each segment to include in the sample, the
researcher would first determine the ratio of items in the sample to the total number
of items in the population.

EXAMPLE
EndiFirst’s researchers selected a stratified random sample of 1,000 customers
from its population of 140,000 customers. To find the number of items to include
from each region, the researcher
1. Calculated the ratio of items in the sample to the total items in the
population, which was 1,000/140,000, or 1/140.
2. Multiplied the number of items in each stratum—in this case, each of the
four regions—by the ratio.
The following table shows the number of employees to be selected from each
stratum. Fractional values are rounded to the nearest whole number.
Location Number of Employees Number of Employees

x 1/140
Region A 89,500 639
Region B 5,000 36
Region C 11,500 82
Region D 34,000 243
In this example, the sample (the sum of the values in the third column) is equal to
1,000. The customers from each stratum are selected at random. Each customer,
in this case, has a weighted rather than an equal probability of being included in
the sample.
Nonrandom Sampling
Unlike random sampling, nonrandom sampling does not randomize sample selection.
Instead, nonrandom sampling bases sample selection on specific, personally selected
criteria.

Because using specific selection criteria excludes some members of the

population, not every member has an equal or even a predetermined probability of
being selected. Thus, nonrandom sampling is less reliable than random sampling for
predicting the characteristics of a population based on the characteristics of the
sample.
Nonrandom sampling can be useful despite its limitations. Insurers often use
nonrandom sampling when there is reason to believe that examining only a few clearly
defined members of a population can identify a “typical” member.
EXAMPLE
Although employees created the survey to evaluate overall customer satisfaction,
they sent the survey only to EndiFirst customers who have called into the office in
the past two months.
The employees decided these customers know most about the current quality of
customer service and are still relatively representative of EndiFirst’s entire
customer population.
Validity
Statistical validity is the degree to which an observed result can be relied upon and
not attributed to random error in sampling or measurement. Decision makers can
improve the accuracy of results drawn from sample data by ensuring that the
observed results are statistically valid. Validity of sample results depends largely on
large sample sizes. Other factors include the degree of confidence and the margin of
error.
Degree of confidence refers to the likelihood that a calculated value accurately
predicts the true value. For example, a 95 percent degree of confidence indicates a
probability of 95 percent that calculated results are accurate.
In general, the larger the sample size, the higher the degree of confidence. If the
risk involved with a decision based on sample data is low, managers may be able to
select a relatively small sample. If the risk involved with a decision is high, managers
may need to increase the size of the sample to increase the degree of confidence.
Margin of error indicates the likely range of inaccuracy of a given sample result

relative to a result based on the total population. In other words, the margin of error
indicates how accurately a given sample represents the population. In most cases, the
larger the sample size, the smaller the margin of error. In general, researchers
consider a margin of error of 3 percent acceptable. If the margin of error is greater
than 3 percent, increasing the sample size might be necessary.
Avoiding Bias
Ensuring validity also means avoiding statistical bias. Statistical bias is a consistent or
systemic error arising from a flaw in the research design. Sampling bias is a type of
statistical bias that occurs when the method used to obtain information results in a
sample that is not representative of the population being studied. Even when
researchers are careful to use appropriate sampling techniques, they can still fall prey
to sampling bias. Three subtypes of sampling bias are response bias, nonresponse
bias, and selection bias.
Response bias occurs when the way researchers word a question distorts the
answer.
EXAMPLE
How would you improve EndiFirst’s poor customer service? is a question that might
elicit response bias because it does not define “poor customer service,” identify
what aspect is being evaluated, or provide a rating scale. As a result, survey
participants have to base their answers on personal criteria.
The question also leads participants to think that EndiFirst’s customer service is
poor. How should a customer answer who believes the service is excellent?
Nonresponse bias occurs when some members of a sample are inherently

more likely to provide information than other members of the same sample.

EXAMPLE
Customer reviews posted on a website tend to demonstrate nonresponse bias,
because customers who have had neutral experiences are not as likely to post.
Selection bias occurs when the method of data collection systematically

excludes certain members of the sample.
EXAMPLE
A survey about overall customer service conducted through the mobile app only
would exclude those customers who have had a customer service interaction but
do not use the mobile app.
Other types of statistical bias can affect both population and sample data.
Examples of these are measurement bias, cultural bias, attention bias, and social
acceptance bias.
Measurement bias refers to a systematic error arising from the instruments used
for data collection.
EXAMPLE
Different body weight scales often don’t calibrate in the same way. If a variable is
body weight, using different scales to weigh participants can result in
measurement errors.
Cultural bias refers to a consistent cognitive error resulting from the tendency to
interpret and report data in terms of the observer’s own culture. Members of a
culture tend to hold shared assumptions about conventions and can confuse these
assumptions with fact. Cultural bias is important to consider when entering a new
market.
EXAMPLE
Some cultures write from left to right; others write from right to left. A survey
using a left-to-right writing system should be redesigned to flow from right to left
when introduced in a country with a right-to-left writing system.
Attention bias is a consistent error in research outcomes that arises when people
perform better because they know they are being studied.
EXAMPLE
A researcher wants to see how people interact with the new website. Because the
researcher is watching, some participants take care to avoid mistakes with
website features that, in everyday life, might lead to customer mistakes.
Social acceptance bias refers to a consistent cognitive error based on a tendency

for individuals to make socially acceptable statements even when they feel something
else.
EXAMPLE
When a product manager asks participants how they feel about EndiFirst’s new
product, some participants omit negative opinions to be polite.
Staying alert to the potential for bias helps decision makers identify when they might
need more information to follow through with a decision.

Fill in the blanks.

__________ statistics summarize a population of data, and __________
statistics draw conclusions about a population based on a sample group.
A. Descriptive; biased
B. Descriptive; inferential
C. Inferential; random
D. Inferential; descriptive
The following statements describe inferential statistics. If all three

statements are true, choose the last answer choice. Otherwise, choose
the correct statement.
A. Nonrandom sampling is the best way to predict the characteristics of a
population based on the characteristics of a sample.
B. Random sampling is less reliable than choosing the sample based on
specific, personally selected criteria.
C. The larger the sample group, the more likely it is to yield accurate
results.
D. All of these choices are true.

To ensure that a sample results in accurate inferences, insurers should

use __________.
A. Decision criteria
B. Random sampling
C. Nonrandom sampling
D. Attention bias

Modeling
In addition to statistical analysis, a decision maker can improve available information
by looking at the results of models. A model is an item or system that simulates
something else. Models help insurers manage uncertainty by demonstrating the
possible consequences of a variety of controllable and noncontrollable conditions.
Using models, a decision maker can see how a particular solution will work to address
a problem without actually implementing the solution.
In most cases, models call for extensive mathematics. Because they can be
complex, insurance companies often rely on computer software to develop the
models. Computational modeling is a form of modeling that uses the processing
capabilities of IT to perform millions of simulations at once.
Experimenting within the artificial constructs of a model is much easier, less costly,
and faster than experimenting by making real-world changes. The objective of
modeling is not to produce a single forecast of future conditions, but to identify a
number of “what if” situations that can help decision makers select the best decision
alternative. Modeling can also generate possibilities that take into account decision
criteria, decision constraints, and various influences on decisions called states of
nature.
Decision Alternatives and States of Nature

In Chapter 7, you learned that decision alternatives are the options a decision maker
considers before selecting a future course of action. Decision alternatives refer to
elements under the control of the decision maker. A decision maker chooses decision
alternatives based on a characteristic, attribute, or expected outcome from the
alternative.

EXAMPLE
EndiFirst’s operations team is considering the purchase of a new customer
routing system to increase call center efficiency. Its current system can handle
light demand, but experiences problems under moderate or heavy demand. The
team faces three decision alternatives, as illustrated in Figure 8.3.
Figure 8.3 Decision Alternatives

Decision makers need to evaluate the merits of each decision alternative in

conjunction with other factors.
Decision criteria are the simple-to-understand rules a decision maker uses to
evaluate decision alternatives. They describe what the decision should achieve. To
select an appropriate decision alternative, a decision maker considers the criteria as
well as objectives and potential risks and rewards.
EXAMPLES
Decision Criteria at EndiFirst Insurance Company
Contact center criterion: No caller should wait more than two minutes before
speaking with a customer service representative.
Other examples of decision criteria include:
New business: EndiFirst sets a maximum error percentage on new policies
issued. This maximum applies to clerical errors such as incorrect birth
dates and misspelled names. If a unit exceeds the maximum error rate, the
manager investigates and takes action.
Claims: Claims payments should be made within two business days of
receiving the final requirements.
Marketing: Social media advertisements must result in at least 10 online
purchases each week.
Decision constraints are practical limitations that affect the selection of decision
alternatives. In business, limitations are often determined by the company, but
influenced by regulatory requirements or resource capacity (such as budgets and staff
time).

EXAMPLES
Decision Constraints at EndiFirst Insurance Company
Contact center constraint: EndiFirst’s equipment supports up to 50 customer
service representatives at one time.
Other examples of decision constraints include:
Information technology: System modification projects may not consume
more than 2,500 staff hours for completion.
Product development: Timely launch of the new product is subject to
regulatory responses.
Office services: Replacements for common office supplies should average
no more than $1,000 per month.
The number of decision alternatives frames the environment in which managers

make business decisions. Alternatives depend on both the problem that needs solving
and the existing, although controllable, criteria and constraints.
States of Nature
States of nature are potential influences on the outcome of a decision that are not
under a decision maker’s control. States of nature contribute to uncertainty. The most
obvious example of a state of nature is the weather: on a given day next week, it could
be rainy, cloudy, or sunny. A person has no control over which state of nature exists
on that day. States of nature in business can emerge from either the internal or the
external business environment. As a result, decision makers must stay informed
about surrounding circumstances and factor any variability into their decision making.
States of nature can be simple, such as the unpredictability of customers calling in
on a given day. They can also be complex. According to research by LIMRA, over 50
percent of people in executive positions believe market conditions, which are outside
a decision maker’s control, have the greatest impact on their organization. Market
conditions include factors such as changing interest rates and new market entrants. In
other words, interest rates and new market entrants can significantly influence
whether economic conditions are favorable or unfavorable. Many computational
models can incorporate the various conditions of a decision into the decision-making
process.
Decision constraints are the rules a decision maker uses to evaluate

decision alternatives.
A. True
B. False
Market conditions are an example of __________.

A. Decision alternatives
B. Decision criteria
C. States of nature
Forecasting Models
Forecasting models are mathematical constructs for projecting unknown or future
outcomes using known results or data. Forecasting models allow users to find
approximate values to represent unknowns, called estimates. Insurers can use
forecasting models for resource and financial planning. Two traditional types of
forecasting models are time-series models and causal models.
Time-Series Models
Time-series models estimate unknown future values based on known, historical data.
Time-series models use time-series data to project future values. Time-series data is
information about a variable over successive periods. The formula used to make the
projection depends on the time-series model subtype.

The appropriate time-series model to use in any given situation depends primarily
on the usual behavior of the unit of analysis, such as whether the value tends to vary
or remain stable over time. The simplest time-series model is called the naïve time-
series model. For a naïve time-series model, a forecaster uses the data value(s) for the
most recent period as the forecast value(s) for the next future period. Naïve time-
series models are easy to use and can be useful for estimating values that don’t
change much from period to period. However, if the value tends to show a less steady
pattern, then this model will probably provide inaccurate results.
EXAMPLE
A customer service department received 500 customer requests for withdrawals
last month. Therefore, the naïve time-series model would project 500 new
withdrawals for next month.
Another simple form of time-series model is the arithmetic average model, which
uses the arithmetic average of a series of values (the mean) from previous periods as
the forecast value for the next future period. The arithmetic average model gives
equal weight to all data periods, regardless of the age of those periods. In other
words, using this model, old data is equally as important as new data. In many
situations, recent data periods are more representative of future data than are earlier
periods. For data that show increases or decreases in value over time, the arithmetic
average model would provide a less accurate forecast than the naïve time-series
model.
To find the arithmetic average for a given number, n, of sequential data
observations, first add the n sequential results. Then divide the sum by n. The result is
the arithmetic average. The result is used as the expected value of the next data point.

EXAMPLE
EndiFirst tracks the number of its customers who withdraw funds from its
products and uses those results to forecast the number of customers who will
make withdrawals in future months.
The following numbers of customers have withdrawn funds in the past four
months:
March – 433
April – 456
May – 449
June – 442
To find the arithmetic average for the four months,
1. Add together the four monthly totals: 433 + 456 + 449 + 442 = 1,780
2. Divide the sum by the number of data observations: 1,780 / 4 = 445
Using an arithmetic average model, EndiFirst would expect 445 customers to

make withdrawals in July.
The simple moving average model is closely related to the arithmetic average
model. The simple moving average model also requires finding the mean data value,
but it considers only a specified number, n, of the most recent data values. Each time
the model is used, the data value from the oldest period is eliminated, and the data
value from the most recent period is included. A simple moving average forecast can
more accurately reflect changing conditions than can the arithmetic average model.
To use the simple moving average model to forecast a future value, the forecaster
must decide how many periods of data values to include in the model. For instance, in
our earlier example, we presented data about the number of customers withdrawing
funds over a four-month period. Using that data, we can use a four-period simple
moving average to forecast the new value for each successive month. To use a four-
month simple moving average to project a data point for July, consider the known data
from March, April, May, and June. To use the model again for August, drop the value
representing the oldest data point—in this case, March—and add the actual value for
the most recent data point—in this case, July. Although you continue to use an
average of four values, the four data points included move forward as time passes.
Not all moving average models use four periods. A moving average model could
use three periods, and it would be known as a three-month moving average. Further,
not all moving average models use months as the period under consideration. It could
use days: A five-day moving average would use values for each of five days in each
forecast. Each day, it would drop the value for the earliest day and add the value for
the most recent day.
The weighted moving average time-series model assigns relative weights to the
data values used in the forecast. Typically, more recent data are assigned a greater
weight or importance than are older data. As with the simple moving average model,
when values from new data periods become available, new data are added to the
model and the oldest data are removed.
EXAMPLE
Using the withdrawal data from our previous example, the weighted moving
average time-series model assigns twice the weight to the most recent data point
as is assigned to the next most recent data point. Here we weight the oldest data
point, March, once; the next oldest, April, two times; May, four times; and the most
recent data point, June, eight times. The results are shown in the following table:
July Forecast
Month Count Weight Count × Weight
March ........ 433 1 433
April .......... 456 2 912
May ............ 449 4 1,796
June ........... 442 8 3,536
Total 6,677

To derive the forecast for July, divide the total of the weighted counts by the
number of data observations, 15 (1 + 2 + 4 + 8):
July forecast: 6,677÷ 15 = 445.13, rounded to 445
To develop a forecast for August on a later date, an analyst would include the
actual July value (which might be different from the forecasted value) and exclude the
March value. Then he would multiply the monthly data using the following weights:
April, once; May, twice; June, four times; and July, eight times. Finally, the analyst would
find the average of the four weighted values as before.
Figure 8.4 summarizes the types of time-series models covered here.

Figure 8.4 Time-Series Forecasting Models
To this point, we have addressed only simple time-series models. Other time-
series models are suited for data values that increase or decrease by regularly
changing amounts. These models warrant considerable computing. If the risks or
costs of error are low, then one of the simple models can probably provide an
adequate forecast. In general, the greater the risk of any kind from an error in a
forecast, the greater the effort a forecaster usually makes to ensure the forecast’s
accuracy.
Causal Models
A causal model uses historical data and other relevant variables as a basis for
describing unknown future data points. In effect, causal models create projections
using patterns. These projections can be created using analytical software. Causal
models generate projections with excellent accuracy if the relationships between
variables can be expressed in numerical terms.
Decision makers can use causal models when values show correlation.
Correlationis a measure of whether, and how strongly, two values are related. Values
correlate when a change in one value is associated with a consistent and equivalent
change (positive or negative) in the other value. If two sets of values correlate,
researchers are able to use the value of one dataset to project the value of the other
dataset.
EXAMPLES
Correlation
A sales manager finds that the sales of her product correlate to the level of
disposable income in her target market.
A sales professional finds that his sales correlate to the number of people of a
specified age in his assigned territory.
Economists generally believe that leading economic indicators correlate to the
overall direction of the business cycle.
Underwriters generally believe that weight, blood pressure, and smoking status
correlate to a person’s longevity.
Studies show a correlation between policy loan activity and the prime interest
rate. As the prime interest rate increases, policyowners with loan options are
increasingly likely to take out policy loans.
The following animation illustrates the concept of correlation. You can

demonstrate correlation by plotting two variables on the same graph.

Video 8.1 Correlation

Sorry, it appears your system either does not support video playback or cannot play the MP4
format provided. Go to the online course portal to view the video.
Video 8-1 Transcript
We should note that correlation does not prove causation. As an example of

causation, problems with a website can cause customers not to use it. On the other
hand, successful marketing might not be the cause of new website traffic. Customers
might be searching for the product because someone they follow online complained
about it. In other words, two factors occurring together does not always mean that
one caused the other.
Companies can use causal models to project factors like unemployment in relation
to future disability insurance claims. Industry experience shows that disability
insurance claims tend to rise along with increases in unemployment in the economy.
Using causal models, companies can develop insights about the relationship between
unemployment levels and disability claims. They can then use that information to aid
in planning for future disability claims.
Financial Models
Financial modeling refers to a computer-based mathematical model that
approximates the operation of real-world financial processes. Financial models are
particularly important to the insurance industry. Insurers can use financial models to
predict future financial conditions such as cash inflows, cash outflows, and values for
assets, reserves, capital, and expenses. Most financial models consist of inputs,
processes, and outputs.
Inputs generally take the form of variables, which are items of data with values
that change over time. The input variables used in financial models are
independent variables. An independent variable is a variable that influences
the behavior of another variable. Independent variables can come from real-
world observation, forecasting projections, or random selection.

EXAMPLE
Pricing for a new product is an example of an independent variable. An analyst at
EndiFirst could use the expected price of the new product as the input for the
model.
Processes usually simulate the behavior of known values and use those
behaviors to identify how unknown values are likely to behave over time.
EXAMPLE
Analysts at EndiFirst use computer-generated simulations to assess the impact of
different levels of economic activity, such as market interest rates and economic
growth (inputs), on customer purchase behavior (an output).
Outputs represent the projected future values produced by processing input

variables through the model. Output variables are considered dependent
variablesbecause they react to outside influences. In particular, dependent
variables react to changes in independent variables. The outputs created by
financial models can be single values or a listing of all possible values in a
dataset.
EXAMPLE
Using the economic activity simulation, a dependent variable, or output, could be
the expected amount of revenue generated from new business sales in the target
market.
Financial models typically generate either point estimates or range estimates.

