The Effect of Uncertainty on Estimation

There is always some element of uncertainty in the estimation of the total cycle time, financial benefits or cost for any extended project. The program evaluation review technique (PERT) is one example of the use of estimation in cycle time in project management. In the broader scope, this technique falls under the discipline of tolerance analysis.

Any business process you consider will consist of not just one, but many successive steps to achieve an outcome. We use the techniques developed for the construction of mechanical devices and apply them to the estimation of cycle time for business processes and financial risk for pricing.

Cycle Time for Insurance Policy Underwriting

The term for the entire process of insuring a risk is called underwriting. The usual practise is to have a large number of insurance agents contacting customers and while the preparation of the policies themselves is undertaken by an centralized underwriting team who evaluate the applications, price the risk and write the policies.

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The Model

The process begins when an insurance agent makes a request for underwriting to the centralized insurance underwriting facility. The request is first distributed to the underwriting team assigned to that agent for review, risk evaluation and classification. The underwriting team hands the policy to the pricing team, who calculate the schedule for paying the premiums. The policy is finally passed to the writing team who assemble the final document before it is electronically sent to the originating agent for presentation to the customer.

A Monto Carlo simulation of the process was conducted using Crystal Ball. The results showed the range of expected cycle times and identified the key process steps influencing the wide range of cycle times.

Financial Impact of Process Risk - Medical Claim payments

We are on the project team directed towards reducing the variation in time for processing medical claim payments. As part of the Measure phase we must assess the financial risk associated with the existing process. We have surveyed the customers and know that errors causing delays in payment are a common complaint and require a great deal of time on the part of the business to identify and correct. The belief from management is that the error rate is relatively low, on the order of 1-2 percent. Our job is to estimate the span of the problem in financial terms to baseline the process and get buy-in from management.

We have used a check sheet to track the proportion of errors of different types and their associated execution and delay times. Historical data on size of claims has been supplied by finance. The difficulty in summarizing the risk is that most of the claims are relatively small with a few very large claims.

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The Model

The process begins when documents arrive at the processing center to become part of a medical claim. These documents could be physician's reports, letters from employers, claim forms, financial statements, etc. They must all be received, scanned and indexed before becoming part of a case file. When all the necessary documentation is available, then a case worker can assess the file, approve payment and request a payment to be made to the claimant.

A Monto Carlo simulation of the process was conducted using Crystal Ball. The results showed the range of expected cycle times and financial impact on the customer. It also identified the key process steps influencing the wide range of cycle times and financial impact.

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