This paper describes how rising settlement costs for insurance companies are largely caused by systematic, long-term underinvestment in claims adjusting capacity. Whereas it's easier to blame lawyers and frivolous lawsuits, this explains how an insurance company's own policies led to increased payouts and lawsuits.

When management puts claims adjusters under pressure to increase the speed at which they process claims, adjusters make claims payouts that are too large in some cases and provoke litigation in other cases. This puts the company under even more pressure to increase claims processing speed.

Senge and Sterman note in their paper: "The insidious aspect of these dynamics is the gradual shift in the burden of controlling the workload from capacity expansion to quality erosion. The erosion in quality standards becomes self-reinforcing: Once time pressure is relieved, so are the signals that more capacity is needed. In the short run, slipping quality standards works. Pending claims drop. Time pressure is relieved. Management will not authorize an increase in adjuster head count since there is no apparent problem. In fact, management attention shifts to other problems, for example, what appears to be an inadequate legal staff to handle a growing volume of litigation -- litigation brought on, in many cases, by insufficient adjuster capacity."

This is a great example of
"We have met the enemy... and he is us."
                  Walt Kelly, The Pogo Papers.

It illustrates an important systems thinking lesson: When a company examines how its structures and policies create problematic behavior, it can take positive steps to improve performance. When it resorts to blame, it cannot.

This same dynamic could apply to any company, such as a medical or other manufacturer, that places insufficient emphasis on quality.

Link (970K, 7 pages)