Point Estimates. A point estimate is an estimated result that is assigned a
single value. An important application of point estimates for insurance
companies is calculating product profitability based on interest earnings.www.loma.org
Copyright © 2019 LL Global, Inc. All rights reserved.
EXAMPLE
Financial analyst Tania models interest earnings under various circumstances to
produce a point estimate of a new product’s earnings. She uses the point
estimate to evaluate the profitability of the proposed new product.
Range Estimates. A range estimate is a result that includes possible values

within specified limits.
EXAMPLE
Tania uses a financial model to produce estimates of product earnings that result
in gains of between 5% and 7%.
By analyzing the output values in these ranges, Tania can advise colleagues about
product pricing that would provide an adequate margin in case of unfavorable
market conditions.
Analysts can gain a more holistic view of potential future conditions by running
models more than once using different inputs.
Payoff Tables
Financial models help determine payoffs, which allow decision makers to evaluate
alternatives. A payoff is the projected value of an outcome from a decision. Each
distinct combination of a decision alternative and a state of nature has a distinct
payoff. Payoff values are hypothetical and can be positive or negative, but in most
situations a decision maker isn’t likely to choose a negative payoff.
A payoff table is a decision analysis tool that summarizes potential outcomes
from a decision in a tabular format. A payoff table organizes information about
outcomes from relevant possible combinations of actions under the decision maker’s
control and conditions not under the decision maker’s control.

A conditional payoff table is a type of payoff table showing two or more states of
nature. Each cell in such a payoff table contains a projected payoff value based on at
least two conditions: (1) a decision alternative and (2) a state of nature. In a conditional
payoff table,
The list of decision alternatives must be complete. In other words, a payoff
table must present all decision alternatives under consideration.
The decision alternatives must be mutually exclusive. In other words, a
decision maker can only implement one option in the table.
The list of the states of nature directly relevant to the decision must be
complete. A payoff table should include all relevant states of nature.
The states of nature must be mutually exclusive. A payoff table must express
the states of nature in such a way that only one state can occur.
In any payoff table, rows contain decision alternatives, and columns contain states
of nature. Below is the format of a basic payoff table. Each cell contains a value for a
payoff. In the table, notice that
Each decision alternative appears in a row heading on the left side of the table
Each possible state of nature appears in a column heading
States of Nature
Column 1 Column 2 Column 3
State 1 State 2 State 3
Decision Alternatives
Row A Option A Payoff A1 Payoff A2 Payoff A3
Row B Option B Payoff B1 Payoff B2 Payoff B3
Row C Option C Payoff C1 Payoff C2 Payoff C3
Payoff analysis is a formal approach to decision making wherein each

combination of a decision alternative and a state of nature results in a potential
payoff, as illustrated in the table. After identifying potential payoffs, a decision maker
can use data analytics to evaluate the potential payoffs.

EXAMPLE
EndiFirst’s customer routing system faces three states of nature as to the demand
for customer service: heavy, moderate, or light call demand. The operations team
must evaluate whether to purchase System A or System B, or to continue with the
existing system.
Decision Alternatives
Purchase System A
Purchase System B
Purchase no new system
EndiFirst has the following information about Systems A and B:
1. System A is costlier and has greater capacity than System B.
2. System B is less costly with less capacity than System A.
3. The existing system requires no new expenditure, but has less capacity than
either System A or System B.
The following payoff table for EndiFirst’s purchase decision shows a payoff for each
pairing of a state of nature and a decision alternative. Positive amounts represent a
desirable payoff. Negative amounts, in parentheses, indicate an undesirable payoff.
PAYOFF TABLE 1
States of Nature: Demand
Decision Alternatives Heavy Moderate Light
Option A: Buy System A $60,000 $30,000 ($15,000)
Option B: Buy System B $30,000 $25,000 ($5,000)
Option C: No Purchase ($30,000) $20,000 $10,000
Values in parentheses are negative numbers.

According to the payoff table, if EndiFirst purchases System A and then

experiences heavy customer demand, EndiFirst expects a positive payoff of $60,000.
See that Row A represents System A, and Column 1 represents heavy demand. See
also that the cell at the intersection of Row A and Column 1 contains the payoff of
$60,000, which is the highest positive payoff in the table. On the other hand, if EndiFirst
purchased System A and experienced light demand, then EndiFirst could face a
negative payoff of $15,000.
Sometimes, a payoff table indicates a dominant decision alternative. A dominant
decision alternativeis one that consistently produces the best expected payoff for all
states of nature. Finding a dominant decision alternative requires determining the
best payoff for each state of nature. The best payoff in a table is the highest positive
value in each state-of-nature column. If all states of nature indicate that the best
payoff is connected with a single decision alternative, then that alternative is a
dominant decision alternative. Otherwise, as in Payoff Table 1, there is no dominant
decision alternative.
Payoff Table 2 illustrates a different scenario that does have a dominant decision
alternative. The checkmarks denote the best outcome for each state of nature. In all
three states of nature, System A generates the highest possible payoff. Therefore,
System A is the dominant decision alternative.
PAYOFF TABLE 2
States of Nature: Demand
Decision Alternatives Heavy Moderate Light
Option A: Buy System A $60,000 √ $40,000 √ $35,000 √
Option B: Buy System B $30,000 $25,000 ($5,000)
Option C: No Purchase ($30,000) $20,000 $10,000
Values in parentheses are negative numbers.
In most payoff tables, no decision alternative is clearly best for all possible states of
nature. Often, one decision alternative leads to better results in one state of nature,
and another decision alternative leads to better results in a different state of nature.
In such cases, a decision maker considers which alternative is most suited to the
decision criteria and constraints. The decision maker also takes into account the
likelihood that each state of nature will occur. Values in parentheses are negative numbers.

Limitations
Models have important limitations as well as benefits.
Model results require continuous monitoring for accuracy. To improve the

accuracy of models, insurers should compare forecasted values to actual values
over time. Monitoring model results helps insurers learn from mistakes and
develop stronger forecasts in the future.
A mathematical model of operations is useful only to the extent that it
represents real-world operations. The output from a model should correctly
reflect potential states of nature, even in high-uncertainty environments. This
need for precision means that successful modeling often relies on substantial
computing resources.
Many models do not account for non-numeric aspects of business. For
example, employee morale can affect business outputs but is difficult to
accurately model. As a result, projections often require a degree of human
intuition.
EXAMPLE
A new customer experience initiative at EndiFirst led to increased sales over the
past several months, as projected through earlier modeling. However, the
initiative is so extensive that it takes up half of the work hours of several EndiFirst
customer service representatives.
For the past year, many of these employees have had to come to the office on
weekends, stay later during the week, and respond to emails during off hours.
This situation is contributing to an increase in errors from customer service
representatives, an effect the model did not project.
Decision makers should avoid the temptation to implement the results of models
immediately, especially in the case of high-stakes decisions. Instead, they should
evaluate information from the model in context with other insights—such as those
acquired through research and data analytics—to choose the best course of action
for the real world.
Forecasting models are mathematical constructs that allow users to

project future outcomes by using data to find __________.
A. Estimates
B. Arithmetic averages
C. Correlation
Which type of model allows decision makers to show correlation?

A. Time-series model
B. Causal model
C. Financial model
D. Payoff model
With which kind of model is more recent data assigned a greater

importance than older data?
A. Arithmetic average model
B. Naïve time-series model
C. Simple moving average model
D. Weighted moving average time-series model

Choose the terms that correctly complete the following statements.

An input variable in a financial model that influences the behavior of other
variables is known as a ____________ variable. Insurers might use a single value
____________ estimate to calculate profitability based on interest earnings.
A. independent / range
B. independent / point
C. dependent / range
D. dependent / point
Limitations of using modeling for business purposes include (Select all

that apply)
A. Requires continuous monitoring for accuracy
B. Difficult to include nonnumeric aspects of the business
C. Useful only to the extent that the model represents real-world
operations)

Key Terms
big data
decision environment
statistical analysis
population
descriptive statistics
measures of central tendency
mean
outlier
median
mode
measures of dispersion
range
variance
standard deviation
sampling
inferential statistics
law of large numbers
mortality tables
random sampling
simple random sampling
systematic random sampling
stratified random sampling
nonrandom sampling
statistical validity
degree of confidence

margin of error
statistical bias
sampling bias
response bias
nonresponse bias
selection bias
measurement bias
cultural bias
attention bias
social acceptance bias
model
computational modeling
decision criteria
decision constraints
states of nature
forecasting models
estimates
time-series model
time-series data
naïve time-series model
arithmetic average model
simple moving average model
weighted moving average time-series model
causal model
correlation
financial modeling
variable
independent variable
dependent variable

point estimate
range estimate
payoff
payoff table
conditional payoff table
payoff analysis
dominant decision alternative
best payoff


PRACTICE QUESTIONS Chapter Eight
• • • • • •
Use the following information to answer questions 1 through 3.
The Maple Insurance Company has the following report showing the number of life insurance claims
processed in each month for the past six months:
 January = 100
 February = 150
 March = 180
 April = 160
 May = 210
 June = 190
Learning Objective: 8A. Calculate measures of central tendency and dispersion.
1. The population mean for these monthly claims numbers is equal to

(1) 165
(2) 170
(3) 180
(4) 195
2. The population median for these monthly claims numbers is equal to

(1) 155
(2) 165
(3) 170
(4) 180
3. The population range for these monthly claims numbers is equal to

(1) 60
(2) 90
(3) 100
(4) 110
• • • • • •

4. The variance and the standard deviation are two measures of dispersion for a population. The
following statements are about the characteristics of these two measures when they are applied to a
population. Select the answer choice containing the correct statement.
(1) In general, larger variances indicate that the values in a population are farther from the mean
and more dispersed.
(2) The variance is the most accurate measure of the dispersion of values in a population.
(3) Smaller standard deviations indicate that values in the population are farther from the mean and
more dispersed.
(4) The standard deviation assumes that values are not distributed normally.
Learning Objective: 8B. Distinguish between descriptive and inferential statistics.
5. Decision makers can use two types of statistical analysis to develop conclusions: descriptive
statistics and inferential statistics. Inferential statistics (are / are not) as precise as descriptive
statistics and provide information using (fewer / more) resources.
(1) are / fewer
(2) are / more
(3) are not / fewer
(4) are not / more
Learning Objective: 8C. Describe the importance of the law of large numbers to inferential
statistics.
6. One important concept on which insurers rely is the law of large numbers. The following
statement(s) can correctly be made about the law of large numbers:
A. The law of large numbers states that, under normal circumstances, the more times a person
observes a particular event, the more likely the observations will approximate the “true”
probability of the event.
B. Insurance companies rely on the law of large numbers when they use mortality tables, which
predicts exactly when each individual within a given group of people will die.
(1) Both A and B
(2) A only
(3) B only
(4) Neither A nor B
Learning Objective: 8D. Describe random sampling and distinguish between random and
nonrandom sampling.
7. Insurers can use several types of random sampling. To address the problems created by segmented
populations, companies often use
(1) stratified random sampling
(2) simple random sampling
(3) systematic random sampling
(4) outlier random sampling

8. Two measures of the validity of sample results are the degree of confidence and the margin of error.
With regard to the effect of sample size on these two measures, it generally is correct to say that,
compared to a smaller sample, a larger sample tends to produce a
(1) lower degree of confidence and a smaller margin of error
(2) lower degree of confidence but a larger margin of error
(3) higher degree of confidence but a smaller margin of error
(4) higher degree of confidence and a larger margin of error
Learning Objective: 8E. Explain decision criteria, decision constraints, and states of nature and
provide examples of each.
9. The elements of a decision model include decision alternatives and states of nature. With regard to
whether decision alternatives and states of nature are under the control of the decision maker, it is
correct to say that
(1) both decision alternatives and states of nature are under the decision maker’s control
(2) decision alternatives are under the decision maker’s control, whereas states of nature are not
under the decision maker’s control
(3) decision alternatives are not under the decision maker’s control, whereas states of nature are
under the decision maker’s control
(4) neither decision alternatives nor states of nature are under the decision maker’s control
10. A manager in an insurer’s customer contact center is deciding whether to recommend buying a new
customer routing system or keeping the existing routing system. The manager must keep the
following elements in mind as he evaluates these two decision alternatives:
 Statement A—No customer should wait more than a minute on the phone before speaking
with a customer service representative.
 Statement B—The insurer’s equipment supports up to 30 customer service representatives at
one time.
With regard to whether these statements best represent decision criteria or decision constraints, it is
correct to say that
(1) both Statement A and Statement B represent decision criteria
(2) Statement A represents a decision criterion and Statement B represents a decision constraint
(3) Statement A represents a decision constraint and Statement B represents a decision criterion
(4) both Statement A and Statement B represent decision constraints

• • • • • •
Use the following information to answer questions 11 through 13.
Treetop Financial tracks the number of customers who withdraw funds from its products and uses those
results to forecast the number of customers who will make withdrawals in future months. The following
table shows the number of customers who withdrew funds in the past four months:
 February: 423 customers
 March: 446 customers
 April: 439 customers
 May: 432 customers
Learning Objective: 8F. Describe forecasting models and give examples of types of forecasting
models.
11. If Treetop uses an arithmetic average model based on the past four months, then it most likely will
expect the number of customers who withdraw funds in June to be
(1) 409
(2) 430
(3) 435
(4) 446
12. If Treetop uses a three-month simple moving average model, then it most likely will expect the
number of customers who withdraw funds in June to be
(1) 435
(2) 436
(3) 439
(4) 446
13. If Treetop calculates the estimate for June using a weighted moving average time-series model and
assigns weights to the data for each of the previous four months, then it most likely will assign the
greatest weight to the data from
(1) February
(2) March
(3) April
(4) May
• • • • • •

Learning Objective: 8G. Describe how inputs, outputs, point estimates, and range estimates are
used in financial models.
14. A causal model uses historical data and other relevant variables as a basis for describing unknown
future data points. A decision maker can use a causal model when a change in one value is associated
with a consistent and equivalent change in the other value. This measure of whether, and how
strongly, two values are related is known as
(1) estimates, which prove causation
(2) estimates, which do not prove causation
(3) correlation, which proves causation
(4) correlation, which does not prove causation
Learning Objective: 8H. Explain payoffs, and describe how a company uses payoff tables to
conduct payoff analysis.
15. A conditional payoff table is a type of payoff table showing two or more states of nature. With regard
to the rules governing the construction of a conditional payoff table, it is correct to say that the
(1) list of decision alternatives must be complete
(2) decision alternatives cannot be mutually exclusive
(3) list of the states of nature can be incomplete
(4) states of nature cannot be mutually exclusive
Learning Objective: 8I. Evaluate the limitations of modeling in business.
16. The following payoff table shows a dominant decision alternative:

State of Nature: Demand
1. Heavy 2. Moderate 3. Light
Option A $15,000 ($20,000) $5,000
Option B $25,000 $40,000 $30,000
Option C $20,000 ($45,000) $15,000
Option D ($15,000) $10,000 ($50,000)
* Values in parentheses are negative numbers.
With regard to this table, it is correct to say that the dominant decision alternative is
(1) Option A
(2) Option B
(3) Option C
(4) Option D


Operational Excellence for Insurance Professionals Ch 9: Data for Decision Making | 9.1
Chapter 9
Data for Decision Making

Objectives
9 A Describe the importance of data and its relationship to decision making
9 B Explain how research is used to acquire business data and distinguish
between quantitative and qualitative research
9 C Distinguish among the three data types and provide examples of each
9 D Evaluate attributes of data quality and explain how data editing can
contribute to data quality
9 E Give examples of how data analytics applies to the insurance industry
9 F Describe the three types of data analytics and explain how they are used
to make business decisions
9 G Compare data visualization methods

Outline
Data Acquisition
Quantitative Research
Qualitative Research
Data Storage
Data Quality
Data Analytics
Descriptive Analytics
Predictive Analytics
Prescriptive Analytics
Data Visualization
Tables
Charts
Infographics
Using the Data
The complexity of a decision depends on the characteristics of the decision
environment: the degree of uncertainty about decision outcomes, the number of
decision alternatives and states of nature, and the quality of available information. In
this chapter, we discuss how insurers can use data to improve the quality of the
information guiding their business decisions.
In Chapter 7, we discussed the steps in the decision-making process. First, decision
makers need to frame the decision by defining the problem and asking the right
business questions. Typically, a decision maker forms one or more answerable
business questions soon after identifying an opportunity, challenge, or other situation
that requires a business decision; in other words, a decision maker determines the
business problem.
Next, decision makers identify needs and evaluate alternatives based on the
business question. Recall the example from Chapter 7 involving customer complaints
about hold times. Here, the need is decreased hold times and the alternatives are
whether and how many representatives to hire.
EXAMPLE
Problem
Satish, the claim manager at EndiFirst, has received survey results indicating that
customer satisfaction with the claims process has declined since the previous
survey.
Questions
Why are customers dissatisfied with the claims process?
Satish read the survey results and noticed many complaints about hold times for
speaking with a claim representative. He then used statistical analysis to examine
call data and saw several weeks of average hold times above benchmark levels.
Why aren’t representatives responding to calls at benchmark levels?
Satish used analytics to further examine call data and found that (1) incoming call
volume per representative has been greater than in the past and (2) the
department can expect the increase in call volume to continue.
What can EndiFirst do to address the long hold times for customers making
claims?
Decide whether to hire more representatives and, if so, decide how many to hire.
Satish cannot rely on intuition alone to answer these questions. There could be
more claims than representatives can manage due to other causes, such as inefficient
processes or fraudulent activity. Prior to making analytical decisions, decision makers
need access to the right data. This chapter is intended to help you understand how
decision makers acquire, analyze, and report the data they need to address business
needs correctly and increase value to customers.

Why do insurance companies gather data? Choose all that apply.

A. To assist with analytical decision making
B. To identify opportunities and assess risks
C. To evaluate the success of products and services
D. To predict customer behavior

Data Acquisition
Because today’s insurers have access to vast amounts of data, decision makers can at
times draw all the data they need from existing sources such as internal and external
databases. Sometimes, however, decision makers don’t have the precise data needed
to answer a specific question. Decision makers in situations like these can acquire
data using research. In business, data acquisition (also called data collection) refers to
the tasks involved in obtaining and storing information relevant to the business
question.
Quantitative Research
Quantitative research is research designed to generate easy-to-analyze numerical
data. Quantitative research emphasizes measures that result in objective data, such
as polls and company web metrics. Quantitative research can also involve using
previously computed mathematical information as a starting point for analysis. Some
examples of studies that produce quantitative industry information are benchmarking
studies, mortality studies, and salary surveys.
A benchmarking study is a study of expenses and other quantitative measures
of operational performance in which a company compares its performance with
that of its peers. Benchmarking studies support process and quality
management goals. The nature of benchmarking research requires
intercompany sharing of data, so benchmarking studies usually involve several
companies.
A mortality study is a study of the longevity and ages at death of large groups of
people. To obtain a sufficiently broad sample of a given population—say, life
insureds—these studies are often industry-wide. Large companies can conduct
mortality studies using their own data, but to gain confirmation or new
mortality data, many companies choose to participate in intercompany
mortality studies.
A salary survey, or compensation survey, is a type of comparison study in which
employers share their compensation data with an external researcher, who
accumulates and analyzes the data. Finally, the researcher presents study
participants with a report that summarizes standard compensation amounts.

