Ethical Awareness for Underwriters: pt3 – over optimism

  • 25 August 2016

Despite selling a product that’s based upon risk and losses, insurance people are actually quite an optimistic bunch. And that’s good, for it creates a shared sense of purpose and professionalism, and facilitates innovation and risk taking. Yet let that optimism build too much and it can run away with itself. The nature of insurance mean that underwriters have to be on their guard against over optimism.

That’s because over optimism can create blind spots. Thinking that only good things are bound to come out of something leads us to dismiss the possibility of something going wrong, even if those consequences are staring us in the face. We may firmly believe that what we’re doing is right, but fail to see that everyone else is raising their eyes in amazement. So firms may have honestly held but irrationally optimistic views of a project or product’s prospects, only to subsequently find reality shooting it down and themselves in at least the court of public opinion.

This is not the same as saying that optimism is bad: far from it. Underwriters invest a lot of time and effort into designing, trialing and launching new products and services. They have to push for their proposal to be signed off and to be the one to have time and money invested in it. The process demands optimism.

So, let’s say things go well. Expectations then build, and fears as well, that competitors will want to copy your success. People suggest that if it works with that market segment, then surely it will work with those other segments as well. And after all, the product has things in it that others could value. Why go back to the drawing board, when you have something tried, tested and successful already at hand?

Comments like “let’s make the most of it while we can” start to be heard, along with what in ethics are called rationalisations, such as “no one will really be worse off” and “I’ve worked hard on this product: I deserve this success”. These are classic signals of good people making a bad decision.

When success confirms that original optimism, and then reinforces it, there is a danger that this starts to introduce an irrational level of optimism. Caveats and constraints recognised in the product’s original design are forgotten, reinterpreted as not as significant as originally thought. Differentiations within market segments become blurred, with over optimism causing a loss of focus.

So how can insurers and their underwriters guard against this? Three ways stand out. Firstly, know your markets very well and do your homework on the needs of the customers in each segment. Secondly, have a robust product governance process, and one that includes a distinct ‘customer voice’ and covers the product’s lifecycle. This helps maintain a product’s boundaries over time and reduces the risk of groupthink. And thirdly, make the product development process as clear, quick and smooth as possible, to ensure the success of one product is emulated through adaptation rather than duplication.