Recently, the company my friend worked for changed its vacationpolicy from an accrual system to a PTO model in an effort tostandardize its HR policies with the company it acquired. Under theaccrual system employees were allotted a certain number of days touse for vacation, illness, or personal time. Even though he wasgiven six sick days a year, he never used them. He might haveconsidered taking one for a major dental procedure, but he wouldnever have taken a day just because he was feeling under theweather. For those in supervisor positions at his company it wasjust not done, which meant that every year he lost six sickdays.

As with any change, there are winners and losers, but there areoften also some who are stuck in the middle. While the amount oftime off my friend received under the new PTO model was technicallyless than the combined amount he had under the accrual system sincethe days were no longer classified as vacation, sick, or personaldays, there were no more taboo days. Still, like many othermanagers, he struggled to adjust to the new system. Near the end ofthe first year that the PTO system went into effect, HR sent out anemail reminding everyone to schedule their remaining days. Since myfriend thought that it would irresponsible to use all of his days,he left two or three on the books. Those days were subsequentlytaken from him because the PTO policy was use or lose. Of coursethat didn't bother him, as he was still approaching his time off ashe had under the accrual system -- managers simply don't use all oftheir allotted days.

After the holidays, his boss, a manager from the acquiredcompany, reprimanded him for not using all of his PTO. My friendwas shocked; he thought he was doing what every good manager shoulddo. Instead, he was told that the company ran into all types ofaccounting problems when employees didn't use their PTO. Hismanager also felt that he was setting a bad example for others bynot honoring the company's mission which included supporting aproper work/life balance. Part of the reason he had misinterpretedthe company's new PTO policy may have been because the HRdepartment spent so much time managing possible dissent that theyfailed to help standardize the interpretation of the newpolicy.

Achieving Harmony

In recent years, billions of dollars have been spent on mergers,acquisitions, and major consolidations in the insurance industry,and analysts predict that the amount will continue to increase inthe future. The common goal of these activities is to achieveeconomies of scale and scope. While on paper the changes may appearpromising, in practice it is often impossible to realize the fullextent of the anticipated benefits because success largely dependsupon people, not balance sheets. One need only to examine suchcostly failures as the AOL/Time Warner and Daimler/Chrysler mergersto realize the importance of looking beyond the numbers.

An area that is particularly vulnerable to the ripple effects ofvolatility during major organizational changes is reserving. Inaddition to its basic function of setting aside the proper amountof funds for future claim payments, reserving indicates toactuaries whether or not the product is priced correctly. Ifreserves are artificially low, then actuaries may be inclined torecommend a reduction in price, thereby failing to charge enoughfor the risk. However, if reserves are artificially high thepotential for investment income is unnecessarily reduced. In bothcases organizations risk giving their owners and shareholderserroneous information about their financial stability andprofitability. Consequently, it is imperative for reserves to beset consistently across the organization.

The trouble with calibrating reserving practices after anacquisition, merger, or a major consolidation is that companiesoften use different reserving methods. While individual case,roundtable, average value, formula, expert system, and loss ratiomethods all endeavor to appropriately value the claim, they canarrive at disparate amounts. Despite the differences, it is ofteneasy to identify a company's reserving method, then simplycommunicate the desired replacement; however, if this is wheremanagement involvement ceases, inconsistencies in reserving willremain. Inconsistency happens because there is an inherentsubjectivity in determining reserves. Claim departments are likesubcultures with distinct rules, beliefs, expectations, morays, andtaboos. All of those distinctions may be expressed in standardoperating procedures, but more often they take the form ofunwritten codes of practice. In some cases, these codes have agreater influence on the claim handling process than the publishedrules do.

Therefore, in order to properly calibrate reserving practices,there must be an investigation of the elements that influence theinterpretation of the reserving methods being used. Influences areoften unwritten, or are embedded in the organization's culture,making them difficult to identify. Claim adjusters may even beunaware of their existence. These influences can include sources ofinformation, departmental structure and workflow, management andsystem oversight, performance metrics, and the book ofbusiness.

Sources of Information Claim adjusters rely on avariety of internal and external sources to give them theinformation they need to reserve claims. Adjusters becomeaccustomed to the availability of this information but moreimportantly, they learn how to interpret the information from thesesources. During acquisitions, mergers, and consolidations, thesesources are often altered in order to standardize procedures. Evenwith standardization, managers should not assume that if given thesame information, claim adjusters will arrive at the same reservingamounts.

