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 in the future. The common goal of these activities is to achieve economies of scale and scope. While on paper the changes may appear promising, in practice it is often impossible to realize the full extent of the anticipated benefits because success largely depends upon people, not balance sheets. One need only to examine such costly failures as the AOL/Time Warner and Daimler/Chrysler mergers to realize the importance of looking beyond the numbers.

An area that is particularly vulnerable to the ripple effects of volatility during major organizational changes is reserving. In addition to its basic function of setting aside the proper amount of funds for future claim payments, reserving indicates to actuaries whether or not the product is priced correctly. If reserves are artificially low, then actuaries may be inclined to recommend a reduction in price, thereby failing to charge enough for the risk. However, if reserves are artificially high the potential for investment income is unnecessarily reduced. In both cases organizations risk giving their owners and shareholders erroneous information about their financial stability and profitability. Consequently, it is imperative for reserves to be set consistently across the organization.

The trouble with calibrating reserving practices after an acquisition, merger, or a major consolidation is that companies often use different reserving methods. While individual case, roundtable, average value, formula, expert system, and loss ratio methods all endeavor to appropriately value the claim, they can arrive at disparate amounts. Despite the differences, it is often easy to identify a company's reserving method, then simply communicate the desired replacement; however, if this is where management involvement ceases, inconsistencies in reserving will remain. Inconsistency happens because there is an inherent subjectivity in determining reserves. Claim departments are like subcultures with distinct rules, beliefs, expectations, morays, and taboos. All of those distinctions may be expressed in standard operating procedures, but more often they take the form of unwritten codes of practice. In some cases, these codes have a greater influence on the claim handling process than the published rules do.

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

Sources of Information Claim adjusters rely on a variety of internal and external sources to give them the information they need to reserve claims. Adjusters become accustomed to the availability of this information but more importantly, they learn how to interpret the information from these sources. During acquisitions, mergers, and consolidations, these sources are often altered in order to standardize procedures. Even with standardization, managers should not assume that if given the same information, claim adjusters will arrive at the same reserving amounts.

While adjusters who are not used to the new information may understand it technically, they still need time to understand it contextually -- that is, interpret it according to the culture. For example, if the acquiring company employed some type of evaluating software for its bodily injury claims, adjusters from the target company that might be familiar with concept of evaluation software would still need to learn how adjusters from the acquiring company factor the information into their reserves. Without learning how to interpret the information contextually, the newly aligned adjusters will simply use their previous culture's perspective to interpret the information.

Structure and Workflow Reserving is also influenced by the structure and workflow of the claim department. Some claim departments use a team approach or a buddy system in which adjusters partner with each other to handle a pool of claims. In other organizations adjusters have sole responsibility of a particular inventory.

In addition to the structure, claim departments can also employ a generalist or a specialist model. The generalist model gives adjusters full responsibility for all or most aspects of the claim, and often work on all types of exposures, whereas in the specialist model adjusters are responsible for a particular aspect of the claim or a specific exposure type. Adjusters who are accustomed to working closely with others throughout the claim handing process may unknowingly rely on other people's perspectives, even when they are forced to decide for themselves due to a change in responsibility. Likewise, adjusters who work independently might find it difficult to consider other people's perspectives before setting reserves.

Management and System Oversight Along with structure and workflow, claim departments use authority level protocols and system flags for reserving oversight. The lower the payment authority, the less independence a claim adjuster has to set reserves and make payments; however, they also have more experience articulating their rationale. By contrast, claim adjusters who have been given a relatively high amount of payment authority must learn to articulate their rationale.

There is further opportunity for oversight with the proliferation of predicative analytic software in claims, as managers are able to use system flags to help adjusters identify important information about the claim. If a claim adjuster is coming from an environment where these flags are widely used, they may overlook details without such promptings from the system. Conversely, if a claim adjuster is coming from a relatively primitive environment, they might be overwhelmed by the amount of information 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 largely data driven. Managers use a combination of cycle time, productivity, and financial reports to direct day to day operations. These measures convey what is important to the organization to claim adjusters.

Metrics, however, also have unintended consequences. If an organization seems to emphasize a particular measure over another, claim adjusters may unwittingly learn to favor that measure when reserving. For example, if enforcing policy provisions is seen as a higher priority than closing claims, claim adjusters may set higher reserves to account for potential litigation. If this practice persists, claim adjusters may forgetthat they are factoring that measure into their reserving even after the underlying metrics have been 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 that result from the mixture of marketing channels and tiers create a book of business that is unique to each organization. Like employees from other customer facing departments, claim adjusters are usually aware of this unique quality because of their interactions with policyholders. This familiarity may lead to assumptions about the book of business that influences reserving. Claim adjusters from a company with a non-standard book of business may instinctively reserve for the worst case because of low coverage limits, whereas those from a preferred carrier may reserve for best case because of the availability of limits.

Communicating a new reserving philosophy in a roundtable or an official communication from management may not be the most effective way to calibrate reserves following a company change. Because claim adjusters are often unaware of the subtle factors that influence their reserving, establishing a new method could result in adjusters over-thinking their reserving practices. Instead, they must be given the opportunity to explore these influences in a non-judgmental environment. Companies could allow for this by giving them a chance to talk about practices, processes, and expectations that underpinned their perspective on reserving prior to the change, then building a shared vision of future reserving practices as a department.

It is important to remember that this should not be a goal-oriented project where the objective is just for everyone to produce the same outcome. Claim adjusters, like all employees, need to find meaning in their work in order to truly succeed. A huge barrier to developing this meaning is a lock-step approach to profession practice that robs employees of the opportunity to engage in their jobs with their hearts, as well as their minds. To achieve this level of engagement and the quality of results that come with it, claim managers should seek to bring about a harmony of principle rather than just a consistency of practice. The result will be adjusters who not only see the big picture but help to paint it.

David W. Paredes, M.Ed., CPCU, is Professional Development Manager at Unitrin Direct Insurance and Adjunct Instructor at Drexel University's Goodwin College of Professional Studies.