Why do insurers fail? It turns out it has a lot to do with ethical problems. So while insurance can be a complicated business, when things go wrong, it’s largely down to very human factors. It also means there’s plenty that insurers can do to avoid this grim fate.
A ‘failure of management or staff competence’ came out top of the five main causes of insurer failure in the European Union. The research, by the European Insurance and Occupational Pensions Authority (EIOPA), covered the period 1999 to 2016.
So what does a ‘failure of management or staff competence’ look like in real life? EIOPA described it in three ways:
The second and third of these have a clear ethical dimension. A lack of integrity is self evident, and conflicting objectives is just another way of referring to conflicts of interest.
‘Weaknesses in the face of inappropriate group decisions’ has two components. Firstly, those ‘inappropriate group decisions’. These will include some of the common behavioural biases that can often influence the way in which we make decisions. Here are three common ones that business sectors like insurance are prone to…
And the second component here is of course that reference to 'weaknesses'. Not enough people have been prepared to stand up and challenge questionable decisions. Clearly the new rules on whistleblowing could improve matters, but a lot more will come down to having the confidence to make that challenge in the first place. And such confidence comes from being familiar with ethics and how to use it. More on this in the training paragraph below.
Now you may be thinking that surely a conflict of interest or two shouldn’t cause insurer failure. Yet conflict of interest can easily act like snowballs, growing in size and significance as their consequences roll out, picking up all sorts of things along the way, until they end up defining that person or the firm they’re an executive at. Here's an example.
Could this happen at your firm? It’s certainly possible if all three of those aforementioned three ways become part of its culture. It happened at this well known UK insurer. So the $64,000 questions are clearly going to be these: are you monitoring for them? Do you have controls to limit them? Do you train your people to overcome them? When was an audit last done on these effectiveness of these things?
Let’s keep with that training angle for a minute. Your firm may be full of good people, well trained in underwriting and claims. Surely that’s enough? Not at all. When it comes to tackling conflicting objectives or a reluctance to challenge inappropriate group decisions, the training that is most needed is around ethical decision making and the handling of ethical dilemmas (more here). These give people the skills and confidence to bring ethics into the everyday decisions they make, or that they seen others making.
The EIOPA research looks back over a recent 17 period. How representative will that period be for the insurance market going forward? Two factors are at play here. One is that that 17 year period encompassed the financial crisis around 2008. Another is that the insurance market is changing in significant ways and not all insurers will make the right decisions. The least we can say with some certainty is that there is unlikely to be any significant decrease.
The reasons for insurer failure provide lessons that present day insurers should pay heed to. At the top of that list is addressing ethics.
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.