Quantitative research tends to deliver more precise business data than qualitative
research. However, it demands a level of precision that can conflict with the need to
obtain actionable information quickly and inexpensively.
Qualitative Research
Qualitative research is research that uses subjective data collection methods and
produces data that is difficult to summarize in numerical form. Whereas quantitative
research usually answers a concrete question, qualitative research is more open-
ended.
EXAMPLE
Quantitative Research Question
How many customers have submitted complaints over the past year?
Qualitative Research Question
How do customer service representatives influence hold times?
People use qualitative research in business as well as academic settings, typically

in fields related to decision making, behavior, and marketing. In qualitative research
for business, companies usually attempt to record observations, describe behaviors,
and attribute reasons for the observations or behaviors. Many companies conduct
opinion surveys and facilitate group discussions to collect research information.
Qualitative research usually relies on statements that describe subjective conditions,
such as feelings toward a product or service. Video 9.1 shows one example of
gathering qualitative information.
Video 9.1 Gathering Qualitative Feedback

Researchers typically need to codify qualitative information in order to examine it.

In other words, researchers organize data into uniform categories that decision
makers can use for analysis. Codifying qualitative information allows analysts to make
inferences from large numbers of qualitative responses.
EXAMPLE
To compare the likelihoods of particular call center complaints, Satish labels the
complaints as follows:
Complaints about hold times—Category A
Complaints about voice prompts—Category B
Complaints about inadequate or confusing information—Category C
Complaints about lack of resolution—Category D
Complaints about lack of courtesy or etiquette—Category E
Complaints that don’t fit in any of the above categories—Category F
This codification can provide Satish with the data he needs to determine when
Category A complaints happen most often.
The characteristics of the business question can help the researcher decide
whether to pursue quantitative or qualitative research. Often, researchers get the
clearest understanding from both types of research.
Data Storage
What do researchers do with the collected data? The storage of acquired data is
predominantly a question of architecture, and the issue differs from company to
company.
Data architecture describes the method or methods by which authorized users
access and apply the information stored in company databases. The data stored can
be structured, semistructured, or unstructured. Structured data exists in a fixed field
within a record, data file, or spreadsheet; allows for systematic organization; and is
easy to enter, store, and analyze. Unstructured datadoes not have a rigid pattern and
can’t be organized systematically. Semistructured data includes a combination of
structured and unstructured elements. Figure 9.1 offers examples of these three data
types. Companies that engage in enterprise-wide reporting make data in all three of
these forms accessible to authorized users across the organization.
Figure 9.1 Data Types

Data Security
Whether structured, unstructured, or semistructured, companies have to secure their
protected data. Today’s high-volume flow of data can expose companies to risks from
fraud and other malicious activity. In the United States, the total cost of insurance fraud
was estimated at over $40 billion per year in 2018.
The consequences of unauthorized access to protected data, such as personal,
health, and financial information, are destructive to business in a number of ways. In
Chapter 4, we addressed some of the methods that organizations use to protect their
data from unauthorized access. Companies have security awareness trainings in place in
addition to protective systems such as virtual private networks, intrusion detection, and
antivirus software.
Insurers use a variety of additional security measures to protect the data stored in
company databases. A common security measure is authentication. Authentication
requirementsenable companies to ensure that someone requesting or sending
information is who he claims to be. The factors used for authentication can be knowledge
factors, such as a password, phrase, or personal identification number; personal factors,
such as fingerprints, signatures, or vocal features; or ownership factors, such as
identification cards and security tokens. Most insurers require users to provide two
authentication factors. For example, individuals logging into a company network from a
remote site might be required to provide a password and a security token, which is a
device used to generate a one-time-use code the user enters in order to gain access to
private company information. Another popular security measure is encryption, wherein
technology is used to encode collected data so that only an authorized person with the
required hardware, software, or both can decode that data.
Data Quality
The quality of any analytical decision depends on the quality of the data available to the
decision maker. Analysts can measure data quality in terms of the data’s

Appropriateness: The degree to which data meets the requirements of its

intended applications
Accuracy: The degree to which data measures what it is intended to measure
Relevance: The degree to which information derived through data analysis
meets the needs of users
Timeliness: A measure of the delay between the compilation date and
publication date of the data
Interpretability: The ease with which an intended user can correctly interpret
the data
Accessibility: The ease with which an intended user can obtain the necessary
data
Coherence: The degree to which an intended user can successfully integrate
the data with other statistical information over time
To improve data quality, data editing is sometimes required. Similar to the earlier
example of codifying qualitative information, data editing is a process for detecting
and correcting inconsistencies, errors, and omissions in a collection of data. The
following are examples of situations that might require data editing:
Some insurers use numeric indicators for underwriting classes, whereas other
companies use alphabetic letter indicators for the same purpose. For inclusion
in a benchmarking study, an analyst should edit the data by changing all alpha
indicators to numeric indicators in the combined data.
In a survey, some participants used single letters to indicate gender (such as
“M” for male), and other participants spelled out the word. In this case, the
analyst can change the records so that all responses use the same variant—for
example, the analyst could change all instances of “male” to the letter “M.”
For a benchmarking study, records submitted from one company contain more
data fields than the study requires. Here, an analyst can remove the extra data
fields from that company’s data submissions.
Sometimes an analyst needs more or better data to proceed with analysis. These
cases might call for data enrichment, wherein an analyst pursues additional research to
enhance the available data.
Ideally, the data used for analytical decision-making meets all the attributes of
quality data. In reality, however, trade-offs are often necessary. For example, ensuring
data timeliness may require sacrificing a degree of data accuracy, and ensuring
maximum accuracy may require sacrificing timeliness.
Determine which of the following types of research would likely be classified

as quantitative research. (select all that apply)
A. Benchmarking study
B. Mortality study
C. Opened-ended customer surveys
D. Customer demographics analysis report
E. Group discussion recordings
Determine which of the following types of data would likely be classified

as structured data. (select all that apply)
A. Email communications
B. Claim payment transactions
C. Social media posts
D. Customer contact information
E. Customer complaint telephone recordings

To improve data quality, data editing is sometimes required. When data is

edited so that the intended user can successfully integrate the data with
other statistical information over time, the editing should improve the quality
of the data’s
A. Appropriateness
B. Accessibility
C. Accuracy
D. Coherence

Data Analytics
Data analytics is the practice of applying analytical techniques to large amounts of
raw data in order to draw conclusions and make business decisions. The use of data
analytics in the age of big data has many applications to the insurance industry. Data
analytics is used for
Intelligent underwriting. Intelligent underwriting systems perform
underwriting activities based on preprogrammed rules and analyze data from
internal as well as external databases to assess risk automatically.
Fraud prevention. Software can evaluate large sums of existing fraud data,
including typical indicators, and compare it to new data to evaluate the
potential for fraud activity.
Market conditions. Insurers can use data to model economic and market
conditions and forecast how changes in conditions will affect business
performance.
Customer behavior. Software can draw conclusions from existing customer
data about the likelihood of lapses or withdrawals, and about the likelihood of
making additional purchases.
Mortality rates. Mortality tables often contain estimates for mortality
experience based on industry-wide mortality data.
Call center analytics. Some software can evaluate call volumes, call
interactions, and customer call behavior to identify unaddressed customer
service needs.
The broad term analytics can refer to any method for collecting, scrutinizing, and
drawing conclusions from data. Approaches to analytics commonly require the use of
statistics and modeling—concepts we discussed in Chapter 8. Some tasks involved in
analytics require software, but not specific analytics expertise. For other tasks,
decision makers rely on analysts to help them perform the analytics they need. Ideally,
the process of data analytics ends in the presentation of information in a way that a
nontechnical audience can easily understand.
Insurers often use software to analyze big data because there is simply too much
information to rely on human capacity. Many insurers maintain business intelligence

systemsthat include tools for analyzing business conditions. For insurance companies,
being able to combine available information to evaluate past behavior and estimate
future behavior is critical to long-term success. In all cases, data analytics is important
because it uncovers patterns that can act as guides to decision making.
Although their precise titles differ among sources, three frequently used types of
analytics are descriptive, predictive, and prescriptive analytics.
Descriptive Analytics
Descriptive analytics (sometimes referred to as reactive analytics) uses historical data
to provide information about past or current business conditions. Insurance
companies use descriptive analytics to study data about customers, products and
services, and processes housed in their databases and warehouses. Descriptive
analytics turns existing data into information.
Simple sources of information used in descriptive analytics are balanced
scorecards and dashboards. The information in these tools helps describe
operational performance, and insurers can use the information to understand results.
For data not consolidated in this way, decision makers can mine the data for insights.
Data mining is a process in which an analyst examines numerical data to uncover
trends and patterns. Software in a company’s business intelligence systems help with
this process.
EXAMPLE
EndiFirst traditionally monitored its marketing efforts across its entire block of
business. Although this approach provided a picture of EndiFirst’s overall
marketing costs, it did not indicate which customers were most profitable.
Marketing manager Viola teamed with several of EndiFirst’s business analysts,
who used data mining techniques to examine costs at the individual customer
level. This process allowed Viola to identify which customers were generating the
most costs and which customers were generating the most revenue. She could
then share this information with her colleagues in the marketing department.
Speech analytics is a descriptive analytics technique used to gain insight into

customers’ attitudes about a company by analyzing recorded speech. Analysts search

for specific words that indicate the customer’s state of mind. Speech analytics is
especially effective for identifying information that customers lack or find confusing.
EXAMPLE
EndiFirst recently introduced a promotional discount program for customers
(“EndiFirst for Fitness”) that allowed the company’s mobile app to access
information from the customer’s activity tracker. Viola noticed that few eligible
customers were opting in, despite having indicated that they would be willing to
participate in a survey from the previous year.
To determine what the problem was, Viola searched recorded calls with
customers for the words “tracker,” “app,” and “discount” and discovered that
most mentions of the program originated from customer service representatives.
This indicated that many customers might not have known the program had
started. Viola used this information to present a marketing need to her team.
As we mentioned earlier, the exchange of data across networks can expose

companies to fraud risk. Speech analytics can help insurers identify possible
fraudulent activity by flagging interactions that require further observation.
EXAMPLE
After identifying the perpetrator of recent fraud attacks, a call center team
examined earlier call recordings to determine if other calls contained indications
that the same fraudster initiated them. The team knew that the perpetrator
tended to repeat every question asked of him before answering. As a result, the
team listened for that behavior when they analyzed recorded speech.
Social media analytics is a descriptive analytics technique used to understand

customers through activity on blogs and social media networks. Using social media
analytics, analysts work to evaluate customer engagement and sentiment about a
company. They also consider factors such as the number of followers the company
has or the number of mentions of the company name in online discussions and social
media posts.
EXAMPLE
A call center manager wanted to know how people view EndiFirst’s latest
customer service initiatives. Social media analytics were used to search for
mentions of EndiFirst and words synonymous with customer service in social
media. Results before September of the previous year when the initiatives began
were excluded.
Then the manager calculated the number of keywords identified as positive (such
as “wonderful”) and those identified as negative (such as “terrible”). He eliminated
ones considered neutral. From this analysis, the manager was able to form a
general concept of how the initiatives have performed.
He also compared this most recent analysis to social media analysis from two
years ago to assess whether popular opinion has improved or worsened since
September. Analysts can use insights gathered during descriptive analytics to
perform diagnostic analytics, which is a type of analytics that examines the cause of
observed patterns. Diagnostic analytics tends to involve advanced statistical
modeling used to identify and scrutinize correlations between variables.
Uncovering patterns and correlations can help companies see what changes they
need to make to maximize business opportunities.
Predictive Analytics
Predictive analytics is an analytical technique used to forecast future events or
customer behaviors and anticipate conditions that are likely to cause negative
consequences. An insurer can use the patterns that emerge from the analysis of
historical data to predict the future behavior of that data. In many cases, insurers use
computational modeling to produce estimates of future conditions. Predictive
analytics forecasts the future.
This type of analytics combines features of data mining, modeling, and machine
learning to analyze big data and forecast future trends and opportunities. Recall that
machine learning is a component of artificial intelligence that allows computers to
identify patterns within data without express instruction about where or how to find
them. Insurers can use predictive analytics to

Evaluate the likelihood that a customer will need a particular product in the
near future
Predict the probability that customers will respond to a targeted offer
Detect behaviors that are likely to lead to claims fraud
Provide insight into customer behaviors that affect mortality or health risks
(such as exercise habits)
Assess product risks such as surrender rates, lapse rates, and claims
Predict the lifetime value of a specific customer to the company
Determine expected revenue from a new product line
Trend analysis is one way that analysts predict future conditions. Trend
analysisinvolves forecasting the future movement of specified factors based on
observed historical patterns of change. Insurers often use trend analysis to identify
patterns in population characteristics.
EXAMPLE
Analysis of the data included in periodic census reports has identified a number of
population trends that could have a significant impact on the insurance industry,
such as longer lifespans, changing household structures, and changes in income
distribution.
Changes from the norm that do not indicate a pattern of behavior are variations.
Trend analysis can be a valuable tool for forecasting predictable measures. However,
trend analysis generally can’t provide accurate predictions for variations, such as
short-term changes in market interest rates, or short-term increases in claims due to
a natural disaster. Computational models used in predictive analytics can alleviate
some of the uncertainty caused by variations by allowing more than one input to
represent several potential states of nature.
Prescriptive Analytics
Prescriptive analytics is a type of proactive data analytics that uses data to suggest
decision alternatives and show the possible implications of each decision. Prescriptive

analytics relies on information from both descriptive and predictive analytics to

recommend actions. An insurer can use the patterns that emerge from the analysis of
historical data to predict the future behavior of that data.
Techniques used in prescriptive analysis include those used in descriptive and

predictive analytics, in addition to complex computing algorithms based on
preprogrammed rules. These algorithms allow software to simulate scenarios,
perform updates when information changes, and optimize decisions by evaluating
trade-offs. Software that performs prescriptive analytics can make recommendations
about decisions involving
New product pricing. Accurate pricing is essential for managing the risks
associated with new insurance products. Prescriptive analytics can recommend
pricing structures that will mitigate the negative effects of these risks.
Reduction of claims fraud. A variety of suspicious activities can indicate fraud.
For example, medical exams that directly contradict patient evaluations are one
indicator. Prescriptive analytics can pool past and current behavioral data,
measure the data against known fraud indicators, and offer recommendations
for when to investigate potential instances of fraud.
Product marketing. Prescriptive analytics can provide recommendations
about whether to proceed with a marketing initiative based on the likelihood of
a particular market to respond to the initiative.
Operational efficiency. Basic business intelligence systems retrieve and
analyze information and create reports. Advanced prescriptive analytics
systems can incorporate data about operational processes, foresee lulls in
productivity based on values such as decreased logins, and make
recommendations for scheduling and staffing needs.
Figure 9.2 summarizes these three types of analytics. In the majority of cases,
decision makers use all feasible types of data analytics to reach comprehensive
decisions.

Figure 9.2 Three Types of Data Analytics

Data mining involves forecasting the future movement of specified

factors based on observed historical patterns of change.
A. True
B. False
For the next three questions identify the type of data analytics used in each situation.
EndiFirst wants to send marketing materials about a new life insurance

product only to those customers who have the highest probability of
buying the new product. EndiFirst has historical data that indicates
people above a certain level of income and who have recently had a baby
will be interested in buying life insurance. Data mining, modeling, and
machine learning are used to identify and forecast those individuals who
are most likely to buy the new product.
A. Descriptive analytics
B. Predictive analytics
C. Prescriptive analytics
EndiFirst uses data mining software to uncover historical trends in

contact center staffing levels and the number of service complaints.

EndFirst uses analytics to simulate scenarios and determine which of two

potential marketing campaign will have the greatest appeal to urban
Millennials.

Data Visualization
When the data analysis phase is complete, the researcher generally reports
conclusions to decision makers. Although detailed information is useful for an
insurance company’s actuaries or accountants, senior management generally prefers
to see big-picture summaries of conditions through written research reports or oral
presentations with supporting visuals.
Similar to how a business case is established, which we covered in Chapter 5,
research reports contain information that demonstrates value to the company at
large. Research reports might include executive summaries, research methods, key
findings, limitations, recommendations, benefits, and sources of data.
For oral presentations, data visualization can be used to support a point by
presenting important findings quickly. Data visualization is the use of illustrative
graphics to convey an intuitive understanding of data. Some common forms of data
visualization are tables, charts, and infographics.

EXAMPLE
Call Center Hold Times
Notice how the information below is difficult to interpret because the values have
no meaningful order.
Saturday 1st shift: 2 minutes
Friday 3rd shift: 5 minutes, 14 seconds
Friday 1st shift: 26 seconds
Thursday 1st shift: 1 minute, 1 second
Tuesday 1st shift: 27 seconds
Saturday 3rd shift: 3 minutes, 37 seconds
Friday 2nd shift: 3 minutes, 22 seconds
Tuesday 2nd shift: 57 seconds
Thursday 2nd shift: 1 minute, 12 seconds
Saturday 2nd shift: 1 minute, 35 seconds
Sunday 3rd shift: 6 minutes, 45 seconds
Sunday 1st shift: 1 minute, 45 seconds
Tuesday 3rd shift: 1 minute, 45 seconds
Monday 3rd shift: 2 minutes, 4 seconds
Sunday 2nd shift: 2 minutes, 15 seconds
Thursday 3rd shift: 4 minutes, eight seconds
Wednesday 3rd shift: 1 minute, 37 seconds
Monday 2nd shift: 1 minute
Monday 1st shift: 37 seconds
Wednesday 2nd shift: 54 seconds
Wednesday 1st shift: 15 seconds

Suppose the information was presented in a table instead that contains the same
information organized by day of week and shift.
Shift 1 Shift 2 Shift 3 Day Average

(7am - 3pm) (3pm - 11pm) (11pm - 7am)
Monday 0:37 1:00 2:04 1:14
Tuesday 0:27 0:57 1:45 1:03
Wednesday 0:15 0:54 1:37 0:55
Thursday 1:01 1:12 4:08 2:07
Friday 0:26 3:22 5:14 3:01
Saturday 2:00 1:35 3:37 2:44
Sunday 1:45 2:15 6:45 3:35
Shift Average 0:55 1:36 3:34
In this format, it is easy to see which days and shifts have the longest average hold
times. Among first shifts, Saturdays have the longest average hold times. Among
second shifts, Fridays have the longest average hold times. And among third shifts,
Sundays have the longest average hold times.
A table also makes it easier to display totals for values. Among day totals, Sundays
have the longest average hold times. Among shift totals, third shifts have the longest
average hold times. From this information, a manager can discover which shifts
require additional attention.
Charts
People commonly use charts to illustrate analyzed data. Charts can be even easier to
digest than tables because they convey relationships and patterns among data at a
glance. Examples of charts commonly used to display analyzed data are frequency
distributions, heat maps, scatter diagrams, line diagrams, bar charts, and pie charts.

