Checking Ethical Culture – Over-Optimism

Duncan Minty -

In this toolkit, we look at what it is, its influence on culture and how an insurer can tackle it.

What is Over-Optimism

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 there’s a risk that this over-optimism runs away with itself. The nature of insurance means 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 people and their firm may have honestly held but irrationally optimistic views of a project or product’s prospects, only to subsequently find reality shooting it down in the court of public opinion.

How Over-Optimism can Arise

This is not the same as saying that optimism is bad. Far from it. Underwriters invest time and effort into designing and launching new products and services. They have to push for their proposal to be signed off and to be the one to get 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 the 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 well value. Why go back to the drawing board, when you have something tried, tested and successful already at hand?

The Rationalisations

Comments like “let’s make the most of it while we can” start to be heard, along with what in ethics are called rationalisations. Typical rationalisations in such circumstances include “no one will really be worse off” and “I’ve worked hard; I deserve this”. These are classic signals that good people could be making a poor decision.

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

All of this introduces ethical risk, primarily into product distribution.

Tackling Over-Optimism

So how can insurers and their underwriters guard against this? Four ways stand out:

  • know your markets well and do your homework on the needs of the customers in each segment;
  • have a robust product governance process, and one that includes a distinct ‘customer voice’ across the product’s lifecycle. This helps maintain a product’s boundaries over time and reduces the risk of over-optimism;
  • 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;
  • encourage the use of ‘constructive voices’ within teams, to allow for alternative views to be voiced and heard.

Behavioural Ethics

Conformity is one of a number of ethical culture themes that fall under the heading of behavioural ethics. Look out for other toolkits that explore other aspects of ethical culture / behavioural ethics.