Where do insurance firms go wrong with conflicts of interest?

Where do insurance firms go wrong with conflicts of interest? Their track record has not been good. Two problems stand out: adopting too narrow a perspective from the outset, and assuming that procedures and controls are effective and fully adopted. The challenge for firms is that these are problems that often only come to light after a conduct issue has already erupted.

So how can management avoid being perennially on the back foot with conflicts of interest? Of course, building an ethical culture that really does put the best interests of the client at the heart of how the firm works would work wonders, but let’s put that aside for the moment and look instead at a series of more immediate steps that a firm can take.

Adopting too narrow a perspective on conflicts of interest is often down to two things: not appreciating the full range of conflicts of interest at play in financial services, and using policy and procedures that have been outgrown by an increasingly complex business model. Here’s how to tackle these issues.

First off, be more rigorous in what you mean by a conflict of interest. Standard practice with conflicts of interest is organise them into three categories, covering seven types, as follows:

• is it actual, potential or perceived?
• is it personal or impersonal?
• is it individual or organisational?

So each conflict of interest can be categorised in three ways: for example, an insurance broker recommending a particular policy to a client so that its higher commission helps him achieve his annual target is creating a conflict of interest that is actual, personal and individual.

These categories help you to track the various influences that drive conflicts of interest, which in turn allows you to organise how you manage them. And it makes sure you don’t omit perceived conflicts of interest from your risk assessment: after all, who isn’t influenced by perceptions?

Secondly, map out the network of relationships that your firm works within. In that network lies the many varieties of conflicts of interest that your review needs to identify and weigh up. Some may be obvious ones that your firm has long been familiar with; others may operate more ‘under the radar’ or in the background.

A simple way to portray that network of relationships is through an ‘influence map’. These are made up of a series of linked circles, each representing a particular organisation (or type of organisation) that is connected in some way with your firm. Various techniques are then used to represent levels of importance and types of influence.

Influence maps tend to be constructed at the organisational level, yet often it is the interests of important individuals that create conflicts for firms. Those can be tracked with ‘social network analysis’, which looks at how individuals form clusters of influence and act as bridges of information between organisations. The way in which these bridges of information form and cluster (for example, as local or triadic) can influence how easily conflicts of interests arise and how adaptable (or resistant) they are to change.

A word of warning: social network analysis is sometimes used by journalists to analyse complex business networks, in order to understand how conflicts of interests may be driving particular outcomes, so be careful not to come across it when you’d least prefer to.

And finally, be sure when thinking about conflicts of interest to encompass not just regulatory and legal considerations, but ethical responsibilities as well. Remember: regulations tell you what you have to do; ethics tell you what you ought to do. If your firm tries to skim too close to just what you have to do, there’s a good chance that at some point, your firm’s complex business model will find itself tripped up and under investigation. And anyway, would your clients would be happy to find out that your firm has been operating ‘only just within the law’?

In a later post, I’ll look at that other problem firms have with conflicts of interest: assuming that procedures and controls are fully effective.