A frequency distribution is a set of data organized to show the number of times

each outcome occurs. Frequency distributions are particularly useful in
summarizing large data sets. For example, a frequency distribution might depict
a distribution curve that shows the standard deviation of policy face amounts
across a population of customers. See Figure 9.3 for an example of a frequency
distribution.
Figure 9.3 Frequency Distribution

A heat map is a data map in which different values for a given variable appear
as different colors. For example, a heat map of Country A might contain
“warmer colors” (such as red and orange) for larger populations of customers
served and “cooler colors” (such as blue and green) for smaller populations. See
Figure 9.4 for an example of a heat map.
Figure 9.4 Heat Map

A scatter diagram is a diagram used to check visually for a likely correlation

between two variables. Typically, a scatter diagram uses dots or small shapes
(called “points”) to indicate units. For example, a scatter diagram might convey
that for one company, in general, the policy face amounts are higher for
younger insureds. In this case, each point represents a customer. Figure 9.5
shows an example of a scatter diagram.
Figure 9.5 Scatter Diagram

A line diagram is a diagram used to show changes in data over time. For
example, to demonstrate trends in mortality experience, companies can use
line diagrams showing increasing lifespans for both men and women. See Figure
9.6 for an example of a line diagram.
Figure 9.6 Line Diagram

A bar chart is a graphical display of a frequency distribution. Bar charts present

data in the shape of rectangles, with one rectangle for each classification. In a
bar chart, the length of the bar represents the relative size of one category of
the entire data distribution. Bar charts display the relative proportions of a data
distribution that belong to each of a few different classifications. For example, a
bar chart can quickly convey the difference in average hold times for each day of
the week. An example of a bar chart appears in Figure 9.7.
Figure 9.7 Bar Chart

A pie chart presents data in the shape of a circle divided into radial sections. In
a pie chart, each section of the circle represents a different classification of data
observations, and the relative size of each radial section indicates the size of
that group relative to the distribution as a whole. For example, a pie chart can
depict the percentage of customers holding each type of policy offered by a
company, for a total of 100 percent of the types of policies offered. See Figure
9.8 for an example of one type of pie chart.
Figure 9.8 Pie Chart
Infographics
Data analytics yields a lot of information, which makes infographics a good choice for
data visualization. An infographic is a graphic representation designed to make
information easy to understand and patterns easy to identify. As a result, infographics
have a lot of potential to persuade audiences. Typically, infographics include the
numbers or percentages most important for conveying a point, pictures or charts to
convey relationships, and a small amount of text as needed to aid the visual. As
opposed to other forms of data visualization that by themselves communicate facts
without taking a stance, infographics combine facts with images in order to tell a story.
To develop an effective infographic, a person should decide on the goal of the
infographic, present facts supporting that goal, and use visuals to add context to the
facts. Information that requires flowcharts, calls for side-by-side comparisons, or
conveys direction will likely work well in an infographic. Figure 9.9 provides an example.
A person can use infographics to convey a point to anyone who might influence a
business decision or a business experience.
Figure 9.9 Infographic Example

Of the following data visualization methods, the best method for showing
how the average number of telephone-related IT requests has changed
over time would be
A. A table
B. A line diagram
C. An infographic
Of the following data visualization methods, the best data visualization

method for communicating a formula for how much life insurance
potential customers need would be
A. A table
B. A line diagram
C. An infographic
Of the following data visualization methods, the best data visualization

method for showing total expenditures by department within a specified
period would be
A. A table
B. A line diagram
C. An infographic

Using the Data

After analyzing the data and identifying decision alternatives, it is up to the decision
makers to apply the data and select a plan of action that will yield the greatest return
on investment.
EXAMPLE
After analyzing relevant customer service, claims, and expense data with other
stakeholders, Satish decides that hiring two additional claims analysts would
improve the quality of communications with customers without burdening
company resources, ultimately yielding the greatest return on investment.
We described enterprise risk management (ERM) in Chapter 1. Remember its

definition: a system that identifies and quantifies risks from both potential threats and
potential opportunities, and manages risks in a coordinated approach that supports
an organization’s strategic objectives. Effective ERM relies on the appropriate selection
of decision alternatives.
In today’s volatile decision environment, the need for ERM is especially great. Using
ERM, decision makers analyze and model possibilities in order to make decisions that
help their companies avoid loss and seize opportunity. However, the avoidance of loss
and the pursuit of opportunity involve opportunity costs. Recall that opportunity costs
are benefits that a decision maker forfeits or gives up in choosing one alternative over
another. Whenever a manager makes a decision, the business gives up a resource in
exchange. These resources can include things like time, money, and publicity.
Opportunity costs are unavoidable, but decision makers can minimize them using
data.
It’s important to note that the analysis of data is not fail-safe. All decisions are
subject to the uncertainties caused by noncontrollable conditions such as
globalization, consumer expectations, regulations, technology, and an increasingly
diverse workforce. As a result, decision makers revisit conditions after
implementation. They also make adjustments in line with new information and
opportunities. In the majority of cases, decision making is best combined with
innovative thinking.
Key Terms
data acquisition
quantitative research
benchmarking study
mortality study
salary survey
qualitative research
data architecture
structured data
unstructured data
semistructured data
authentication requirements
security token
encryption
data editing
data analytics
business intelligence system
descriptive analytics
data mining
speech analytics
social media analytics
predictive analytics
machine learning
trend analysis
variation
prescriptive analytics

data visualization
table
frequency distribution
heat map
scatter diagram
line diagram
bar chart
pie chart
infographic


PRACTICE QUESTIONS Chapter Nine
Learning Objective: 9A. Describe the importance of data and its relationship to decision making.
1. The following statement(s) can correctly be made about the importance of data.
A. Prior to making analytical decisions, decision makers need access to the right data.
B. Insurers can use data to improve the quality of the information guiding their business decisions.
(1) Both A and B
(2) A only
(3) B only
(4) Neither A nor B
Learning Objective: 9B. Explain how research is used to acquire business data and distinguish
between quantitative and qualitative research.
2. Companies use quantitative and qualitative research to answer business questions. An example of
qualitative research is
(1) a study of expenses and other measures of operational performance in which a company
compares its performance with that of its peers
(2) a study of the longevity and ages at death of large groups of people
(3) research that uses subjective data collection methods and produces data that is difficult to
summarize in numerical form
(4) a type of comparison study in which employers share their compensation data with an external
researcher, who accumulates and analyzes the data.
Learning Objective: 9C. Distinguish among the three data types and provide examples of each.
3. The data can be structured data, unstructured data, or semistructured data. An example of
semistructured data is
(1) user-produced media
(2) customer transactions
(3) customer demographics
(4) an email
Learning Objective: 9D. Evaluate attributes of data quality and explain how data editing can
contribute to data quality.
4. Data analysts can measure data quality in terms of several characteristics of the data. For example,
the ease with which an intended user can obtain the necessary data is known as the data’s
(1) accessibility
(2) interpretability
(3) relevance
(4) appropriateness

Learning Objective: 9E. Give examples of how data analytics applies to the insurance industry.
5. The use of data analytics in the age of big data has a variety of applications to the insurance industry.
Data analytics is used for
A. evaluating large sums of existing fraud data, including typical indicators, and comparing it to new
data to evaluate the potential for fraud activity
B. modeling economic and market conditions and forecasting how changes in conditions will affect
business performance
(1) both A and B
(2) A only
(3) B only
(4) neither A nor B
Learning Objective: 9F. Describe the three types of data analytics and explain how they are used
to make business decisions.
6. One method that analysts use for predicting future conditions involves forecasting the future
movement of specified factors based on observed historical patterns of change. This method is
known as (trend analysis / diagnostic analysis), which generally (can / cannot) provide accurate
predictions for variations, such as short-term changes in market interest rates, or short-term increases
in claims in response to a natural disaster.
(1) trend analysis / can
(2) trend analysis / cannot
(3) diagnostic analysis / can
(4) diagnostic analysis / cannot
7. The following statements are about descriptive analytics, predictive analytics, and prescriptive
analytics. Three statements are true, and one statement is false. Select the answer choice containing
the FALSE statement.
(1) Insurance companies use descriptive analytics to study data about customers, products and
services, and processes housed in their databases and warehouses.
(2) Analysts can use insights gathered during descriptive analytics to perform diagnostic analytics,
which is a type of analytics that examines the cause of observed patterns.
(3) Predictive analytics is an analytical technique used to forecast future events or customer
behaviors and anticipate conditions that are likely to cause negative consequences.
(4) Prescriptive analytics relies on information from predictive analytics, but not from descriptive
analytics, to recommend actions.
Learning Objective: 9G. Compare data visualization methods.
8. Data visualization is the use of illustrative graphics to convey an intuitive understanding of data. A
line diagram is a form of data visualization that is
(1) a set of data organized to show the number of times each outcome occurs
(2) used to check visually for a likely correlation between two variables
(3) used to show changes in data over time
(4) a graphical display of a frequency distribution



Operational Excellence for Insurance Professionals Ch 10: Innovation and Innovative Thinking | 10.1
Chapter 10
Innovation and Innovative Thinking

Objectives
10 A Define disruptive change and explain how viewing change as an
opportunity or threat can impact an insurer
10 B Describe the four primary business objectives for innovation
10 C Distinguish between incremental and breakthrough innovation, and
explain the importance to insurers of moving beyond incremental
innovation to breakthrough innovation
10 D Distinguish between analytical and innovative thinking and describe the
steps in the innovative thinking framework, including problems such as
plastic words
10 E Describe Vijay Govindarajan and Chris Trimble’s three models of
executing innovation initiatives
10 F Describe cognitive biases and constraints that can affect the execution
of innovation in business organizations
10 G Describe the management of innovation and the use of an innovation
portfolio matrix as an aid in decision making

Outline
Understanding Innovation
Business Objectives
Level of Novelty
The Innovative Thinking Process
Execution of Innovation
Model S—Small Projects
Model R—. Repeatable Projects
Model C—Custom Projects
Innovation Biases and Constraints
Cognitive Biases
Constraints
Innovation Management
Analytic decision-making processes that assign probabilities to different scenarios are

most useful for managing current business operations where historical data is
available for managing uncertainty. Unfortunately, the environment in which
insurance businesses currently operate is being disrupted. Disruptive changeis
change that has the potential to influence how a business operates. We have
described throughout this text technological, regulatory, and economic changes in the
insurance environment that are disrupting the insurance business. Whether company
leaders view these changes as opportunities or as threats to business often
determines a company’s chances of thriving or even surviving. Company leaders who
see disruptions as opportunities consider innovative ways to recreate the business in
order to be relevant in the future. Company leaders who see disruptions as threats
look for ways to protect the current business.
Companies that are currently successful and profitable are more likely to resist
disruption and focus on the current business model because, “Why should they make
changes when business is good?” Life insurance companies, in particular, have been

slow to react to disruptive changes. However, with declining or flat premiums over the
past decade, this reality has been changing. Insurers are attempting to overcome
buyer reluctance to purchase life and annuity products with advanced analytics that
can shorten the underwriting process, and with digital distribution that is more
attractive to some underserved market segments. In addition, customers’ needs for
insurance are changing; for example, as car sharing increases, will fewer people need
car insurance? As a result, insurance companies are beginning to consider innovative
business models that can meet customers’ insurance needs in new ways.
In today’s environment, leaders and employees at all levels of an organization
need to be able to think innovatively to identify opportunities and solve problems. In
this chapter, we present an innovative thinking framework and explain how
organizations can better spur innovation.
Innovation and invention are the same thing.

A. True
B. False

Understanding Innovation
Innovation consultant Mike Maddock describes invention as having an idea first and
then looking for someone with a need for that idea, and innovation as looking for a
unique and valuable way to satisfy an identified need. In innovation, needs come first.
To further understand innovation, we can look at business objectives and level of
novelty.
Business Objectives
Insurance companies are continually looking for ways to better satisfy customer
needs and improve the customer experience. Specifically, insurers attempt to
Develop new products and services to meet customer needs
Enhance existing products and services to meet changing customer needs
Deliver products, services, and communications according to customer
preferences
Improve operating effectiveness and efficiency so that costs to customers are
controlled or even reduced
Insurers’ innovation efforts can be classified according to these four business
objectives:
Process innovation consists of the introduction of a new or significantly
improved production process or method of delivery, including changes in
techniques, equipment, or software.
Organizational innovation consists of the introduction of a new or significantly
improved design for business practices or workplace organization.
Product innovation refers to the introduction of a new product that is
significantly different from existing products in terms of its characteristics,
materials, components, software, functions, or intended uses.
Marketing innovation consists of the introduction of a new or significantly
improved marketing method, product design, product packaging, product
placement, product promotion, or product pricing structure.

Innovation in any of these areas has the potential for increasing a company’s
profits and growth. Process and organizational innovations support efficient
operations and typically produce improved service levels, expanded service
availability, or cost savings. Product and marketing innovations attempt to better
satisfy customer and market needs.
Level of Novelty
All innovation involves novelty and risk. In Chapter 2, we introduced two types of
innovation: incremental and breakthrough innovation. Incremental innovation is a new
idea applied to enhance or upgrade an existing product, service, process, or
organization. Breakthrough innovation is innovation in which a new idea significantly
influences the economic activity of businesses operating in a specified market.
Breakthrough innovation has the potential for large gains in productivity and profits
but also typically presents greater risk and costs than incremental innovations, as
shown in Figure 10.1.

Figure 10.1 Innovation by Level of Novelty

Incremental innovation involves less risk and cost because it builds upon existing
knowledge and typically involves familiar components—improvements to existing
processes or products, expanding further into an existing market, or broadening an
existing delivery channel. An insurer’s core business operations focus on the current
business and seek incremental innovations that will promote profitability and growth.
EXAMPLES
Incremental Innovations in Insurance Companies
—Redesigning operational processes to automate handoffs in underwriting and
claims
—Creating a new and improved version of an existing insurance product
—Improving the security of data and systems to better protect against
unauthorized access
To respond to disruptive change, however, companies often need breakthrough

innovation that will shift the company from the status quo. Breakthrough innovation
typically requires new knowledge and new technology. Breakthrough innovation can
Satisfy new customer needs that existing products or services or current
methods of engagement don’t satisfy
Satisfy existing customer needs in an entirely new way with new products or
services
Create an entirely new market for an insurance product
Solve existing organizational problems that current processes cannot solve

EXAMPLES
Breakthrough Innovations in Insurance
—In car insurance, real-time data furnished by customer monitoring offers a way
for insurers to provide connected policyholders lower premiums and to increase
customer retention.
—In home insurance, insurers are using smart phone-connected home
technology to monitor for intruders, fires, or other perils and proactively avoid or
minimize losses.
—In life insurance, insurers are replacing traditional medical underwriting tests
with evaluations of applicants’ digital prescription drug information or other big
data to decrease time to issue.
—Online insurance applications are experimenting with video-based personal
verification using smart phone cameras.
Listen to this expert talk about different types of innovation where she describes
incremental innovation as “small I” innovation and breakthrough innovation as “big I”
innovation.
Video 10.1
Company culture and organizational structure often make breakthrough

innovation difficult to accomplish in traditional insurance companies because they
focus on efficiency (doing the same processes better) and risk minimization. Research
suggests that breakthrough innovation is best introduced into traditional business
operations once the initiative’s value and success have been proven outside the
organization. As a result, insurers seeking breakthrough innovation are creating
innovation labs that operate outside of current operations, or they are investing in
start-up companies that will provide access to innovative technologies or products. A
recent report found that 81 percent of high performing insurance businesses have
invested in or are already working with insurance technology companies to innovate
traditional insurance models. Investing in innovative ventures allows an insurer to
learn the costs and benefits of an innovative idea without incurring all of the costs.
In today’s business environment, both the nature of work and the environment in
which the work takes place are changing rapidly. The ability to tap the innovative
intelligence of all of a company’s workers for both incremental and breakthrough
innovations across a company’s value chain is necessary. To do this, companies must
create a corporate culture that promotes innovative thinking throughout the
organization.
Innovations in product packaging or product placement are correctly

categorized as types of
A. Process innovation
B. Organizational innovation
C. Product innovation
D. Marketing innovation
Innovations in an insurer’s core business operations that focus on

promoting the profitability and growth of the current business are most
likely
A. Incremental innovations
B. Breakthrough innovations

The Innovative Thinking Process

Leaders play a key role in creating conditions favorable to innovation by making
innovation a priority, incentivizing innovation, and training workers in innovative
thinking. Innovative thinking is the process of solving problems by discovering,
combining, and arranging insights, ideas, and methods in new ways. In contrast,
analytical thinking involves breaking down a problem into separate manageable
parts and finding the best workable solution. The vast majority of business problems
or issues are complicated issues that require analytical thinking. Traditional decision
models described in earlier chapters work well for complicated problems or issues
where there is objective data to guide decision making. However, innovative thinking
provides better results for complex problems or issues. Figure 10.2 explains how to
distinguish between complicated and complex issues in order to determine whether
to use innovative or analytical thinking.

Figure 10.2 Complicated and Complex Issues
Source: Adapted from LOMA, Transforming Retirement Security, (Atlanta: LL Global, Inc., ©
2017.)
Many of the disruptions facing the insurance industry involve complex issues. For
example, how to use blockchain technology in underwriting or claim processing is a
complex issue. Analytical thinking based on past experience will not be helpful
because no one has experience in how to apply this new technology to existing
processes. Instead, innovative thinking that accepts ambiguity, uses imagination, and
understands that there might be more than one correct answer to a problem

provides an environment in which innovation can flourish.

In an innovative culture, employees have a shared definition of innovation. They
also know the basic principles of innovative thinking and the best situations in which
to use innovative thinking. Here we present the basic principles of innovative thinking
suggested by innovation experts Charles Legrand and David Weiss, which expand
upon the basic steps in the decision-making process presented earlier.
Create a diverse project team. Diversity spurs creativity, and the results from a
group are typically better than the results from one individual. People who are
experts in a particular subject or process often cannot view an issue or a
problem outside of a particular frame of reference. As a result, outsiders often
see things that those closer to the issue cannot see.
Understand the issue. Asking the right questions is a critical first step to
understanding an issue. The right questions address root causes. During this
step, the group should use divergent thinking, which explores all aspects without
criticism or censure. The group should then use convergent thinking to select the
best possible options from the range of possibilities identified during
divergence. Framing the option as a question can help everyone better
understand the group’s objective.
EXAMPLE
Sales revenue from Product X has plateaued. A task force is formed to consider
what the company should do. The group uses divergent thinking to consider every
possibility, including discontinuing Product X, modifying Product X to better
satisfy customer needs, and lowering Product X’s price. After discussing all
identified courses of action, the group uses convergent thinking to decide that
Product X is still a good product but needs better messaging so that customers
are aware of the product’s value. The question posed is:
How can we double the sales of Product X through more effective customer
messaging?
Identify boundaries. Boundaries determine what must be included in an

acceptable solution and what cannot be included.
Global boundaries are outside the control of the innovation project, such
as regulations or corporate strategy.
Specific boundaries relate directly to the innovation project, such as the

budget, time available, or resources needed.
EXAMPLE
Global boundary: Our enterprise data warehouse is being transitioned to a new
cloud-based system, making access to Product X data slow and cumbersome.
Specific boundaries: $20,000 budget; results in six months
Innovative thinking always challenges boundaries to ensure that an outdated or

inapplicable boundary won’t limit the solution. A group tasked with thinking
innovatively should ask, “Why?” or “Why not?”
EXAMPLE
Since Product X brings in approximately $5 million in revenue each year, the
group asks, “Why is the budget for new messaging only $20,000?” As a result of this
question, the budget was increased to $50,000.
The group asks, “Why is the deadline only six months, given the technology
complications?” As a result of this question, the time frame for completion was
extended to 12 months.
Identify types of solutions. Categorizing the type of innovation sought and the
desired outcome helps create a shared understanding within the group of what
is to be accomplished. Is this a process, product, or marketing innovation? Are
we seeking incremental or breakthrough innovation? Will the solution be fully
implemented at the end of the process or used for further exploration? Group
members should be in agreement about the group’s goals and the next step.

