We know that ethical culture has been a core feature of regulatory expectations for several years now. And the steps that firms should take to understand and improve their ethical culture are regularly highlighted by the regulator. All fine, you may think then. Yet there’s a problem, for as I set out in this January post, the sector is currently facing an unprecedented level of ethical challenge. So what’s been missed then in terms of improving a firm’s ethical culture? The answer could lie in a facet of ethical behaviour that has not received anywhere near enough attention from insurers.
Let’s clarify a few things first. Do I think that insurers have been ignoring their ethical culture? Not at all - far from it. It’s definitely something that insurers have been working on, and progress has been made.
Do I think then that insurers have not been doing enough on ethical culture? Are they going in the right direction, but perhaps not making enough progress? It’s not that, I don’t think. From what I see of inputs and outputs from the market that relate in some way to ethical culture, the willingness to make progress is definitely there. And while progress is being made, it does vary of course. That’s to be expected from a market made up of so many different types of firms.
Forms of Resistance
So where is the problem here? Progress is being made on ethical culture, but it’s also been meeting resistance. And by resistance, I do not at all mean in the sense of people actively saying that ethical culture should be resisted. Of course there will be a few bad apples in the market, but there are huge numbers of good people (I’ve worked with a lot of them) who want the market to succeed on ethical culture and enhance the public’s trust in it. So what sort of resistance am I talking about then?
I alluded earlier to an aspect of ethical behaviour that was not receiving enough attention from insurers. It’s what in ethics circles has become known as behavioural ethics. This looks at how we behave on encountering different types of ethical situations. So this is about what we actually do, rather than about what we think we do.
Hey, we’re not perfect, you might say. And of course, none of us are. Yet ethical culture is not about perfection. It is about making better, more ethical decisions. And about what both individuals and firms can do to facilitate that.
Time for some examples. I’m going to look at two themes within behavioural ethics that are relevant to improving a firm’s ethical culture. The first are cognitive biases, and the second are rationalisations. They can overlap a bit, but for simplicity, I’ll look at them separately.
Cognitive bias involves mistakes in reasoning and situational processing. We are all subject to them, but at the same time, we can all do something about them. I’m going to quickly look at four that I’ve seen while working in both personal and commercial insurance markets.
Conformity can arise through people having a tendency to think differently in a group compared with how they might do so when on their own. They can make decisions according to what other people are doing and saying, rather than weighing up the pros and cons of a situation for themselves. It’s often referred to as ‘group think’ (more here).
Self serving bias brings in a common tendency to ‘see’ what is most supportive and advantageous to our own viewpoint, while playing down the importance of things that are in conflict with that viewpoint. We filter in what we think is significant and filter out what we think is not significant, with significance being of course in the eye of the beholder (more here).
Ethical fading happens when we begin to dismiss questionable actions, or stop seeing the questions hanging over what we’ve done. We think our decisions are falling within the scope of what is ethical, when fact they’re progressively straying into unethical territory. It tends to happen in situations that require frequent judgement calls, sometimes in adversarial situations (more here).
Over optimism happens when the firm’s culture encourages its people to think that only good things will come out of something. This leads them to dismiss the possibility of something going wrong, even if those consequences may be staring them in the face. They may firmly believe that what they’re doing is right, but fail to see that everyone else is raising their eyes in amazement (more here)
Let’s move on and look at rationalisations. You come across these when you hear a colleague making excuses for not addressing the obvious ethical side to a decision. Those excuses are attempts to rationalise what is essentially a bad decision, to make it look better than it really was.
Rationalisations are relevant to improving a firm’s ethical culture because the frequency with which they arise, and the response they evoke in others, are symptoms of how some of people would prefer to work. They are narrative forms of resistance. Here are five common rationalisations…
- there are people who deny responsibility – they say things like “I had no choice! There was no other option.”
- some people deny there’s been any loss, and they say things like “No one will really be worse off. And, who are these people anyway?”
- and then there are people who try to appeal to other loyalties – “the company expected this from me”
- then there’s the claim to entitlement – “I’ve worked hard on this deal; I deserve to win it”
- and finally, the most common of all, and what the famous investor Warren Buffett has described as the five most dangerous words in business – “Everyone else is doing it”
Now think for a minute about that last one. Have you ever heard it at some point in your insurance career? I certainly heard on a couple of occasions during my 18 years working in the market. And from what audiences have told me over the years, many of you will have heard it too.
Some people might think that statements like “everyone else is doing it” are some sort of pragmatic response to a difficult situation. They are not: they’re attempts at reshaping a decision so as to make it look less bad than it really was.
The Wider Ethical Culture Picture
OK, let’s stand back and look again at the wider picture of improving a firm’s ethical culture. What do all these behavioural biases and rationalisations add up to? What do they mean for the sector? Well, I believe they represent a brake on the sector’s ability to really get to grips with ethical culture. And a brake significant enough to bring about the sorts of big ethical challenges we’re seeing in 2020.
So just as much as insurers should push forward on ethical culture, they also need to disassemble the behavioural biases and rationalisations that are pushing back. Here are some places to start looking…
- Corporate risk management – to what extent are behavioural biases contributing to the gross-net spreads between what you expect to be happening and what is actually happening?
- Learning and development – to what extent has the exposure to certain behavioural biases been evaluated and targeted by training programmes and other such resource?
- Corporate communications – to what extent are internal and external communications about behaviours gaining traction with key audiences? Are they experiencing what they are hearing?
Look at it from a simple resources perspective. The time and money invested in improving a firm’s ethical culture will only ever see a partial return if steps aren’t taken at the same time to address these behavioural bias and rationalisations. The obvious analogy is driving with the handbrake partly on. Rather than press down more on the accelerator, it makes sense to address the brake. It removes a lot of heat from how your firm goes about its work.
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