Are insurance firms taking conflicts of interest seriously enough? It’s a question that is needs addressing, given recent headlines. So what should insurance firms check for when it comes to being better at conflicts of interest? Here are nine suggestions.
Three recent events have drawn attention to conflicts of interest in insurance:
- the former executives of a UK legal expenses insurer on trial for fraud in its claims supply chain;
- the leading Australian wealth management firm who has admitted lying to regulators for years about charging customers for services it didn’t provide;
- the loss adjusting firm who received record fines for unlawfully obtaining and disclosing personal data about a claimant.
At the top of an firm’s must do better’ checklist should be to stop seeing conflicts of interest as just a set of inputs: for example, a policy, procedures and the like. They’re important but still only secondary to what really matters, which are the outcomes. There’s no point ticking off all your inputs to managing conflicts of interest in insurance, if you don’t give as much, if not more, attention to the outcomes that are generated. Are these identified, and are they being tracked and reported?
Next on the list should be to people’s attitude towards conflicts of interest. Make sure the culture doesn’t equate having lots of good people at your firm, with the firm then having no conflicts of interest. Of course there’s lots of good people in insurance (I’ve worked with some great ones too), but that doesn’t mean they’re not capable of making some poor decisions. It does happen - I’ve seen this happen before my very eyes on more than one occasion, with disastrous consequences for one firm in particular.
Some people may purposely decide to ignore the conflict of interest for reasons of personal gain, or just making life easier. And it will be these people that will be most impacted by the next item on the list. Many conflicts of interest in insurance happen because those involved believe that no one will notice. Those days will soon be over, for the tools making up something called SupTech (supervisory technology) will soon allow regulators to pin point conflicts of interest with ease (more here).
If you align SupTech with the accountability of the Senior Managers and Certification Regime, then the ball for such behaviour will land firmly in the lap of the senior managers named on their firm’s responsibility map. So if they’re setting targets that make conflicts of interest more likely, SupTech will identify the outcomes and draw a line through those targets to the person responsible for setting them. Cue a re-application to remain certified.
Next on the list should be to take conflicts of interest in insurance as a warning sign that more serious misconduct might be present. They are often found to lead to much more serious behaviour, such as bribery and corruption (more here). The allegations being made against the senior insurance executives mentioned above will have started with a plain and simple conflict of interest being ignored.
The Gross / Net Risk
One reason people don’t see conflicts of interest in insurance is because they assume all will be fine because the right policies and procedures in place. Yet some insurance firms have learnt to their high cost (more here ) that what is called the gross / net risk (more here ) cannot be ignored. This is the difference between the processes being in place and people actually using them.
After gross/net risk on the list should be a simple test – take each of the firm’s senior directors aside and ask them to talk to you about conflicts of interest for just one minute. Encourage them not to engage in too much repetition, deviation or hesitation! They don’t have to give a brilliant performance, but it should be one that is coherent and considered. And if they struggle, get them some training.
I included all senior directors in that last point, and not just obvious ones like broking or procurement. That’s because conflicts of interest in insurance are pervasive. Underwriting, claims, broking, marketing and adjusting all have them at the heart of their work. And, given the cost of the repercussions of getting them systemically wrong, next on the list should be the inclusion by default of conflicts of interest on the material risk schedules of all insurance firms.
‘By default’ does not of course mean compulsory, for it still allows a firm to give reasons for not including conflicts of interest in their risk schedule. And this brings me to the last item on the list, which is for each firm to undertake a risk assessment of their conflicts of interest. It’s not rocket science – I set out a straightforward approach in this guide. What this does is to make decisions on conflicts of interest more informed ones. And by turning it round so that not including them in the risk schedule has to be justified, it makes those decisions more reflective ones as well.
Some parts of the insurance market have got fat on a relaxed attitude to conflicts of interest. The advent of SupTech should put those happy to ‘have their cake and eat it’ on notice for a regulatory crash diet.
The 9 Points in Summary.
- judge your firm’s conflicts of interest programme on its outcomes, not its inputs;
- don’t think that conflicts of interest are just down to bad people; even good people get into them;
- prepare for more invasive scrutiny of conflicts of interest by supervisory technology;
- unaddressed conflicts of interest often lead to more serious misconduct so don’t ignore them;
- remember the difference between having procedures in place and people actually using them;
- make sure senior executives can speak the language of conflicts of interest;
- recognise that conflicts of interest exist in all functions within insurance firms;
- adopt an ‘apply or explain’ approach to conflicts of interest as an item in schedules of material business risks;
- take informed decisions through a conflict of interest risk assessment.