EXAMPLE
Refining the messaging for Product X will be an incremental marketing innovation
requiring full implementation at the end of 12 months and measured results to
determine success.
Focus on the customer. Solutions should always address customer needs.
EXAMPLE
After looking at current customer data, the team realized that there were
considerable differences within customer segments. The group recognized that
no one single message would be appropriate for the needs of young, old, recent,
and long-term customers.
Separate facts from assumptions. Innovative thinking requires questioning

the appropriateness of all assumptions.
EXAMPLE
Most people on the team were surprised when they learned that customers who
owned more than one of the company’s products represented only a small
percentage of Product X sales. A widely held assumption in the company was that
Product X was a gateway product to the purchase of other products.
Identify three alternative solutions. The first identified solution may be the
best plan. However, requiring at least two other options helps the group to
consider other potentially valuable options and avoid groupthink. The group
should evaluate all three alternatives and choose one option to recommend to
management.
Identify all stakeholders. Not all stakeholders will be or should be actively
involved in the innovation process. However, stakeholders with an interest in
the outcome need to be aware of and sign off at major decision points. In
particular, the decision maker who will ultimately have to approve the plan
before implementation should be aware of and on board with a group’s
solution and implementation plans.
Carefully plan implementation. What will be delivered? How will success be
measured? During this step, it is important that involved stakeholders are
committed to the plan’s implementation.
Measure results. Make adjustments and improvements as needed based on
results. End the project or continue to refine it based on results.
An individual can use the innovative thinking process outside of a group or project
team. An individual can use divergent and convergent thinking to clarify a problem’s
root cause, identify boundaries that constrain solutions, consider the customer in any
solution, and consider at least three options for solving the problem. By following this
process, an individual is more likely to come up with a solution that will take care of
the problem in its entirety rather than simply treat the problem’s symptoms.
Innovation expert Charles Legrand says, “Words and language have a major
impact on innovation and problem solving.” He advises paying particular attention
during the innovative thinking process to “plastic” words—words without clear
meanings—and to clarify these words to the greatest degree possible. For example,
relative words such as “good” and “better” need to have objective standards
associated with them. Watch Video 10.2 to see how plastic words can generate instant
confusion.
Video 10.2 Ways Plastic Words Might Be Interpreted

In addition, the innovative thinking process requires conscious effort. Using

checklists or guidelines can help formalize the process. Figure 10.3 is an example of a
guide for organizing the work of an innovation project team.

Figure 10.3 Checklist for Innovation Project Team
Source: Reprinted from Claude Legrand, “Type of Thinking Chart” (PowerPoint

handout, LIMRA Executive Development Programs, Atlanta, GA, 13 September 2016).
Used with permission.

Execution of Innovation
Innovation expert Chris Trimble states that “The execution of innovation initiatives
demands much greater attention and energy than it normally gets. It is vital to match
the right initiative with the right organizational model.” To that end, Trimble and
innovation expert, Vijay Govindarajan, present three models for organizing innovation.
Model S—Small Projects

If an innovation project can be executed by one person or a small number of people in
naturally occurring spare time, Model S is appropriate. Model S is suitable for limited
projects intended to improve processes within the existing organizational and
management structure. However, since most companies aren’t staffed to support
significant amounts of extra time, only very small initiatives fit this model. Even then,
Model S projects may take a long time to complete or may never be completed
without employees devoting personal time to the project. Model S works best within a
culture of innovation where employees are encouraged to pursue innovation on their
own initiative.
Model R—Repeatable Projects

Model R projects use existing staff and existing organizational structures, but team
members are typically assigned to the innovation project as a work responsibility and
time is allocated for them to work on the project. Model R is suitable for applying
familiar tasks and processes to achieve a repeatable and predictable outcome. A
classic example of a Model R innovation is delivering this year’s version of last year’s
product. Model R innovation projects, like other business processes, should be
efficient and routine.
Model C—Custom Projects

If an innovation project cannot be accomplished with existing staff or with current
organizational structures, a customized approach identified as Model C is essential. All
innovation projects that do not fit Model S or Model R should be accomplished one
unique initiative at a time with a dedicated innovation team. Creating and maintaining
a specialized team of existing staff members makes sense for innovation initiatives

that are likely to be repeated in the future and when the required expertise exists
within the company. However, innovation requiring specialized expertise is often best
conducted outside of normal business operations. Innovation expert Trimble warns,
“Companies often overlook Model C, instead imagining that any innovation initiative
can be tackled using the more familiar models, R and S. The main challenge of Model C
is that it requires a dedicated team.”
Steps in the innovative thinking process include [select all that are
correct]
A. Creating a project team of only subject experts
B. Divergent thinking
C. Convergent thinking
D. Identifying three possible decision alternatives
An innovation project must identify global and specific boundaries. The

budget is an example of a
A. Global boundary
B. Specific boundary

One type of innovation project uses existing staff and existing

organizational structures. Team members are typically assigned to the
innovation project as a work responsibility, and time is allocated for them
to work on the project. Innovation expert Chris Trimble would classify this
type of innovation project as a
A. Model S project
B. Model R project
C. Model C project

Innovation Biases and Constraints

The goal of an innovation team is to learn new information as quickly as possible with
the least cost to the company. Failing fast is a philosophy that values extensive testing
of an idea early and often to determine value, correct mistakes, and reduce risk. If
testing reveals that something is not working, the team quickly shifts focus and tries
something else, a process known as pivoting. A variety of biases and constraints can
inhibit this process.
Cognitive Biases
During the innovation process, the innovation team is susceptible to many cognitive
biases that can impede the learning process.
Optimism bias is a tendency for innovators to form unrealistically positive
expectations as to future outcomes and to codify these expectations into plans
and performance standards. A team susceptible to optimism bias will likely have
good research results, but the innovation fails spectacularly when introduced
into the real world.
Political bias is the tendency to try to outdo one another in order to win. Such
competition may come from within the innovation team or from outside the
team. Within the team, one or more members may not be fully committed to a
goal or in agreement about steps in the process. These people may act to
sabotage the initiative to gain support for their view. People outside the team
may act in ways that undermine the initiative because they fear the effects of
the innovation on their area of the company.
Ego bias is a memory distortion that leads an individual or group to recall
information in a self-serving manner. Ego bias often exists when an innovation
team attributes positive outcomes to its work, but unsuccessful outcomes to
external circumstances beyond its control.
Size bias consists of a tendency to prefer large concepts instead of smaller
ones. Humans are often predisposed to believe that bigger is better, that big
outcomes come from big actions, and that if something is more expensive, it is
better.
Simplicity bias is the tendency to believe that a complex outcome must have
come from a complex cause, and a complex outcome cannot have come from a
simple cause.
The innovation process outlined earlier that calls for creating a diverse team,
asking questions, and ensuring that team members are in agreement can help avoid
these types of bias.
Constraints
In order for innovation to flourish, it must overcome several constraints, such as
Individual constraints. Innovative thinking requires that individuals have time,
knowledge, and confidence in themselves and in the innovative process.
Without time allocated for innovation, employees may focus only on current
work and current customers. Training in innovative thinking allows employees
to look at circumstances in a new way, and leaders must encourage
experimentation in order to overcome a tendency toward conformity. Creativity
is stifled when individuals are afraid to take chances.
Group constraints. Group constraints are similar to individual constraints but
they apply to the innovation team. Management shows support for an
innovation group by budgeting the funds and the staffing needed for the group
to do its work. Training in group dynamics and in avoiding dysfunctional group
behavior can improve innovation. Leadership should carefully staff innovation
teams with appropriate people, establish boundaries within which the group
can operate, and then set the group free to experiment.
Organizational constraints. The organization and its culture can inhibit
innovation in many ways. Strategic leadership focused on short-term results
and on doing the same things better stifles innovation efforts. Leaders who do
not see failures as learning opportunities inhibit innovation. Internal
competitions for scarce resources and using traditional methods for measuring
innovation are likely to stop innovation within an organization.
Industry-wide constraints. A company’s suppliers, consultants, customers,
regulators, and competitors can stop innovation from being widely adopted.
For example, a company may create an innovative new system for ordering, but
if suppliers or customers refuse to adopt the system, it will eventually be
abandoned. Diffusion is the process by which an innovation spreads and is
adopted outside of its place of origin. The greater the degree of diffusion, the
more successful the innovation. In a commercial market, profits are also a
typical result.

Innovation teams are subject to a variety of biases. A memory distortion

that leads an individual or group to recall information in a self-serving
manner is known as
A. Optimism bias
B. Political bias
C. Ego bias
D. Size bias
Diffusion is the process by which an innovation spreads and is adopted

outside of its place of origin.
A. True
B. False

Innovation Management
Innovation, like any other business endeavor, needs to support and advance a
company’s value proposition and mission through established corporate strategies.
An innovation steering committee is an executive-level committee that meets
regularly to foster innovation and set priorities for innovation initiatives. The main
responsibilities of this committee are to
Ensure that innovation strategies are linked to corporate strategies, with an
emphasis on achieving synergies
Balance incremental innovation with more ambitious innovation initiatives
needed for future growth
Allocate resources across ongoing initiatives and new initiatives
Monitor the performance of innovation initiatives
Evaluating, prioritizing, and selecting ideas for innovation initiatives requires
thorough analysis. Figure 10.4 compares characteristics for different types of
innovation initiatives.

Figure 10.4 Characteristics of Innovation Initiatives


An evaluation of innovation initiatives should also look to determine if the project

Puts the customer first
Reduces complexity throughout the organization
Accelerates automation and digitization
Reduces or eliminates non-value-adding activities
Invests in value-adding activities
A survey of U.S. company leaders in 2017 found that the top five strategic priorities
for innovation are (1) greater speed-to-market, (2) digitization of the business, (3)
becoming more data driven, (4) building public trust, and (5) implementing disruptive
technology.
Once a company selects an innovation strategy, the innovation steering
committee should consider several primary factors before going forward with a
specific innovation project.
What are the risks?
What are the rewards?
What resources (technology, people, skills) are needed?
Are needed resources available within the organization? Outside it?
What is the budget?
What is the time frame?
Several problems can occur during this process with the potential to sabotage
innovation. For example, the innovation steering team needs to be alert for
Misaligned time horizons—focusing on incremental innovations with a short-
term impact
Risk aversion—avoiding risky projects that have the potential for attractive
rewards
Champion bias—accepting evaluations of innovation proposals when the
proponent is a trusted associate
Sunflower bias—promoting consensus around the senior-most-person’s
choice of project

Innovation portfolio management is an approach to managing all company

innovation as part of one coordinated portfolio so that risks and returns from
multiple initiatives can be aligned with the organization’s mission, vision, strategies,
and resources. Management may use an innovation portfolio matrix to assist with
decision analysis and in allocating resources. Potential and existing projects are
located on a matrix according to value, risk, and time horizon. Figure 10.5 provides an
example of a portfolio matrix. In this example, the size of the circle represents a
project’s projected value.

Figure 10.5 Innovation Portfolio Matrix
Notice also that low-risk, short-term projects predominate. Managing the core
business usually requires that the majority of innovations be low-risk, short- to mid-
term projects. However, breakthrough ideas, the upper right-hand quadrant of the
innovation portfolio matrix, are where the future of the business lies.

The responsibilities of the innovation steering committee include (select

all correct answers)
A. Linking innovation strategies to corporate strategies
B. Focusing on incremental innovations
C. Allocating resources across ongoing initiatives and new initiatives
D. Monitoring the performance of innovation initiatives
Managing core business operations requires long-term, high-risk

innovation.
A. True
B. False

Conclusion
Operational excellence requires continually assessing the environment in which
insurance companies operate in order to identify and respond to environmental
disruptions effectively while continuing to efficiently manage current operations. In
this text, we’ve presented methods, such as project and process management and
ongoing quality management, to assist with managing and optimizing current
company operations. Responding effectively to disruption requires creating new
opportunities through innovation. Innovation thrives in an organizational culture that
promotes trust and openness, with leaders and employees who are motivated and
empowered to freely explore new options, and when every employee understands
decision-making and innovative thinking processes.

Key Terms
disruptive change
process innovation
organizational innovation
product innovation
marketing innovation
innovative thinking
analytical thinking
global boundaries
specific boundaries
optimism bias
political bias
ego bias
size bias
simplicity bias
diffusion
innovation steering committee
innovation portfolio management


PRACTICE QUESTIONS Chapter Ten
Learning Objective: 10A. Define disruptive change and explain how viewing change as an
opportunity or threat can impact an insurer.
1. The following statement(s) can correctly be made about disruptive changes and how companies react
to them:
A. Disruptive changes are changes that have the potential to influence how a business operates.
B. Company leaders who see disruptive changes as opportunities consider innovative ways to
recreate the business in order to be relevant in the future.
(1) Both A and B
(2) A only
(3) B only
(4) Neither A nor B
Learning Objective: 10B. Describe the four primary business objectives for innovation.
2. Insurers’ innovative efforts can be classified according to four business objectives. Organizational
innovation is one such business objective that consists of the introduction of a
(1) new product that is significantly different from existing products
(2) new or significantly improved design for business practices
(3) new or significantly improved production process or method of delivery
(4) new or significantly improved marketing method, product design, or product packaging
Learning Objective: 10C. Distinguish between incremental and breakthrough innovation, and
explain the importance to insurers of moving beyond incremental innovation to breakthrough
innovation.
3. Two types of innovation are incremental innovation and breakthrough innovation. Creating a new
and improved version of an existing insurance product is an example of (breakthrough /
incremental) innovation. Creating an entirely new market for an insurance product is an example of
(breakthrough / incremental) innovation.
(1) breakthrough / breakthrough
(2) breakthrough / incremental
(3) incremental / breakthrough
(4) incremental / incremental

Learning Objective: 10D. Distinguish between analytical and innovative thinking and describe the
steps in the innovative thinking framework, including problems such as plastic words.
4. Companies need to distinguish between complicated and complex problems in order to determine
whether to use innovative or analytical thinking. The following statements are about these two types
of problems. Select the answer choice containing the correct statement.
(1) For complicated problems, companies’ success with a similar problem does not guarantee
future success.
(2) For complicated problems, it is difficult to separate parts from the whole.
(3) Complex problems are unique and not often repeated.
(4) For complex problems, companies’ experience is critical and often sufficient.
5. Innovation experts Charles Legrand and David Weiss proposed several basic principles of innovative
thinking. The following statements are about these principles. Three statements are true, and one
statement is false. Select the answer choice containing the FALSE statement.
(1) A project team should use convergent thinking to select the best possible options from the
range of possibilities identified during divergence.
(2) All stakeholders should be actively involved in the innovation process.
(3) A project team should identify three alternatives, evaluate all of them, and choose one option to
recommend to management.
(4) Innovative thinking requires questioning the appropriateness of all assumptions.
Learning Objective: 10E. Describe Vijay Govindarajan and Chris Trimble’s three models of
executing innovation initiatives.
6. Innovation experts Chris Trimble and Vijay Govindarajan presented three models for organizing
innovation. The following statement(s) can correctly be made about these models:
A. Model S works best within a culture of innovation where employees are encouraged to pursue
innovation on their own initiative.
B. The main advantage of Model C is that it does not require a dedicated team.
(1) Both A and B
(2) A only
(3) B only
(4) Neither A nor B
Learning Objective: 10F. Describe cognitive biases and constraints that can affect the execution of
innovation in business organizations.
7. During the innovation process, the innovation team is susceptible to many cognitive biases that can
impede the learning process. The tendency to try to outdo one another in order to win is known as
(1) ego bias
(2) simplicity bias
(3) political bias
(4) size bias

Learning Objective: 10G. Describe the management of innovation and the use of an innovation
portfolio matrix as an aid in decision making.
8. For this question, if answer choices (1) through (3) are all correct, select answer choice (4).
Otherwise, select the one correct answer choice.
Innovation, like any other business endeavor, needs to support and advance a company’s value
proposition and mission through established corporate strategies. An innovation steering committee
is an executive-level committee that meets regularly to foster innovation and set priorities for
innovation initiatives. The main responsibilities of this committee include
(1) ensuring that innovation strategies are linked to corporate strategies, with an emphasis on
achieving synergies
(2) balancing incremental innovation with more ambitious innovation initiatives needed for future
growth
(3) allocating resources across ongoing initiatives and new initiatives
(4) all of the above
Learning Objective: 10F. Describe cognitive biases and constraints that can affect the execution of
innovation in business organizations.
9. One problem for which an innovation steering committee needs to be alert is sunflower bias, which
can correctly be defined as the tendency to
(1) focus on incremental innovation with a short-term impact
(2) accept evaluations of proposals when the innovation proponent is a trusted associate
(3) avoid risky projects that have the potential for attractive rewards
(4) promote consensus around the senior-most person’s choice of project


Operational Excellence for Insurance Professionals Figure and Video Descriptions | DESC.1
Figure and Video Descriptions
Figure 7.1
The Organizational Hierarchy of Decisions
A pyramid with three levels. The top level is identified as the Corporate Level.
Wording outside the top level says “Strategic decisions focus on establishing and
revising corporate goals and strategies.” The middle level is identified as the
Business Level (Subsidiary or Division) Level. Wording outside the middle level
says “Business decisions focus on implementing corporate strategies for a
division or business segment.” The bottom level is identified as the Operational
Level. Wording outside the bottom level says “Operational decisions focus on the
day-to-day implementation of business-level strategies.”
Figure 7.2
The ABCDs of Categorizing Decisions
A matrix with four sections describes different types of decisions. The y-axis of the
matrix identifies the scope and impact of decisions from narrow at the bottom to
broad at the top. The x-axis of the matrix identifies the level of familiarity with the
decision as being unfamiliar and infrequent from the left side of the matrix to
familiar and frequent on the right side.
The top, left-hand section of the matrix is “Big-bet decisions.” These decisions
have broad scope and impact but are unfamiliar and infrequent. The top, right-
hand section of the matrix is “Cross-cutting decisions.” These decisions have
broad scope and impact but are familiar and frequent. The bottom, left-hand
section of the matrix is “Ad hoc decisions.” These decisions are narrow in scope
and impact and are unfamiliar and infrequent. The bottom, right-hand section of
the matrix is “Delegated decisions.” These decisions are narrow in scope and
impact and familiar and frequent.

