The insurance sector will face some big ethical challenges in 2019. Tough questions are going to be asked about core functions. Those insurers who really understand the ethical issues involved will learn quicker and adapt faster.
So what should insurance firms be looking out for as priority issues? I’m going to mention four of the big ones, but it is around the fifth and most important priority that this post will be focused.
There’s no doubt that the market practice around which most ethical questions will circulate during 2019 will be pricing. And the sector’s response will need to be pretty impressive, given how unified the UK’s Government, competition regulator, financial conduct regulator and civil society organisations are on the issue. More on this here and here.
The Liberty Mutual case then highlighted two other areas of significant ethical challenge: delegated authority and claims supply chains. And it also introduced fraud oversight as a function around which ethical questions can circulate. I’ve written about these in some detail in earlier posts (here and here), so in this post I want to stand back from them a little bit and concentrate on…
With ethical challenges like the four noted above, I often in posts like this highlight different ways in which the sector could respond to them. And of course, this is something I do in detail with individual firms that I work with. Yet over the last year or so, I’ve also been preparing clients for the ethical challenge that I think will overarch all others in 2019.
If you track the emergence of those four ethical challenges noted above, you’ll notice that there is a common factor linking the expectations that individual insurers are now facing. And it’s more than just ‘get these things sorted’. That’s been said often enough.
The ethical challenge this represents is not to find a new set of answers to this year’s pricing or claims challenge. That would be missing the point that links these challenges. The insurance sector doesn't need answers. It needs questions.
The ethical challenge that now overarches all others is the capacity of insurance executives to ask the right ethical questions, and to understand, and if need be challenge, the answers they’re given.
Look at the regulator’s diagnostic work on household pricing, and at the various ethical issues associated with the Liberty Mutual case. The one thing that stood out in both cases was the lack of questioning and challenge by senior executives and board directors. Questionable practices had been allowed to develop unchecked, without consideration of ethical issues like fairness and the interests of customers.
So how did this come about? Clearly, these practices grew up over time and became common across the market. ‘Everyone else is doing it’ became a refrain I began to hear too often (especially around pricing). This can sometimes make it difficult for someone to put their hand up and ask ‘why are we doing this?’ Yet for several years, it was exactly that question that the regulator has been urging senior people to ask of their firm.
I believe that this detachment of senior executives and board directors came about in large part because they came to rely too much on people whose business was to deliver 'oven ready' answers. Many of them were the corporate fixers in big consultancies. Their role has traditionally been to come into an insurer and plug in processes and systems that signal to key audiences like regulators that ‘things are under control here’.
And regulators have come to rely on this almost ‘industrialised compliance’. It's what they became familiar with. After all, it's where they sometimes came from, or where they often hoped to go.
Yet all that industrialised compliance had missed something. In creating a culture within insurance firms that depended on them to deliver the answers, it meant that insurers had lost the habit of asking themselves the questions.
The regulators have been complicit in creating that culture.Invariably, when presented with a 'big four' sticker on a problem, they've assumed it had been addressed.
This puts the regulator in a somewhat contradictory position. Principles based regulation relies on regulated firms asking themselves the right questions about the work they're doing. Many an FCA speech has emphasised this. And the UK’s Senior Managers and Certification Regime (SMCR) expects firms to hard wire this pattern of question and challenge across the significant roles and senior functions.
Yet if you read the recent pricing review, you find that underneath all the talk about pricing, the real FCA hubris lies in how significant and senior people have been failing to ask the right questions, sometimes to an extraordinary extent. So the regulator has been happy to rely on those ‘big four’ stickers, but now finds that because firms have been doing the same, a gap between ethical intent and deliver has opened up.
So unfortunately for many firms, they're now facing both corporate and individual accountability, ill equipped to do exactly what principles based regulation and SMCR have been expecting most from them. Firms need to learn again how to ask themselves questions, and how to challenge the answers they’re given. They need to cure their addiction to purveyors of oven ready answers.
And in unbundling a pricing process or delegated authority into a series of related questions, anomalies will appear. Are we really doing that? Is that really the right thing to do? Can't we do better than that? And if we can't, why not? Understanding and addressing those anomalies is part of what leaders are there to do.
Insurers need to become much better at critical thinking, at reflecting on what they are doing, at listening to different viewpoints from outside of their immediate circle. Yet I wonder how many learning and development programmes have those skills included in their schedules for 2019?
Accountability relies on board directors and senior executives asking the right questions, in a regular, organised, evidenced way. And so I suspect that the regulator, from what it has learnt from its work on pricing and Liberty Mutual, will be concentrating a great deal during 2019 on the capabilities of a firm’s leaders.
Do capabilities matter that much? Think of it this way. SMCR is not there to just deliver accountability. It’s intended to foster and sustain an ethical culture within regulator firms. If you read key speeches by the regulator in recent years, they’ve repeatedly emphasised capabilities as one of the core components of ethical culture.
So the capability of board directors and senior executives to know what ethical questions to ask, to weigh up the answers they’re given, and to support or challenge the decisions they’re being asked to sign off, will be the biggest ethical challenge in 2019. It will be both a challenge for insurance executives, and a challenge to executives as well.
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.