While adjusters who are not used to the new information mayunderstand it technically, they still need time to understand itcontextually -- that is, interpret it according to the culture. Forexample, if the acquiring company employed some type of evaluatingsoftware for its bodily injury claims, adjusters from the targetcompany that might be familiar with concept of evaluation softwarewould still need to learn how adjusters from the acquiring companyfactor the information into their reserves. Without learning how tointerpret the information contextually, the newly aligned adjusterswill simply use their previous culture's perspective to interpretthe information.

Structure and Workflow Reserving is also influenced bythe structure and workflow of the claim department. Some claimdepartments use a team approach or a buddy system in whichadjusters partner with each other to handle a pool of claims. Inother organizations adjusters have sole responsibility of aparticular inventory.

In addition to the structure, claim departments can also employa generalist or a specialist model. The generalist model givesadjusters full responsibility for all or most aspects of the claim,and often work on all types of exposures, whereas in the specialistmodel adjusters are responsible for a particular aspect of theclaim or a specific exposure type. Adjusters who are accustomed toworking closely with others throughout the claim handing processmay unknowingly rely on other people's perspectives, even when theyare forced to decide for themselves due to a change inresponsibility. Likewise, adjusters who work independently mightfind it difficult to consider other people's perspectives beforesetting reserves.

Management and System Oversight Along with structureand workflow, claim departments use authority level protocols andsystem flags for reserving oversight. The lower the paymentauthority, the less independence a claim adjuster has to setreserves and make payments; however, they also have more experiencearticulating their rationale. By contrast, claim adjusters who havebeen given a relatively high amount of payment authority must learnto articulate their rationale.

There is further opportunity for oversight with theproliferation of predicative analytic software in claims, asmanagers are able to use system flags to help adjusters identifyimportant information about the claim. If a claim adjuster iscoming from an environment where these flags are widely used, theymay overlook details without such promptings from the system.Conversely, if a claim adjuster is coming from a relativelyprimitive environment, they might be overwhelmed by the amount ofinformation that is available to them.

Metrics The old adage, 'what gets measured gets done,'is especially true in claim work because it is perceived as largelydata driven. Managers use a combination of cycle time,productivity, and financial reports to direct day to dayoperations. These measures convey what is important to theorganization to claim adjusters.

Metrics, however, also have unintended consequences. If anorganization seems to emphasize a particular measure over another,claim adjusters may unwittingly learn to favor that measure whenreserving. For example, if enforcing policy provisions is seen as ahigher priority than closing claims, claim adjusters may set higherreserves to account for potential litigation. If this practicepersists, claim adjusters may forgetthat they are factoring thatmeasure into their reserving even after the underlying metrics havebeen altered.

Book of Business Insurance companies use direct, agent,and affinity channels to market their products to non-standard,standard, and preferred customers. The various combinations thatresult from the mixture of marketing channels and tiers create abook of business that is unique to each organization. Likeemployees from other customer facing departments, claim adjustersare usually aware of this unique quality because of theirinteractions with policyholders. This familiarity may lead toassumptions about the book of business that influences reserving.Claim adjusters from a company with a non-standard book of businessmay instinctively reserve for the worst case because of lowcoverage limits, whereas those from a preferred carrier may reservefor best case because of the availability of limits.

Communicating a new reserving philosophy in a roundtable or anofficial communication from management may not be the mosteffective way to calibrate reserves following a company change.Because claim adjusters are often unaware of the subtle factorsthat influence their reserving, establishing a new method couldresult in adjusters over-thinking their reserving practices.Instead, they must be given the opportunity to explore theseinfluences in a non-judgmental environment. Companies could allowfor this by giving them a chance to talk about practices,processes, and expectations that underpinned their perspective onreserving prior to the change, then building a shared vision offuture reserving practices as a department.

It is important to remember that this should not be agoal-oriented project where the objective is just for everyone toproduce the same outcome. Claim adjusters, like all employees, needto find meaning in their work in order to truly succeed. A hugebarrier to developing this meaning is a lock-step approach toprofession practice that robs employees of the opportunity toengage in their jobs with their hearts, as well as their minds. Toachieve this level of engagement and the quality of results thatcome with it, claim managers should seek to bring about a harmonyof principle rather than just a consistency of practice. The resultwill be adjusters who not only see the big picture but help topaint it.

David W. Paredes, M.Ed., CPCU, is Professional DevelopmentManager at Unitrin Direct Insurance and Adjunct Instructor atDrexel University's Goodwin College of ProfessionalStudies.