Figure 7.3
Basic Steps of the Decision Making Process
The steps in the decision making process are shown in cascading boxes. Top box:
Identify and define a problem or need. Second level box: Identify decision
alternatives. Third level box: Evaluate the relative benefits and risks of proposed
solutions. Fourth level box: Choose the best decision alternative. Fifth level box:
Implement the decision. Sixth level box: Monitor decision outcomes.
Figure 7.4
Examples of Business Questions
A series of business questions that are often included in the decision-making
process are shown in boxes. First box: How much revenue will this new product
generate? Second box: What is our target market? Third box: How many people
will buy our new product? Fourth box: What makes our customers decide to
purchase? Fifth box: How satisfied are customers with our products? Sixth box:
When is the best time to release an update? Seventh box: How many customers
can we reach with this advertisement?
Figure 7.5
Group Characteristics and Conflict
A description of cooperative conflict and competitive conflict.
The first image has a bullseye and arrow heading toward the word “goal” in the
center. The arrow includes the characteristics of cooperative conflict: (1) effective
group communication and trust, (2) shared values and beliefs, (3) Recognition of
the legitimacy of others’ interests, and (4) Desire to search for solutions that are
responsive to the needs of all.
The second image has a bullseye and the word “goal” in the center. Several arrows

are heading toward the goal but missing it. The arrows include the characteristics
of competitive conflict: (1) lack of trust caused by misinformation and false
promises, (2) coercive tactics to impose one side’s view on the others, (3) ongoing
disagreement about and critical rejection of others’ ideas, (4) prefer decision
failure over loss in power struggle.
Figure 7.6
The Four Levels of Uncertainty
Four levels of risk. Level 1: clear enough future with a single view of the future.
Level 2: alternative futures with a limited set of possible future outcomes, one of
which will occur. Level 3: range of futures with a range of possible future
outcomes. Level 4: true uncertainty with not even a range of possible future
outcomes.
Figure 8.1
The Three Measures of Central Tendency
What?
The mean is the numerical average of a series of values.
The median is the middle value in a set of values arranged in numerical order.
The mode is the value that appears most often in a population.
How?
To find the mean, (1) find total of values, and (2) divide total of values by the
number of values
To find the median, (1) arrange values in numerical order, (2) count the number of
values, (3) if odd, find the middle value. If even, average two middle values.
To find the mode, find the value or values that appear the most.
Drawbacks?
The mean doesn’t represent outliers well.

The median ignores all other values.

The mode ignores all other values. Also, population may contain no mode or
more than one mode.
Figure 8.2
The Three Measures of Dispersion
What?
The range is the difference between the highest and lowest values in a particular
population.
The variance is the average squared distance between the population mean and
each individual item in the population.
The standard deviation is the square root of the variance.
How?
To find the range, (1) identify lowest and highest values, and (2) subtract lowest
value from highest value.
To find the variance, (1) calculate the mean, (2) find the distance between each
item of data and the mean, (3) square each distance, (4) add squared values, and
(5) divide total by the number of items in the population.
To find the standard deviation, find the square root of the variance.
Drawbacks?
The range ignores middle values and doesn’t indicate patterns in the data.
The variance is not on the same numerical scale as raw data, so doesn’t provide
information about actual distance between data items.
The standard deviation assumes values are distributed normally.
Figure 8.3
Example: Decision Alternatives
Decision alternatives:
Purchase new system A

Purchase new system B
Purchase no new system
Figure 8.4
Time-Series Forecasting Models
Types of time-series forecasting models include:
Naïve time-series model. This is the simplest time-series model. It uses the data
value from the most recent period as the forecast value for the next period.
Arithmetic average model. This model uses the average value of all periods as the
forecast value for the next period.
Simple-moving average model. This model uses the average value of a specified
number of previous periods as the forecast value for the next period.
Weighted moving average time-series model. This model assigns relative weights
to the values of previous periods based on recentness. It uses the average of
weighted values as the forecast value for the next period.
Video 8.1
Correlation
Variables that change in response to each other have correlation.
[A woman who looks like she is thinking about/comparing two items appears.]
When variables have positive correlation, they move in the same direction.
[Graph appears. Age is on the x axis, and Mortality is on the y axis. Starting in the bottom
left corner and moving to the top right corner, dots on the graph appear and a plotted
line moves through each dot. ]
See how when age increases, mortality also increases?
[Graph fades out.]
When variables have negative correlation, they move in the opposite direction.
[Graph appears. Savings is on the x axis, and Need for loan is on the y axis. Starting in
the top left corner and moving to the bottom right corner, dots on the graph appear and
a plotted line moves through each dot.]
Notice how the need for a loan decreases as savings increase.
Figure 9.1
Data Types
Three data types are structured data, unstructured data, and semistructured
data.
Structured data includes customer demographics such as name, address, age,
marital status, occupation, and income level. Structured data also includes
transactions such as deposits, premiums paid, and account balances.
Unstructured data includes user-written text such as the content in blogs or
social media posts. Unstructured data also includes user-produced media such as
videos, gifs, images, and pdf files.
Semistructured data includes email messages which contain structured data in
fixed fields (sender, date, time) and unstructured data (the text or media in the
body of an email).
Figure 9.2
Three Types of Data Analytics
Three types of data analytics include descriptive analytics, predictive analytics,
and prescriptive analytics.
Descriptive analytics uses analyzed data to provide information about past or
current business conditions, and turns existing data into information.
Predictive analytics uses data to predict future events and anticipate
conditions, and forecasts the future.
Prescriptive analytics uses analyzed data to suggest decisions and show
implications of those decisions, and recommends actions.

Figure 9.3
Frequency Distribution
A sample frequency distribution that shows the standard deviation of policy face
amounts from $250,000 to $5,000,000. An arrow points down to the mean, at
around $400,000.
Figure 9.4
Heat Map
A sample heat map of the United States with red for denser populations of
customers served (Southern United States and Pacific Northwest) and green for
sparser populations of customers served (around California, the Midwest, and the
Northeast).
Figure 9.5
Scatter Diagram
A sample scatter diagram that shows higher policy face amounts at lower spots
on the diagram (assuming the unlabeled Y-axis is age while the X-axis is face
amount, ranging from $50,000 to $3,000,000).
Figure 9.6
Line Diagram
A sample line diagram trending upward overtime (from 1970 to 2020) for both
men and women.

Figure 9.7
Bar Chart
A sample bar chart demonstrating the difference in hold times for each day of the
week. The tallest bar is Sunday, followed by Friday, Saturday, Thursday, Monday,
Tuesday, and Wednesday.
Figure 9.8
Pie Chart
A sample “donut shaped” pie chart showing the percentage of each type of policy
held. From the chart,
Whole life is at 42%
Term life is 31%
Universal life is at 13%
Variable universal life is at 11%
Variable life is at 3%
Figure 9.9
Infographic Example
An example of an infographic to show how meaning is conveyed through both
words and pictures.
Infographic has an image at the top of a person next to dollars. Near the image is
the following text: Benefit funding matters. Enrollment rates are clearly related to
employer funding, but not the value of these products to employees.
Beneath the text is a bar chart showing average benefits participation rates.
For dental insurance: where employer pays less than 50% of the premiums,
53% participate; where employer pays more than 50% of the premiums, 80%

participate; 68% participate on average.

For vision care: where employer pays less than 50% of the premiums, 50%
participate; where employer pays more than 50% of the premiums, 78%
For short-term disability insurance: where employer pays less than 50% of the
premiums, 40% participate; where employer pays more than 50% of the
premiums, 85% participate; 65% participate on average.
For accidental death and dismemberment insurance: where employer pays
less than 50% of the premiums, 38% participate; where employer pays more
than 50% of the premiums, 82% participate; 60% participate on average.
For critical illness insurance: where employer pays less than 50% of the
For cancer insurance: where employer pays less than 50% of the premiums,
21% participate; where employer pays more than 50% of the premiums, 63%
For accident insurance: where employer pays less than 50% of the premiums,
29% participate; where employer pays more than 50% of the premiums, 76^
For long-term care insurance: where employer pays less than 50% of the
For hospital indemnity insurance: where employer pays less than 50% of the
For limited-benefit medical/”skinny” plans: where employer pays less than 50%
of the premiums, 25% participate; where employer pays more than 50% of the
Beneath the graph is the following text inside of a down-pointing arrow: Watch
out: Core insurance benefit penetration rates are declining.
Branching out from the arrow is an arm that holds a cloud. Inside the cloud reads
the following text: A silver lining? Employers’ interest in non-insurance benefits is
growing. Can you provide them with non-traditional benefits they’ll subsidize?

Video 9.1
Gathering Qualitative Feedback
Qualitative research relies on statements that describe subjective conditions such
as feelings toward a product or service.
[Satish sits at a desk interviewing another man.]
Satish conducted one-on-one interviews to gather qualitative feedback about
customer interactions with the voice response system.
[Satish sits at a desk writing.]
He observed their interactions, and then recorded their responses.
[A woman looks distressed while holding a phone to her ear.]
Woman: I’m frustrated by so many prompts!
[A man looks enthusiastic while holding a phone to his ear.]
Man: I wish there was an option to have a representative call me when someone is
available.
[A woman smiles while holding a phone to her ear.]
Woman: I’m glad the option to speak to a representative is offered at the start of
the call.
[A man holds a phone in his hand.]
Man: The music is really annoying, especially if I’m waiting so long that it loops and
I have to hear it all over again.
Qualitative feedback from customers can help Satish decide what changes the
company should make to the voice response system.
Figure 10.1
Innovation by Level of Novelty
A vertical arrow illustrates the degree of innovation. From the top to bottom:
Incremental innovation has the least risk and the least cost. Breakthrough
innovation has the most risk and the greatest cost to innovate.

Figure 10.2
Complicated and Complex Issues
An illustration of complicated and complex problems.
Complicated problems have (1) certainty about context and desired outcome,
(2) experience is critical and often sufficient, (3) problems can be simplified
into parts and solved, (4) success with a similar problem practically
guarantees future success, (5) are likely to reoccur, (6) traditional analytical
thinking works well.
Complex problems have (1) ambiguous context and uncertainty about desired
outcomes, (2) experience is useful but often limited, (3) difficult to separate
parts from the whole, (4) success with a similar problem doesn’t guarantee
future success, (5) are unique and not often repeated, and (6) innovative
thinking works well.
Figure 10.3
Checklist for Innovation Project Team
A checklist to assist with the decision-making process. Determine whether you
have a few or many solutions or ideas. Determine whether you have
implementable solutions or new ideas/directions. Are the solutions incremental
or breakthrough? Will implementation be short or long? Are there tight or open
boundaries?
Figure 10.4
Characteristics of Innovation Initiatives
Characteristics of innovation projects.
Small innovations: (1) little risk, (2) small payback, (3) use existing staff as part of

normal work responsibilities, (4) continuous improvement methods work well.

Larger innovations: (1) greater risk, (2) potentially greater payback, (3) existing
staff participate on a dedicated team in addition to regular work responsibilities,
(4) traditional project management methods work well.
Breakthrough innovations: (1) greatest risk, (2) potentially greatest payback, (3)
experts inside and outside organization participate on a dedicated innovation
team with no other work responsibilities, (4) customized design needed.
Figure 10.5
Innovation Portfolio Matrix
An innovation portfolio matrix with nine sections. Risk is shown increasing from
low to high on the y axis. Time is seen increasing from short-term to long-term on
the x axis. The most innovation projects occur in the short- to –mid-term range
and in the low to moderate risk range.
Video 10.1
Maria Ferrante-Schepis
President
Maddock Douglas
Innovation has many definitions and we’ve made a major distinction over the last
couple of years in the lessons that we’ve learned in doing innovation and being
out on the forefront of it as an emerging discipline. There is “big I” innovation and
“small I” innovation and that distinction is important when leaders are looking at
and talking about embedding innovation in their organizations. “Big I” innovation
is about the future, new to the world, giant leaps forward, high risk, and requires
obviously a certain skills set to get to that. Now that same skill set can be applied
to “small I” innovation as a proving ground or permission slip to do some bigger
things. So “small I” innovation is taking those same skills sets and tools and
applying them to everyday challenges—the challenges that people already sort of
understand or they know how to measure. So, once they can get those sort of
quick wins under their belt, it gives them the confidence to be able to take on
some bigger things.
Video 10.2
Plastic Words
[A man holds a stack of papers.]
Man: I want the most recent statistics we have on our customers.
[A woman contemplates the man’s request.]
Woman (thinking): Does he want statistics on our best customers? Our average
customers? Our most recent customers?
[Screen fades out. The same man appears again.]
Man: It is imperative that we improve our numbers.
[Three people look confused by the man’s statement.]
Person 1 (thinking): By 2% or 100%?
Person 2 (thinking): By next month or next year?
Person 3 (thinking): At all costs?
Man: I’ve made my decision.
[A woman contemplates the man’s statement.]
Woman: Is it negotiable? Is there no turning back? Until when?
Man: That was a good communication.
[The same woman from the previous scene scratches her head.]
Woman (thinking): Was it well-written? Did it achieve its goal? Was it interesting?

Operational Excellence for Insurance Professionals Endnotes | END.1
Endnotes
Chapter 7
1. Aaron De Smet, Gerald Lackey, and Leigh M. Weiss, “Untangling Your Organization’s
Decision Making,” McKinsey Quarterly, June 2017,
https://www.mckinsey.com/business-functions/organization/our-
insights/untangling-your-organizations-decision-making (14 May 2018).
2. Bruno Aziza, “Franck Schuurmans: Making Better Decisions Through Proper
Framing,” BizIntelligence.TV, 6 May 2011, https://www.youtube.com/watch?
v=Hu7WpZiiwbU (14 May 2018).
3. Brad Spangler, “Competitive and Cooperative Approaches to Conflict,” in Guy
Burgess and Heidi Burgess, eds., Beyond Intractability, Conflict Information
Consortium, University of Colorado, Boulder, posted July 2003,
http://www.beyondintractability.org/essay/competitive-cooperative-frames.
4. Hugh G. Courtney, Jane Kirkland, and S. Patrick Viguerie, “Strategy Under
Uncertainty,” McKinsey Quarterly, June 2000, https://www.mckinsey.com/business-
functions/strategy-and-corporate-finance/our-insights/strategy-under-uncertainty
(14 May 2018).
5. Aziza, “Franck Schuurmans.”

Chapter 8
1. Kristen E. Gillis, What’s on the Minds of Executives Now? (Windsor, CT: LL Global, Inc.,
©2018). Used with permission; all rights reserved..
Chapter 9
1. Federal Bureau of Investigation, “Insurance Fraud,” FBI.gov,
https://www.fbi.gov/stats-services/publications/insurance-fraud (9 April 2018).
2. Gary Shaw and Jim Eckenrode, “2018 Insurance Outlook: Shifting Strategies to
Compete in a Cutting-Edge Future,” Deloitte Center for Financial Services, 2017,
https://www2.deloitte.com/content/dam/Deloitte/global/Documents/Financial-
Services/us-fsi-insurance-2018-outlook.pdf (30 April 2018).
3. Valinda Chan, “Getting It Right: Why Infographics Are Not the Same as Data
Visualizations,” Prototypr, 6 June 2016, https://blog.prototypr.io/getting-it-right-why-
infographics-are-not-the-same-as-data-visualizations-a23da7de745e (17 May 2018).
Chapter 10
1. Mike Maddock, “The Difference Between Inventors and Innovators,” Monkey Minute
with Mike Maddock (video blog), Maddock Douglas, 9 August 2012,
http://maddockdouglas.com/video-the-difference-between-inventors-and-
innovators/ (5 March 2018).
2. Mark McLaughlin et al., “Friend or Foe? Insurtechs and the Global Insurance
Industry,” IBM Institute for Business Value, Executive Report (Armonk, NY: February
2018)
https://public.dhe.ibm.com/common/ssi/ecm/10/en/10012910usen/friend_or_foe.pdf
(5 March 2018).
3. David S. Weiss and Claude P. Legrand, Innovative Intelligence: The Art and Practice of
Leading Sustainable Innovation in Your Organization (Mississauga, ON: John Wiley &
Sons Canada, 2011), 4–5, 8, 13–14, 20–24, 64.
4. Vijay Govindarajan and Chris Trimble, The Other Side of Innovation (Boston, MA:
Harvard Business Review Press, 2010), 143, 160–161.
5. Ibid.
6. Amy Wolf, “Six Ways We Kill Innovation Without Even Trying,” Research News @
Vanderbilt University, 21 November 2011,
https://news.vanderbilt.edu/2011/11/21/achieve-innovation-success-by-mastering-
your-constraints/ (28 February 2018)
7. KPMG, Disrupt and Grow: U.S. CEO Outlook 2017, KPMG, 2017,
https://assets.kpmg.com/content/dam/kpmg/us/pdf/2017/06/us-ceo-outlook-
survey-2017.pdf (5 March 2018), 6.
8. Dan P. Lovallo and Olivier Sibony, “Distortions and Deceptions in Strategic
Decisions,” McKinsey Quarterly, February 2006, https://www.mckinsey.com/business-
functions/strategy-and-corporate-finance/our-insights/distortions-and-deceptions-
in-strategic-decisions (5 March 2018).

