This is the third post in my series about the ethical issues associated with insurance claims. For the insurance sector, being in a conflict of interest is like having the flu – there’s invariably nothing unethical about it; it’s just something that happens to us all. So the ethical question to be addressed is not how you avoid conflicts of interest, but how you recognise and respond to them.
Recognising and responding to conflicts of interest is not something the insurance sector has always been good at. The impact of this has ranged from multi-million pound fines for systemic failures, to a general erosion of trust with everyday policyholders. That said, it’s also important not to treat conflicts of interest as accusations – they are just situations that need to be handled properly.
Let's look at three types of conflicts of interest that occur in insurance claims, starting with the most obvious one, between the insurer and the policyholder. There’s a tension between the insurer wanting to run a profitable business, with claims as its biggest expense, and the policyholder wanting to get a full and fair settlement of their claim. In between them sits a policy wording, the details of which are much more understood by one side than the other.
This can lead to an atmosphere of unhealthy tension, with one side viewed as using their knowledge and power to cut claim settlements in order to raise profits, and the other side viewed as perennially seeking to get more out of their claim through exaggeration or fraud. Conflicts of interest go into a dangerous slide when these perceptions are left to feed into, and reinforce, the other.
Many insurers don't sign up to this simple view, instead seeing a happy claimant as a more profitable long term customer than an unhappy one. Delivering on such a commitment requires careful attention to how information asymmetry is managed and how a culture of honesty and integrity is maintained within the claims department.
A second type of conflict of interest lies in the various layers of the insurer’s claims supply chain. The supplier often seeks to justify its appointment with a keen eye on cost management and procedural fulfilment, the upshot of which can often leave the quality of work and the fair treatment of customers struggling to achieve an equal voice. That conflict between cost, quality and fairness will never disappear altogether, but an insurer who wants to turn happy claimants into profitable customers needs to be adept at working in non-financial ways.
The third layer of conflict of interest involves one insurer covering both parties to a claim, or in similar fashion, an adjuster being on the panel of the insurers of both parties to a loss. This should be familiar ground to most insurers and adjusters who should be responding to such situations with clear and well established procedures.
Historically, a simple structure to a claims management service meant that conflicts of interest were more easily recognised and dealt with. This was because lines of control were shorter, clearer and closer to the customer. However many insurers now manage their claims through complex networks of product and service providers, with some prepared to outsource the whole lot. As a result, conflicts of interest have multiplied, both in size and complexity. This has resulted in two trends: firstly, the scope of conflicts of interest at play within a supply chain are often being underestimated, and; secondly, the controls put in place for conflicts of interest are often thought to be more effective than they really are. An eerie self confidence seems to exist at times around conflicts of interest within claims management, something that history indicates has not always been earned.
To resolve such issues, some insurers may be tempted to introduce more detailed controls for managing conflicts of interest and to use contract clauses to reinforce their adoption. Of course controls needs to be adequate and training in their use tailored and focused, but they are effective only up to a certain point. The lynch pin in their adoption and use is the ethical culture within the organisations concerned. I'll look at ethical culture in a later post, but suffice to say at this stage, that unless people want to use such controls and are supported in this by their firm, they are always going to struggle for attention against more attractive ones like reward and recognition.
So what can an insurer do now that would make a difference to their handling of conflicts of interest? I mentioned earlier that one of the main problems has been too narrow a scope for the conflicts of interest being addressed. One way to start tackling this issue is through constructing a comprehensive ‘relationships map' for their claims service, in which is set out all of the organisations involved and the different relationships that they have with each other. By orientating this map correctly and recognising the various layers of relationship (and what flows along them) between users and providers, you’ll start to get a clearer picture of the ethical risks a claims department faces from conflicts of interest.
In my next post, I'll look at an issue that was on UK Parliamentarian's radar in 2015 - privacy and in particular, surveillance.
For an up-to-date overview of the key ethical trends in insurance claims, read this post about 20 changes influencing the ethics of insurance claims. It was one of the most popular posts of 2017. James Ruotolo, a director at the SAS Institute, described it as "a 'must read' for insurance execs."
Duncan is the founder of the Ethics and Insurance blog and the author of its many posts. He's a Chartered Insurance Practitioner, having worked 18 years in the UK market. As an adviser to many firms on ethics issues, as well as a regular conference speaker, he is one of the leading voices on ethics and insurance.