Why conflicts of interest are an exponential ethical risk

Conflicts of interest are a significant ethical risk that every insurance firm needs to address on an ongoing basis. Yet serious as they are in their own right, conflicts of interest also send out a variety of other signals about your firm. This means that the reputational risk they pose is much greater.

The poor handling of conflicts of interest creates reputational risks on four levels:

they signal that your firm’s customer strategy is ineffective;
they signal that poor decision making both exists and is tolerated;
this then signals that accountability and oversight are weak;
and finally, this then signals that other ethical risks like bribery and corruption are also likely to be present.

Let’s look at each of these in turn.

Your Customer Strategy is Ineffective

The structure of insurance and insurance markets makes conflicts of interest a permanent feature of how insurers work, and this is why they need to be addressed seriously and on an ongoing basis. So it’s how they are handled, and not that they exist, that is the key ethical issue for insurers.

Most often in insurance, it is customers whose interests are in conflict with those of the insurer. And so poor handling of conflicts of interest point to that insurer’s customer strategy having at best insufficient traction, or at worse, failing.

It’s fine for a customer strategy to talk about engagement, empathy and the like, but if it doesn’t address conflicts of interest, then it is failing to engage with one of the core concerns of the people who buy your products. So, what does your customer strategy have to say about conflicts of interest?

Poor Decision Making is Tolerated

I’ve been told on several occasions that conflicts of interest are just ‘one of those things’ and that they don’t really cause much harm. And I’ve listened to chief executives explaining why something had to be done, despite it being an obvious and significant conflict of interest.

In both cases, these were good people talking. Yet this was clearly poor decision making, happening in plain sight. It highlights why most misconduct in insurance is not down to a ‘bad apple’ doing some terrible thing, but down to good people making poor decisions, and getting use to doing so.

So an ignored or badly handled conflict of interest doesn’t just signal that poor decision making is taking place, but that others are tolerating it. I recognise that people can sometimes make a bad decision, but I expect them to quickly learn how to make a better decision next time round. What I challenge is a culture of toleration of poor decision making.

A key component of the ethics training I provide is how to recognise signs of that toleration of poor decision making, and how to address it. And this is based on peer reviewed papers in academic journals.

Accountability and Oversight are Weak

It’s just a small step for someone who sees that a firm has a culture that tolerates poor decision making, to then wonder where else this is happening within that firm. How endemic is this problem? Can I believe other things they’re saying? What sort of control do they have over their business?

And when questions like these start to be raised, a conclusion that can easily be drawn is that their accountability is poor and their oversight is weak. At that point, the doubts start to crowd in. Boards directors will wonder if they’ve been told the full story. Investors will wonder if their financial reporting can be trusted. Regulators will wonder if their regulatory reporting is all that it says it is.

What emerges then is this. Inadequate handling of conflicts of interest signals poor decision making, which if tolerated, raises questions about how far that has taken hold. It’s a slippery slope that insurers should strenuously avoid, if they want to be trusted.

Worse is Tolerated

There have been occasions when the strategies of some insurance firms have steered them onto that slippery slope of poor decisions and undermined trust. And there have been occasions when an insurer has found themselves being pushed down that slippery slope, to their great financial cost and on occasion, ruin.

This happens when a toleration of obvious conflicts of interest sends out a signal that other ethical risks, such as bribery and corruption, will be tolerated too. Corrupt behaviours are tested on a small scale, before being scaled up in both depth and scope. That’s why, I’m afraid, the history of insurance has some horror stories, of collapsing firms, sometimes involving those who had been held in high esteem.

Where to Begin

Conflicts of interest need to be addressed, on a systematic and ongoing basis. If not, they send out all the wrong signals about your firm. So where should you begin?

Step one is to understand where and when your firm is at risk from conflicts of interest. This will need to cover all the main functions – underwriting, claims, counter fraud and marketing. Then you need to prioritise them and identify where your mitigation resources need to be focused. This guide will help.

The next step is to stress test your policies and procedures. What you’re looking for is the gross net gap: the difference between what should be happening and what is actually happening.

Step three is to then establish what is behind that gross net gap. Is it lack of leadership? Is it performance and promotion pressures? Or is it as wide as your firm’s ethical culture?

And the final step is to start logging all this to create an evidence trail. And you may think that this will be rather dry reporting, but remember what the FCA were talking openly about back in 2018. They were experimenting with AI models to “predict the probability and location of an adviser mis-selling financial products.” In other words, the classic conflict of interest. When their supervisory technologies turn their radar towards your part of the market, the last think you want is to be sending out the wrong signals, without even realising it.