Operational Excellence for Insurance Professionals Glossary | GLOSS.1
Glossary
360-degree review
A performance evaluation process in which opinions about an employee’s
performance are solicited from several sources, such as the employee, peers,
subordinates, and customers and then combined into one rating.
80-20 principle
A specific guideline which states that 20% of the components of a situation
account for 80% of the outcomes.
activity
Any part of a set of actions that generates work to accomplish a job, problem, or
assignment.
activity analysis
A report that documents the expected tasks and estimated time for completing a
given activity, based on observation of or interviews with an individual performing
the activity.
ad hoc decision
An infrequent decision that can be made quickly at an individual level because the
risks involved is relatively small.
agile management
An approach to business effectiveness focused on finding and seizing
opportunities to improve operations and processes.
AI
— artificial intelligence.
analysis paralysis
The process of spending excessive time and energy in gathering decision-making
information.

analytical thinking
The breaking down of a problem into separate manageable parts, and finding the
best workable solution.
arithmetic average model

A forecasting model that uses the arithmetic average of a series of values as the
forecast value for the next future period.
artificial intelligence
The area of computer science that emphasizes the development of intelligent
machines that work, learn, and react like humans.
attention bias
A consistent error in research outcomes that arises when people perform better
because they know they are being studied.
authentication requirements
Methods that enable companies to ensure that someone requesting or sending
information is who he or she claims to be.
authority
The right to direct others.
automation
The operation of a process, system, or piece of equipment without human
intervention.
autonomous motivation
Motivation arising primarily from intrinsic rewards affiliated with needs for
competence, relatedness, and autonomy.
balanced scorecard
A performance monitoring tool that displays a set of KPIs and compares the value
to performance standards.
balanced scorecard approach

A conceptual framework that relies on two types of graphic displays—balanced
scorecards and dashboards—to give decision makers actionable information

about the progress of operations.
bar chart
A graphical display of a frequency distribution.
barriers to entry
Obstacles, such as regulations, that impede a new seller’s entry into a market.
benchmark
A performance standard that a company aspires to achieve.
benchmarking
A formal program for measuring company performance results, identifying best
practices for the same performance areas, and emulating best practices for
company processes.
benchmarking study
A type of comparison study of expenses and other quantitative measures of
operational performance in which a company compares its performance with that
of its peers.
best payoff
In a payoff table, the highest possible value in each state of nature column.
big-bet decision
An infrequent, unfamiliar decision that can have a profound effect on a company’s
operations and future success.
big data
Large amounts of unprocessed information gathered from various sources, in
various formats, and at a rapid speed.
board of directors
group of individuals elected by the company’s owners that serves as the
company’s primary governing body.
BOD
See board of directors.

BPR
See business process reengineering. See Module 2, Chapter 4.
breakthrough innovation
A type of innovation that can change a company’s business model.
business case
A justification for a proposed project that highlights how a project’s benefits to the
company will outweigh its costs and risks.
business intelligence system

Software that includes tools for analyzing business conditions.
business process
An ongoing method or system for responding to customer needs.
business process management system

Software which supports business process management and business process
automation.
business process reengineering

A formal program for fundamentally redesigning business processes, structures,
and software with the goal of substantially improvement cost, quality, service
levels, and speed.
business strategies
Action plans for a line of business such as a product line, business unit, or
strategic business unit (SBU).
cascading report
An electronic report that brings together related data sets and offers distinctive
data views suitable for various user needs.
causal model
A forecasting model that uses historical data and other relevant variables as basis
for describing unknown future data points.
certainty

In decision making, a condition in which an expected outcome can be known based

on available information with little probability of a deviation from the expected
outcome.
chat box
A computer system that uses artificial intelligence and spoken language or text to
answer the most commonly asked customer questions.
child report
A detailed report that supports the master or summary report.
cloud
A virtual storage system that maintains digital data on multiple connected servers
owned and managed by a hosting company.
coaching
A process in which a supervisor works with an employee to improve performance
on the job.
code of conduct
A formal statement of a company’s values and its expectations for how its
employees should behave in the course of business.
coercive power
Power that results from a person’s ability to punish others because of behaviors
or performance.
cognitive bias
A general term used to describe biases in the human mind that are difficult to
eliminate and that lead to inaccurate judgments.
cohesiveness
The degree to which group members work together to accomplish the group’s
purpose.
compensation
The total monetary amount of benefits provided by an employer to an employee in
return for work performed as required, which can include an employee’s pay as
well as the value of vacations, bonuses, insurance, and any other benefit provided
by the employer such as free parking or lunches.
competitive advantage
Any aspect of a company—such as cost structure, distribution network, or
customer support—that allows the company to generate greater sales or retain
more customers than competitors
computational modeling
A form of modeling that uses the processing capabilities of IT to perform millions
of simulations at once.
concentration ratio
The sum of the percentage market shares of the top companies in the industry to
determine industry competitiveness.
concurrent controls
Organizational controls that continuously monitor a company’s activities and
systems as they are being performed to ensure that an activity is meeting
established performance standards.
conditional payoff table

A type of payoff table showing two or more states of nature.
confirmation bias
The human tendency to seek, interpret, and remember information that confirms
pre-existing beliefs.
conflict of interest
A situation that exists when the interests or actions of one entity, such as an
employee, are incompatible with the interests or actions of a related entity, such
as an employer.
consensus
An approach that requires all group members to understand and accept a
solution before jointly choosing the course of action.
continuous process improvement

An approach to process management that uses strategic initiatives to make
ongoing, incremental improvements in processes and technology.
continuous reinforcement
The process of either encouraging or discouraging every instance of a specific
behavior.
control chart
A chart showing a plot of data observations about a given process against a
measure of time.
controlled motivation
Motivation arising primarily from extrinsic rewards.
core team member

On a project team, a person or people assigned to perform a significant portion of
project activities.
corporate culture
The attitudes, values, perceptions, beliefs, and experiences shared by a company’s
employees and instilled in new employees when they join the company.
corporate goals
The broad planning targets a company attempts to achieve in support of the
corporate mission. Also known as corporate objectives.
corporate governance
The responsibility and authority of a company’s board of directors to direct the
organization to fulfill its mission on behalf of the company’s stakeholders in a legal
and fiscally responsible manner.
corporate strategy
A long-term plan that a company intends to use to achieve its goal in the present
and future.
correlation
A measure of whether, and how strongly, two values are related.
crashing
A method for getting a project back on schedule by assigning additional resources
to the project, thereby increasing the cost of the project. See Module 2, Chapter 5.

critical path
The most time-consuming chain of events in a network model.
cross-cutting decision
A familiar decision that can have broad organizational impact and requires
effective collaboration among many different parts of an organization. See Module
3, Chapter 7.
cross-functional team
A group of representatives from two or more work groups that perform related
business activities across organizational boundaries.
cultural bias
A consistent cognitive error resulting from the tendency to interpret and report
data in terms of the observer’s own culture.
customer journey
The path each customer travels with a company from beginning to end, including
every interaction across every point of contact.
cybersecurity
All of the efforts a company takes to protect its computer systems and networks
from criminal activity.
data
Unprocessed facts.
data acquisition
The tasks involved in obtaining and storing information relevant to the business
question.
data analytics
The practice of applying analytical techniques to large amounts of raw data in
order to draw conclusions and make business decisions.
data architecture
The method or methods by which authorized users can access and apply the
information stored in company databases.

data editing
A process for detecting and correcting inconsistencies, errors, and omissions in a
collection of data.
data mining
A process in which an analyst examines numerical data to uncover trends and
patterns.
data visualization
The use of illustrative graphics to convey an intuitive understanding of data.
decision
A choice about a future action.
decision alternatives
The options a decision maker considers before selecting a future course of action.
decision constraints
Practical limitations that affect the selection of decision alternatives. See Module 3,
Chapter 8.
decision criteria
The simple-to-understand rules a decision maker uses to evaluate decision
alternatives.
decision environment
The collection of information, alternatives, values, and preferences available to a
decision maker at the time of a decision.
degree of confidence
The likelihood that a calculated value accurately predicts the true value. See
Module 3, Chapter 8.
delegated decision
A familiar and frequent low risk decision.
dependent activities
Activities that cannot be started until other activities have been completed

because the outputs from one activity are required inputs for another activity. See
dependent variable
A variable that reacts to outside influences.
descriptive analytics
A type of data analytics that uses historical data to provide information about past
or current business conditions.
descriptive statistics
Statistics that summarize a population of data.
devils advocate
A person assigned to make a case against a decision-making team’s proposal. See
diffusion
The process by which an innovation spreads outside of its place of origin. See
disruptive change
A change that has the potential to influence how a business operates. See Module
3, Chapter 10.
DMADV
A five-step approach to solving a problem with the goal of creating a new business
process.
DMAIC
A five-step approach to solving a problem with the goal of improving an existing
business process.
dominant decision alternative

The decision alternative that consistently produces the best payoff for all states of
nature.
drill-down option

A selection within a cascading report that enables linking from a parent report
down to a child report.
drill-through option
A link that the user of a summary report can click to see a different level of detail of
the information.
drill-up option
A selection within a cascading report that enables linking from a child report up to
a parent report.
earned value
A monetary value assigned incrementally to all project steps, with the project
earning another increment of monetary value as more work is completed. See
earned value management

A technique for identifying discrepancies between performance and plans that
involves using monetary values to express performance feedback. See Module 2,
Chapter 5.
effectiveness
In process management, completing the activities necessary to achieve the
desired outcome. Often referred to as "Getting the right things done." See Module
2, Chapter 4.
efficiency
In process management, completing an activity with minimal waste of human or
financial resources. Often referred to as "Getting things done right." See Module 2,
Chapter 4.
ego bias
A memory distortion that leads an individual or group to recall information in a
self-serving manner.
employee engagement
An individual’s involvement with, satisfaction with, and enthusiasm for the work he
does.

employee value proposition

A formal statement of what sets a company apart from other companies and
identifies what employees value most about working for the company.
encryption
A method of securing information wherein a technology encodes collected data so
that only an authorized person possessing the required hardware and/or software
can decode that data.
enterprise project management office

A project management office that operates at the strategic level by assessing risk
and organizing resources in relation to the company mission. See Module 2,
Chapter 5.
enterprise risk management

A system that identifies and quantifies risks from both potential threats and
potential opportunities and manages risks in a coordinated approach that
supports an organization’s strategic objectives.
enterprise-wide reporting
The use of knowledge management systems and information updates across
operations such that employees have access to information relevant to their roles.
EPMO
— enterprise project management office.
ERM
See enterprise risk management.
estimates
An approximate value that represents an unknown.
EVM
See earned value management. See Module 2, Chapter 5.
EVP
See employee value proposition.

exception report
A report generated automatically by a company’s systems when results deviate
from an established standard.
expectancy theory
A motivation theory stating that the strength of an individual’s tendency to act in a
certain way depends on the individual’s expectation that the act will be followed by
a given outcome, and by the attractiveness of that outcome to the individual.
expected time
An estimate of the time needed to complete project activities.
expert power
Power that results from a person’s skills, knowledge, or expertise.
extinction
The process of discouraging a specific behavior by ignoring it.
extranet
A limited-access network that allows people within an organization, and select
external stakeholders, to access company information
extrinsic motivation
A force that causes an individual to pursue an activity to obtain an external goal.
fast tracking
A method for reducing the time required to complete a project wherein a project
manager revisits the network’s critical path to decide if any sequential activities
can be performed simultaneously.
feasibility
The degree to which company resources will be able to carry a project to
completion.
feedback controls
Organizational controls that compare actual performance or output with
established standards at the end of a measurement period.

financial modeling
A computer-based mathematical model that approximates the operation of real-
world financial processes.
firewall
A system component designed to prevent unauthorized access to a network. See
fishbone diagram
A graphical tool used for organizing potential causes for a problem and sorting the
causes into defined categories. Also called an Ishikawa diagram. See Module 2,
Chapter 6.
flextime
A work arrangement in which employees must work a certain number of hours per
week but have discretion in deciding when they will work.
float
The length of time an activity can be delayed without delaying the entire project.
Also known as slack time.
flow chart
A visualization method that shows the systematic progression of a series of
activities, using connecting lines and conventional symbols.
forecasting models
Mathematical constructs for projecting unknown or future outcomes using known
results or data.
formal leadership
The ability of a person to influence the behavior of others through the formal
authority conveyed on the person by the company.
frequency distribution
A set of data organized to show the number of times each outcome occurs. See
Gantt chart

A graphical scheduling tool that separates projects into critical activities and plots
starting and ending dates for each activity.
gig economy
An environment in which an on-demand labor force is utilized to fill temporary or
short-term jobs, and there is no formal employer-employee relationship between
the independent worker and the employer.
global boundaries
Boundaries such as regulations or corporate strategy that are outside the control
of an innovation project.
goal-setting theory
A motivation theory stating that employees are motivated by challenging yet
attainable goals, along with appropriate feedback to mark progress toward goals.
group
Two or more people who interact while sharing a common identity and purpose.
groupthink
A phenomenon in which group members stress conformity and unanimity to the
point where alternate courses of action are ignored which results in inferior
decisions and group outcomes.
hacking
The process of using a computer and technology to gain unauthorized access to
another system’s data.
handoff
A transfer of work from one work team member to another, typically across
organizational boundaries.
heat map
A data map in which different values for a given variable appear as different colors.
heuristics
General rules that allow people to make decisions quickly without gathering
extensive information.
hindsight bias
The tendency of decision makers to believe, after a decision is implemented and a
certain result occurs, that they knew a decision would result in that outcome
during the decision-making process.
incremental innovation
A type of innovation that enhances operations and profitability.
independent activities
Activities that can progress concurrently with no change to resource needs. See
independent variable
A variable that influences the behavior of another variable.
inferential statistics
Statistics that allow a decision maker to draw conclusions about a large population
based on the sample group.
infographic
A graphic representation designed to make information easy to understand and
patterns easy to identify.
informal leadership
The ability to influence the behavior of others by means other than the formal
authority conferred on the person by the organization.
information
A collection of data that is converted into a form that is meaningful or useful for
the accomplishment of some objective.
information technology
The use of computer systems to gather, record, manage, analyze, and transmit
company information.
innovation portfolio management

An approach to managing all company innovation as part of one coordinated
portfolio so that risks and returns from multiple initiatives can be aligned with the

organization’s mission, vision, strategies, and resources. See Module 3, Chapter 10.
innovation steering committee

An executive-level committee that meets regularly to foster innovation and set
priorities for innovation initiatives.
innovative thinking
The process of solving problems by discovering, combining, and arranging
insights, ideas, and methods in new ways.
intellectual capital
The sum of all employee knowledge that a company can use to drive profits as well
as other proprietary information that a company owns.
intelligent underwriting system

A software that performs underwriting steps based on preprogrammed rules and
parses language to assess risk automatically.
intermittent reinforcement
The process of encouraging or discouraging some, rather than all, instances of a
specific behavior.
International Organization for Standardization

A global federation composed of representatives from standards-setting
organizations all over the world.
intranet
A private network accessible only to people within an organization. See Module 2,
Chapter 4.
intrinsic motivation
A force that causes an individual to initiate an activity for its own sake, because the
activity is satisfying to the individual.
intrusion detection software

Technology that monitors system traffic and alerts administrators to potential
security issues.
ISO 9000
A standardized collection of quality management fundamentals designed to help

companies meet customer needs and follow regulatory requirements related to
products and services.
IT
— information technology.
job description
A description of the duties, responsibilities, and accountabilities for a job.
job design
The way in which the elements of a job are organized.
job enlargement
An approach to job design in which a new job is created by combining two or more
specialized tasks to add more variety.
job enrichment
An approach to job design in which a job is redesigned to allow workers more
control over how they perform their work tasks.
job rotation
An approach to job design in which emloyees are periodically shifted from one
task to another task with similar skill requirements.
job sharing
A work arrangement that allows two or more individuals to split one job.
kaizen
A gradual and continuous approach to process improvement using a series of
modest changes and feedback from process team members.
key performance indicator

A performance standard for a process or activity that is critical to a company’s
success.
key process

One of several operational processes critical to meeting customer needs,

maintaining a competitive position, or implementing the corporate plan. See
knowledge workers
Employees who can interpret information within a specific, yet broad, domain; use
skills and knowledge to define problems; and identify alternative solutions to
problems.
KPI
See key performance indicator.
latest allowable date

The last date on which a given event can occur without causing a delay in the
entire project.
law of large numbers

A rule that states that, under normal circumstances, the more times a particular
event is observed, the more likely it is that the observations will approximate the
true probability of the event.
leader
A person who influences other people toward the achievement of a vision or set of
goals.
lean management
A continuous process improvement approach that emphasizes creating a value
stream of Lean processes with minimal waste.
Lean Six Sigma

A hybrid quality improvement method that combines Lean management principles
with Six Sigma management principles.
legacy systems
Older computer systems or applications that perform essential functions and are
costly to replace or redesign.
legitimate power
Power that occurs solely because of a person’s superior position over others in
the organizational hierarchy.
line diagram
A diagram used to show changes in data over time.
lower control limit

In a control chart, the lowest permissible value for an in-control observation. See
machine learning
A component of artificial intelligence that allows computers to identify patterns
within data without express instruction about where or how to find them.
machine learning
A component of artificial intelligence that allows computers to identify patterns
without being expressly told where or how to find them.
macro flow chart

A type of flow chart that shows a broad view of the progression of a series of
activities.
management by exception
A performance management technique requiring that a manager investigate
performance that falls outside an established, acceptable performance range.
management by objectives
A performance evaluation technique in which the employee and supervisor work
together to (1) set clear and attainable goals for the appraisal period and (2)
develop a plan for achieving those goals.
margin of error
A measure that indicates the likely range of inaccuracy of a given sample result
relative to a result based on the total population
market
A physical or virtual area in which buyers and sellers of a particular good or service
interact to exchange resources.

marketing innovation
The introduction of a new or significantly improved marketing method, product
design, product packaging, product placement, product promotion, or product
pricing structure.
market leadership
A company’s competitive position relative to its competitors in terms of market
share percentage.
market share
The percentage of an industry or market’s total sales that is earned by a particular
company over a specified time period.
MBO
See management by objectives.
mean
A measure of central tendency that identifies the numerical average of a series of
values.
measurement bias
A systematic error arising from the instruments used for data collection. See
measures of central tendency

Representative values that describe the values in the middle of a population. See
measures of dispersion
Representative values that describe the distribution of data around specified
central values.
median
A measure of central tendency that identifies the middle value in a set of values
arranged in numerical order.
mentoring
A process for developing employee talent over the long term.

merit-based compensation
A compensation plan that ties employee pay to individual employee performance
in an effort to reward higher performing employees with greater rewards.
milestone
An important interim goal for a project.
milestone schedule
A summary listing of major activities and key milestones. Sometimes referred to as
a master schedule.
mission statement
A statement of a company’s fundamental purpose or reason for existence.
mode
A measure of central tendency that identifies the value that appears most often in
a population.
model
An item or system that simulates something else.
monopolistic competition
A market with many sellers, similar products and services, a customer perception
of non-price differences between products and services, insignificant barriers to
entry for new sellers, and reliance on advertising.
monopoly
A market in which one firm, or a group of firms acting together, controls the
production and distribution of a product.
mortality study
A study of the longevity and ages at death of large groups of people See Module 3,
Chapter 9.
mortality tables
A visual tool that presents the number of deaths projected to occur within a given

group of people during a specified period of time.
most probable time

The amount of time that a given activity is most likely to require. See Module 2,
Chapter 5.
motivation
The force that gives purpose and direction to an individual’s behavior and can be
classified as either intrinsic or extrinsic.
negative reinforcement
The process of encouraging a specific behavior by immediately withdrawing or
terminating something that an individual finds unpleasant or negative.
network model
A visual representation of the activities in a process or project used to identify the
best use of resources. Sometimes referred to as a program evaluation and review
technique (PERT) network.
network path
A sequence of network activities from project inception to project end. See Module
2, Chapter 5.
NIGO rate
A measure of the percentage share of all incoming paperwork received with
incomplete documentation.
nonmedical underwriting
A process in which examination-based proof of medical insurability is not required
from a proposed insured.
nonrandom sampling
A sampling method that bases sample selection on specific, personally selected
criteria.
nonresponse bias
A type of sampling bias that occurs when some members of a sample are
inherently more likely to provide information than other members of that same
sample.
non-value-adding activity
Any activity that does not make the product or service more valuable to the
customer.
norms
The general standards of behavior that dictate how people should behave in a
given situation.
oligopoly
A market with few sellers, undifferentiated products or services, vigorous
advertising, and significant barriers to entry for new sellers.
operational risk
The potential for financial losses resulting from inadequate or failed processes
and controls, people, or systems.
operational strategy
A general action plan for activities that must occur within a budget dictated by the
company’s corporate plan.
operations
The activities any company undertakes to produce goods and services.
operations management
Managerial efforts to ensure that the products and services a company provides
to customers meet stated quality standards, are timely, and are delivered
profitably at the lowest reasonable cost to the company.
opportunity cost
A benefit that the decision maker forfeits or gives up in choosing one alternative
over another.
optimism bias
A tendency for innovators to form unrealistically positive expectations as to future
outcomes and to codify these expectations into plans and performance standards.

