The Ethics of Insurance Claims  

Claims functions have a big job to do, handling everything from the simple and straightforward, to the huge and complex. Yet claims are also the occasion when the insurer fulfils the obligations to the policyholder in the policy that they paid for. This can present claims people with some challenging dilemmas to resolve, especially when inherent imbalances like these are considered…

  • Between what the insured and the insurer each know about the loss;
  • Between the relative financial resources and technical knowledge of insurer and insured;
  • Between the emotional state of the claimant and the detachment of the claims person.

The result is this core insurance service can sometimes struggle to secure the trust of policyholders. And to be honest, this is always likely to be the case, for the simple reason that it is in claims that the more fundamental of all of insurance’s ethical risks lie – the conflict of interest between paying out claims and making a profit.

I’ve heard many senior claims people say that paying claims is what insurers are there to do. Yet I’ve also come across claims practices that run counter to securing the trust of consumers. Remember those dilemmas and imbalances I just mentioned.

if a UK insurer thought that the outcome of the final pricing review was daunting, then the outcome of a regulatory ‘lifting of the lid’ on certain claims and counter fraud practices will be much more so.

What this adds up to then is the need for ongoing attention to the ethical side of claims operations. At the moment, three key themes in the ethics of insurance claims deserve close attention…

You can explore each of these key themes in more detail below.

Ethical Risks in Insurance Claims

The ethical risks associated with claims fall into two broad categories – the ones that are, to be honest, always around, like conflicts of interest and fairness. And the others that can be eliminated with the right drive and attention, like aspects of ethical culture. This then means you are handling some risks where the objective is containment, and some risks where the objective is elimination. That distinction needs to be reflected in your approach to ethics and claims.

Take conflicts of interest as an example. How you recognise conflicts of interest can influence how you respond to them. Does your firm recognise actual conflicts of interest, or does it just talk about potential conflicts of interest? I’ve come across both approaches, with quite different implications.

Fairness is another significant ethical risk associated with insurance claims. While it may be a complex thing, it is also a manageable thing. I’ve found in my work with various insurers that fairness frameworks tend to be very data driven – page after page of numbers. As a result, they’ve tended to see fairness from an output perspective. There’s certainly value in this, but it suffers from two problems. It works in too much of a hindsight way, and it is open to varying interpretations of when something really does become unfair.

Greater attention to fairness needs to be given in the design and implementation of the processes and systems that deliver the claims service. In essence, making them ‘ethical by design’. A typical approach would be to look at structural fairness, process fairness, procedural fairness and outcome fairness. I’ve found this approach to work well when I’ve been brought in by an insurer as a critical friend to look at some aspect of their claims service.

Two other issues should figure in any assessment of ethical risk in claims. The first is the ethical risk embedded in your firm’s culture and the influence it can have on decision making at both the handler and executive levels. It is, in my opinion, a systemic risk that influences all other ethical risks in claims. And the second issue is around the ethical risks that emerge from how claims functions use data and analytics.

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Data Ethics in Insurance Claims

Data and analytics introduce some distinctive ethical risks into insurance claims. They’re distinctive because of the one-to-one relationship between claimant and insurer at the time of loss.

The data ethics risks in claims fall broadly into three categories. Firstly, the gathering and use of data in understanding the claim and the claimant. Remember those imbalances I mentioned above – insurers see data as a way of reducing them. There’s no harm in that overall, but how you manage it will move your firm up or down that ‘trusted by claimant’ scale.

And then there’s the role of analytics in the assessment of claims. In volume situations, this makes sense, so long as the proper controls are in place. If they aren’t, then problems can quickly set in. The example of Liberty Mutual in the UK is a case book example of that.

It helps when weighing up the use of analytics within an insurance claims function to break them down into their different types. This is less about their technical make up (supervised, random forest, etc) and more about their use. So, for example, you could divide them into descriptive analytics (what happened?), diagnostic analytics (why did it happen?), predictive analytics (what will happen?) and prescriptive analytics (judging what should happen and making it happen). As you can imagine, the ethical implications of each type vary enormously – very useful when conducting an assessment. 

No assessment of data ethics risks in claims would be complete without consideration of optimisation techniques and their influence on settlement strategies. Their introduction into claims decision making saw them described as the most controversial claims innovation of all. They represent, in my opinion and from a UK perspective, the greatest threat to the individual accountability of the senior management function holder for claims. 

Given that their use is under active investigation by US insurance regulators, and given the close working relationship that the FCA has with its US counterparts, it would be extraordinary for a UK insurer not to be keeping their use of claims optimisation under very careful review.

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The Ethics of Insurance Counter Fraud

Let’s be clear: combating insurance fraud is an ethical thing for insurers to do. At the same time, how insurers go about tackling insurance fraud has ethical dimensions to it as well. Indeed, all of those campaigns to tackle insurance fraud, and to build public support for doing so, sit within a wider context of how insurers and claimants engage with each other in the reporting and settlement of an insured loss.

So what do those ethical dimensions to insurance fraud look like? In summary, they involve transparency, performance, boundaries, leadership, data analytics and accountability. And wrapped around all of these is the ethical culture within the counter fraud operations of both the insurer and their suppliers. In my experience, a typical insurer will have issues to address in several of these areas.

The FCA is engaged in a two year research programme on transparency and accountability. Another review is looking at data ethics, and performance, leadership and culture are ongoing regulatory concerns. Given how this places counter fraud at a confluence of scrutinies, insurers must be absolutely confident about what they are doing and how this fulfils their responsibilities.  

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