"Pencil Whip" – to complete a form, record, or document without having performed the implied work or without supporting data or evidence. Source: Wiktionary
Wiktionary states that this new term, "pencil whip," is popular among military personnel and auditors. It is a metaphor for checking off forms with made-up data so fast that the end of the pencil is whipping in the air.
The article "The Anatomy of Pencil Whipping" by Dr. Timothy Ludwig in the February 2014 issue of Professional Safety describes how this behavior is compromising the quality of safety data in the construction industry. But pencil whipping is a behavior that crosses industry boundaries.
During the 2000s, mortgages were being written with unsubstantiated and even fabricated information. This led to the 2008 economic crisis in the banking industry.
The insurance industry needs the information on which it is basing underwriting decisions to be reliable. But there is reason to believe that the reliability of check off format risk control underwriting analyses is in some cases questionable due to the phenomenon of pencil whipping.
Actual cases
This article will not surprise some in the insurance industry. Anecdotally, we believe that recognition of this problem is rising.
Recently we had the opportunity to evaluate some check-off format reports. Due to accidental multiple assignments, we visited two policyholders within days of prior visits by an inspection firm using check-off format reports. The insurance company that made the inadvertent multiple assignments allowed us to review the inspection company's prior reports.
In the first case the check-off report indicated that the policyholder was performing pre-employment physicals and drug testing. The insured's management confirmed that this was incorrect. The reported hours of operation and number of employees were materially incorrect. The box confirming that the roof was in good condition was checked, but in another section of the report the box confirming that the roof was inaccessible was also checked.
In the second case, the policyholder's designated management contact told us that the inspector had spoken to no one while on site, other than to introduce himself. He walked through the facility taking photographs and left without a closing conference. Nevertheless, all boxes on the check off report were checked. The report appeared superficially plausible, but the source of its information is unknown, since there was no discussion with the insured's management. As an example, the reported square footage of the facility did not match that shown on the application, and was not obtained from facility management. A substantial amount of the report consisted of photographs.
The trouble with "pencil whipping"
Pencil whipping leads to misunderstanding the true exposures of a book of business and of individual insureds. It limits the opportunity to improve the book of business over time because recommendations are directed at easy targets, and not necessarily the critical exposures.
Signs that it may be happening
Clues that underwriting reports are being pencil whipped:
- The unexpected is rarely found unless it is obvious.
- Reporting of serious problems is rare.
- There are lots of photographs and comparatively little narrative text. Photographs take little time to include in reports relative to text.
- Narrative text, when present, has incomplete phrases that are ambiguous in meaning, rather than full sentences that are clear.
- Responses to underwriting special requests are inadequate.
- Implausibly few recommendations are made.
- The recommendations that are made address common, easily identifiable problems that have straightforward solutions requiring little explanation.
- Recommendation wording is standardized and not tailored to the insured's specific situation.
- Fees are implausibly low considering the amount of time needed to complete the work properly.
- Some service companies have a strong preference for check-the-box report formats over narrative report formats. Narrative reports are far more difficult to pencil whip than check-the-box reports.
Why does pencil whipping occur?
We wish to emphasize that honest mistakes are not pencil whipping. Pencil whipping is the systematic practice in which information is provided without the implied work having been done or the underlying information confirmed.
Pencil whipping is especially likely when the time allowed to complete reports is insufficient for the work to be done. For example, completion of a risk control underwriting report requires, at a minimum:
- Preparation, which may involve review of the information provided with the request, analysis of claims history, and checking the insured's website for information on operations.
- Appointments, which in today's business environment often require multiple calls.
- Travel time to and from the site, which can be substantial in large metropolitan areas.
- Onsite time, which will include interview time, walking-around observation, and a closing conference in which recommendations are discussed.
- Report development.
- Quality control of the report before releasing.
Given the above time requirements to professionally perform the work, and that inspection firms' hourly rates are typically are in the range of $85 to $140, would you be surprised to learn that some inspection firms are offering underwriting survey reports at prices beginning at less than $100? We would argue that such minimal fees drive pencil whipping. But pencil whipping is by no means limited to such extraordinarily low-fee work. When the implied scope of the work is compared to the service fee, the quality of higher fee assignments can be equally questionable.
There are a number of factors influencing why inadequate time may be allocated. Use of a "one size fits all" check the box format combined with arbitrary budget limitations can result in unrealistic expectations. Selection of service based upon cost alone favors firms willing to pencil whip reports and eliminates firms that consider pencil whipping unethical.
When the time allowed to properly perform the work is inadequate, service representatives reasonably assume that everyone involved is aware of this and that pencil whipping is understood and expected. The service representatives believe that the "product" is a plausible report for the file, with all the boxes checked, and not quality information and professional advice.
Check-thebox report formats are equally plausible whether they are supported by actual data or pencil whipping. It is far easier for service representatives to lose their pride of authorship with check off forms than with narrative reports in which they can express themselves professionally.
And finally, service representatives may believe that they have no choice but to pencil whip, or lose income or even their livelihoods. Service representatives can find themselves in an ethical dilemma that they themselves did not create and cannot solve.
What to do about pencil whipping
An essential first step is to establish reasonable expectations for the scope of work and the time needed for its completion.
Quality should be understood as the accuracy of relevant information, not as the number of boxes checked, number of pages, and number of photos taken.
To the degree practical, increase the proportion of narrative information in reports. Narrative encourages service representatives to engage policyholders in discussion and is much more difficult to pencil whip.
Evaluate the indicators of pencil whipping as part of the quality assurance process.
Pencil whipping can become an ingrained organizational behavior. After consultation and evaluation, be prepared to replace service providers that are unable or unwilling to stop pencil whipping.
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