optimistic time
The shortest amount of time a given activity is likely to require. See Module 2,
Chapter 5.
organizational agility
An organization’s ability to adapt quickly to changes in the external environment.
organizational innovation
The introduction of a new or significantly improved organizational design in
business practices or workplace organization.
org chart
A hierarchically patterned array of boxes and lines depicting the formal lines of
authority, responsibility, and communication in an organization. See Module 2,
Chapter 5.
outlier
An extremely high or low value that is not representative of the other values in a
dataset.
parent report
A master or summary report.
Pareto chart
A bar chart that depicts how much each factor contributes to a specified defect,
with all sources arranged in descending order from left to right. See Module 2,
Chapter 6.
Pareto principle
A guideline which states that a small percentage of causes contributes to a large
percentage of the results.
payoff
The projected value of an outcome from a decision.
payoff analysis
A formal approach to decision making wherein each combination of a decision
alternative and a state of nature result in a potential payoff.

payoff table
A decision analysis tool that summarizes potential outcomes from a decision in a
tabular format.
PDCA cycle
See Plan-Do-Check-Act cycle. See Module 2, Chapter 6.
peer recognition program

A compensation plan in which coworkers can nominate another worker for a small
bonus because of exceptional behavior.
performance-based compensation
A compensation plan that ties employee pay to a company-wide goal such as
profits or sales, or perhaps a nonfinancial goal such as improved customer service
levels.
performance dashboard
A type of software that graphically displays the status of a company’s most
important performance measures.
performance standard
An established level of performance to which a company or an individual
compares actual performance.
permanent part-time work arrangement

A work arrangement in which an employee works less than the hours required for
full-time employment.
pessimistic time
The longest amount of the a given activity is likely to require. See Module 2,
Chapter 5.
pie chart
A graphical display that presents data in the shape of a circle divided into radial
sections.
Plan-Do-Check-Act cycle
A four-step control cycle technique for supporting quality improvement. See

PMI
— Project Management Institute.
PMO
See project management office. See Module 2, Chapter 5.
point estimate
An estimated result that is assigned a single value.
political bias
The tendency for innovators to turn a project into a competition and to try to
outdo one another in order to win.
population
A set of all items that share a specified characteristic.
positive reinforcement
The process of encouraging a specific behavior by immediately following it with a
consequence that the individual finds pleasing or positive.
PPM
See project portfolio management. See Module 2, Chapter 5.
predictive analytics
An analytical technique used to predict future events or customer behaviors and
anticipate conditions that are likely to cause negative consequences. See Module
3, Chapter 9.
prescriptive analytics
A type of proactive data analytics that uses data to suggest decision alternatives
and show the possible implications of each decision. See Module 3, Chapter 9.
prevention costs
Expenses for proactively limiting operational defects.
procedure

A set of instructions for following a series of steps in a regular, definite order to

accomplish a process.
process
A series of ongoing operations, work activities, or tasks ordered in a definite
sequence and directed toward achieving an end-result.
process analysis
A systemic evaluation of all aspects of a process to make the process faster, more
efficient, less expensive, and more focused on the customer. See Module 2,
Chapter 4.
process charter
A formal document that establishes the authority and accountability of a process
team.
process innovation
The introduction of a new or significantly improved production process or method
of delivery, including changes in techniques, equipment, or software. See Module
3, Chapter 10.
process management
A formal method of defining, documenting, evaluating, and improvement
resources and workflow so that processes better achieve the tasks they were
designed to accomplish.
process map
A graphical representation of a business process, typically using a recognized set
of graphical symbols.
product development team

A group that performs hands-on development of a new product.
product innovation
The introduction of a new product that is significantly different from existing
products in terms of its characteristics, materials, components, software,
functions, or intended uses.
project
A temporary, planned undertaking to achieve a specified result.
project baseline
A measurable starting point agreed upon by various stakeholders as performance
standards for a project.
project change
An acknowledged deviation from the original project plan.
project charter
A document that formally authorizes the project to take place and appoints a
project manager.
project closure authorization

An instrument used to document the formal closure of a project.
project constraints
Circumstances that place limitations on a project, and traditionally include scope,
time, and cost.
project cost budget

A type of budget that shows the expected operational costs of a project in its
entirety.
project deliverable
A measurable outcome from a project.
project lifecycle
The combination of all project phases, from project initiation to project closure.
project management
A framework for directing projects to completion that involves (1) setting project
goals, and (2) planning, monitoring, and controlling project tasks, resources, and
costs to meet those goals.
Project Management Institute

An organization that maintains a body of knowledge for the project management
community.

project management office

A unit with a permanent staff focused on project management activities. See
project manager
The person who oversees the project team.
project phase
A segment of the project lifecycle consisting of a set of related project activities.
project plan
A comprehensive, formally executed document used to guide a project through
closure.
project portfolio management

An approach to project management that consists of treating all company projects
as a portfolio and coordinating all projects with one another across the company.
In a project portfolio management approach, a committee analyzes a project for
both its intrinsic benefits to the organization and for its relative fit with the
organization’s existing resources, processes, and projects.
project schedule
A document that shows links between project elements, identifies dependencies,
and shows a sequence that satisfies time and other constraints.
project sponsor
Typically a company executive, the person who authorizes the project, provides
support and resources to the project, and communications project information up
the organizational chain of command.
project status
The project’s progress toward completion at a given point in time. See Module 2,
Chapter 5.
project team
The group of team members assigned to perform any portion of the project
activities.
punishment
The process of discouraging a specific behavior by immediately presenting an

undesirable consequence or removing something desirable.
QC
— quality circle.
qualitative research
Research that uses subjective data collection methods and produces data that is
difficult to summarize in numerical form.
quality analysis
Any type of research or investigation to understand an aspect of preventing
defects or meeting customer needs.
quality assurance
The activities a company undertakes to make certain the company delivers
satisfactory performance to customers.
quality circle
A problem-solving group of 5 to 10 employees who meet regularly to discuss
quality improvement, suggest ways to reduce costs, and present
recommendations to higher management.
quality management
The activities an organization conducts on an ongoing basis to plan, control,
measure, and improve its performance to ensure that its products or services
consistently meet or exceed customer expectations. Also called performance
management.
quantitative research
Research designed to generate easy-to-analyze numerical data.
random sampling
A technique in which each item of a population has a determinable chance, or
probability, of selection.
range
A measure of dispersion equal to the difference between the highest and lowest
values in a particular population.
range estimate
A result that includes possible values within specified limits.
RCA
— root-cause analysis.
referent power
Power that exists when a person can influence the behavior of others because of
others’ loyalty, respect, admiration, or a desire for that person’s approval.
response bias
A type of sampling bias that occurs when the way researchers word a question
distorts the answer.
reward power
Power that arises from a person’s ability to allocate incentives to others based on
behaviors or performance.
rework costs
The costs of correcting defective work.
role
A socially determined way of behaving in a specific situation.
root-cause analysis
A set of problem-solving methods and tools designed to determine the actual
causal factors that led to a particular incident or result.
rules engine
A software-based repository of key business process rules that can be consistently
applied in specified circumstances to produce the desired results.
salary survey
A type of comparison study in which employers share their compensation data
with an external researcher, who accumulates, analyzes, and presents the data to
study participants.
sales commission

An amount of money, usually a percentage of the sale amount, paid to someone

for selling a product or service.
sampling
A statistical technique used to examine a portion of a given group in order to
develop conclusions about the entire group.
sampling bias
An error in choosing participants that occurs when the method used to obtain
information from a sample results in a sample that is not representative of the
population being studied.
scatter diagram
A diagram used to check visually for a likely correlation between two variables.
schedule variance
The difference between the scheduled finish date for an activity and the actual
finish date.
scope creep
The practice of gradually modifying features of a project and its objectives without
formally addressing and negotiating changes with project stakeholders. Scope
creep can make it difficult to successfully complete a project as planned.
scope statement
A report that clearly states the limits on a project by specifying the project size,
resources, limitations, and deliverables.
scrum
A framework for managing the processes involved in software development. See
scrum master
A person who facilitates a scrum team by managing all of the business processes
required for software development.
SDT
See self-determination theory.

security token
A device used to generate a one-time-use code the user enters in order to gain
access to private company information.
selection bias
A type of sampling bias that occurs when the method of data collection
systematically excludes certain members of the sample.
self-determination theory
A motivation theory that proposes people have three basic psychological needs
for competence, relatedness, and autonomy.
semi-structured data
A type of data that includes a combination of structured and unstructured
elements.
sexual harassment
Any unwelcome sexual attention or conduct that creates an offensive or
intimidating work environment.
silo
Operational unit that operates in isolation from other operating units, not
understanding how their jobs relate to other operational units or how corporate
goals relate to their jobs.
simple moving average model

A forecasting model that uses the arithmetic mean of a specified number of the
most recent data values as the forecast value for the next period. See Module 3,
Chapter 8.
simple random sampling

A method of random sampling in which every member of the data population has
an equal chance of being included in the sample population.
simplicity bias
The tendency to believe that a complex outcome must have come from a complex
cause, and a complex outcome cannot have come from a simple cause. See

Six Sigma
A disciplined approach for defining, measuring, analyzing, improving, and
controlling quality by reducing process defects so that results fall within
established parameters.
size bias
A tendency to prefer large concepts instead of smaller ones.
skills-based pay
A compensation plan that rewards employees for developing and improving job
skills.
social acceptance bias

A consistent cognitive error based on a tendency for individuals to make socially
acceptable statements even when they feel something else. See Module 3, Chapter
8.
social media analytics

A descriptive analytics technique used to understand customers through activity
on blogs and social media networks.
specific boundaries
Boundaries that relate directly to an innovation project, such as the budget, time
available, or resources needed.
speech analytics
A descriptive analytics technique used to gain insight into customers’ attitudes
about a company by analyzing recorded speech.
spot bonus
A payment made to an employee immediately after the employee performs in an
exceptional way on the job or achieves a level of proficiency.
stakeholder
Any party that has an interest in how a company conducts its business.
standard deviation

A measure of dispersion calculated as the square root of the variance. In general,

the larger the standard deviation, the farther the values are from the mean.
standing committee
A permanent committee that company executives use as a continuing source of
advice.
stand-up meeting
A meeting during which employees stand up as they offer summaries about their
progress on an activity. The unintuitive feature of standing is intended to keep
meetings short. In some cases, these status checks don’t require standing or are
conducted virtually and still retain the name "stand-up meeting."
states of nature
Influences on the outcome of a decision that are not under the decision maker’s
control.
statistical analysis
The use of mathematical techniques for collecting, organizing, describing,
analyzing, and interpreting numerical data to support decisions.
statistical bias
A consistent or systemic error arising from a flaw in the research design. See
statistical validity
The degree to which an observed result can be relied upon and not attributed to
random error in sampling or measurement.
steering committee
A group of stakeholders with diverse company backgrounds who guide and
oversee the planning and implementation of a project.
steering controls
Organizational controls that proactively communicate expectations and try to
prevent problems from occurring.
stoplight indicators
Red, yellow (or amber), green, and sometimes blue symbols that indicate how
favorably the company’s actual performance compares with its performance

standards.
STP
See straight-through processing. See Module 2, Chapter 4.
straight-through processing
A fully automated process in which the steps in a specified transaction type are
conducted without human intervention.
stratified random sampling

A technique in which the user divides the population into segments, or strata, and
then selects a proportional number of items from each segment at random.
structured data
A type of data that exists in a fixed field within a record, data file, or spreadsheet;
allows for systemic organization; and is easy to enter, store, and analyze.
substitute products
Two or more products that customers can use to satisfy the same wants or needs.
systematic random sampling

A method of random sampling that involves selecting items from the population at
a uniform interval.
table
An orderly listing of data.
tactic
An action designed to support an operating strategy.
tasks
The smallest units in a process to undergo analysis.
telecommuting
A work arrangement in which employees work remotely away from the office.

ISO
— International Organization for Standardization.
A forecasting model that uses the data value(s) for the most recent period as the
forecast value(s) for the next future period.
time requirements budget

A type of budget that shows calendar units of time—days, weeks, or months—and
the expected amount of staff time required during each specified unit. See Module
2, Chapter 5.
time-series data
Information about a variable over successive periods.
time-series model
Forecast models that estimate unknown future values based on known, historical
data.
total quality management

A specific, process-oriented approach to quality management for creating an
organizational culture committed to continuous improvement.
TQM
— total quality management.
transactional work
Routine and repetitive tasks with little flexibility in how processes are completed.
trend analysis
A technique that involves forecasting the future movement of specified factors
based on observed historical patterns of change.
trust
A belief in the integrity, character, or ability of others.
unstructured data
A type of data that does not have a rigid pattern and can’t be organized

systematically.
upper control limit

In a control chart, the highest permissible value for an in-control observation. See
value-adding activity
Any activity that makes a product or service more valuable to the customer. See
value chain
A set of activities that a company carries out to create stakeholder value.
value stream
The continuous flow process of value creation.
variable
An item of data with a value that changes over time.
variance
A measure of dispersion calculated as the average squared distance between the
population mean and each individual item in a population.
variation
Changes from the norm that do not indicate a pattern of behavior. See Module 3,
Chapter 9.
virtual private network

A system that provides private access to authorized users who are not on location.
vision statement
A statement of where a company would like to be in the future.
WBS
See work breakdown structure. . See Module 2, Chapter 5.
weighted moving average time-series model

A forecasting model that assigns relative weights to data values used in a forecast
and finds the average of the values.
work breakdown structure

A graphical display of project elements that often includes an estimate of the labor
effort required for each project activity.
workplace bullying
The tendency of individuals or groups to covertly or overtly use aggressive or
unreasonable behavior against a coworker or subordinate that is threatening,
humiliating, or intimidating.

Operational Excellence for Insurance Professionals Answer Key | KEY.1
Answers To Practice Questions

Chapter 7 Chapter 10
1. ............................................................... 2 1. ............................................................... 1
2. ............................................................... 3 2. ............................................................... 2
3. ............................................................... 2 3. ............................................................... 3
4. ............................................................... 2 4. ............................................................... 3
5. ............................................................... 3 5. ............................................................... 2
6. ............................................................... 3 6. ............................................................... 2
7. ............................................................... 1 7. ............................................................... 3
8. ............................................................... 1 8. ............................................................... 4
9. ............................................................... 4
Chapter 8
1. ............................................................... 1
2. ............................................................... 3
3. ............................................................... 4
4. ............................................................... 1
5. ............................................................... 3
6. ............................................................... 2
7. ............................................................... 1
8. ............................................................... 3
9. ............................................................... 2
10. ............................................................... 2
11. ............................................................... 3
12. ............................................................... 3
13. ............................................................... 4
14. ............................................................... 4
15. ............................................................... 1
16. ............................................................... 2
Chapter 9
1. .............. ................................................. 1
2. ............................................................... 3
3. .............. ................................................. 4
4. ............................................................... 1
5. ............................................................... 1
6. ................ ............................................... 2
7. ............................................................... 4
8. ................ ............................................... 3

End of Module 3

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Operational Excellence for

Module 3 Portal with

Preface .................................................................................................... PREF.1

Module 1: People and Purpose (Chapters 1 – 3)

Chapter 1: The Insurance Company and Operations Management .... 1.1

Chapter 2: Aligning Operations with Corporate Strategies ......... ....... 2.1

The Strategic Alignment Matrix ................................................................... 2.20

Chapter 3: Creating a Culture of Excellence......................................... 3.1

Copyright © 2019 LL Global, Inc. All rights reserved. www.loma.org

Module 2: Business Processes (Chapters 4 – 6)

Chapter 4: Business Process Excellence ............................................. 4.1

Chapter 5: Project Management............................................................. 5.1

Chapter 6: Quality Management ............................................................6.1

Module 3: Decision Making (Chapters 7 – 10)

Chapter 7: The Decision-Making Process ............................................7.1

Chapter 8: Analysis and Modeling ........................................................8.1

Chapter 9: Data for Decision Making ....................................................9.1

Chapter 10: Innovation and Innovative Thinking ...............................10.1

Figure and Video Descriptions..............................................................DESC.1

Copyright © 2019 LL Global, Inc. All rights reserved. www.loma.org

Copyright © 2019 LL Global, Inc. All rights reserved. www.loma.org

Copyright © 2019 LL Global, Inc. All rights reserved. www.loma.org

Copyright © 2019 LL Global, Inc. All rights reserved. www.loma.org

Which of the following are examples of decisions made in insurance

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Organizational Effects on Decision

Figure 7.1 The Organizational Hierarchy of Decisions

Figure 7-1 Description

Decisions made at each level of management—corporate, business, or operational

Copyright © 2019 LL Global, Inc. All rights reserved. www.loma.org

Copyright © 2019 LL Global, Inc. All rights reserved. www.loma.org

In efficient and effective organizations, decision makers at the business and

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Operational decisions focus on the day-to-day implementation of

Decision making is not affected by the size of an organization.

Copyright © 2019 LL Global, Inc. All rights reserved. www.loma.org

The ABCDs of Decision Making

Figure 7.2 The ABCDs of Categorizing Decisions

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Cross-cutting decisions require effective collaboration among many different parts

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In the ABCD categories of decisions, a low-risk decision that is made

In the ABCD categories of decisions, cross-cutting decisions are decisions

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The Decision-Making Process

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Figure 7.3 Basic Steps of the Decision Making Process

Figure 7-3 Description

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Figure 7.4 Examples of Business Questions

Figure 7-4 Description

direction for a specific plan of action.

Framing the Decision Correctly

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Schuurmans also cautions against biases in decision framing. Confirmation bias is

Evaluating Decision Alternatives

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Companies often use dashboard systems that include values, projections, or

Dealing with Conflict

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Figure 7.5 Group Characteristics and Conflict

Figure 7-5 Description

Cooperative conflict requires an organizational culture that values diversity in