2020 will be an eventful year for insurers. During the many years I’ve been tracking the ethical challenges facing insurers, never before have I seen so many issues piling up, demanding attention. Those insurers who are informed and prepared will manage, but others will find the learning curve steep and challenging.
In this first post of 2020, I’m going to give you an overview of the five ethical challenges that will make this year such an eventful one. These five challenges do not stand in isolation to each other. Each is sending out ripples that rock the others in some way. This is why I’ve been referring in recent years to an ethics landscape. You need to understand not just the individual components, but the whole that they add up to. That whole, that landscape, both shapes them and is shaped by them.
Pricing is about Culture, not Margin
The first ethical challenge is perhaps the most straightforward, that of the pricing of insurance products, chiefly in the retail general market. It is firmly on insurers’ radars and they’ve been preparing for the regulator’s response for over a year now.
Some insurers may find the interim pricing report’s focus on margin to be reassuringly economic and so view the ethical dimension as pretty secondary at best. That would be a mistake, for the interim report is all about evidencing the impact. Yet decisions precede those impacts, and ethical judgements precede those decisions, to underwrite in this or that manner. And those decisions are replete with ethical implications. Expect the final report to address them.
A variety of signs point to the FCA’s final report putting forward some pretty significant changes to insurance pricing practices. Why else would the Prudential Regulatory Authority be suggesting that insurers elevate pricing to ‘material risk’ status? (more here) And these changes won’t simply be operational. They’ll bring into question some of the core philosophies upon which retail general insurance has evolved in recent years.
This will be hard for some insurers to take on board, so firmly do some have these pricing practices built into their core models. So we’ll see a lot of accusations bandied about, of regulatory over-reach and unfairness. Yet this ignores the problem that insurers have to confront: the regulator is sitting on a massive database of insurance pricing information, from which it has drawn evidence based findings.
That database, and the tools that draw findings from it, is just an early output of the regulatory interest in supervisory technologies (more here). What this points to is this scrutiny of retail general pricing being not a one-off, but an ongoing aspect of regulatory scrutiny. The implications of this for insurer strategies should not be under-estimated.
The Compliance Puzzle
The pricing super-complaint was a big surprise for the market . Yet it very much shouldn’t have done. The signs were there a year before, and glaringly obvious six months before. So why did this happen? Why didn’t any one of the three lines of defence that insurers use to manage corporate risk pick up on this rocket coming over the horizon?
That’s a question insurers need to ask themselves, and have their conclusions ready to show the regulator. The regulator wants to see that insurers’ radars are properly tuned in and working, recognising issues and responding to them. Why? Because there will be other rockets coming over the horizon, which need to be scoped and addressed without another super-compliant (or worse) landing on the insurance sector.
So why did the three lines of defence fail when it came to retail insurance pricing? And what does that say about the efficacy of the three lines as a management system?
(Postscript – I’ve explored this issue in more detail in a subsequent post – here )
Rocket Number Two
Another rocket is coming over the horizon, and its impact is going to be seismic. It has come out of the analysis the regulator has undertaken for its pricing review. What’s more, the regulator is under political pressure to address it, and to evidence that it has been addressed. Discrimination will be a significant ethical challenge in 2020.
Now I know that the reaction of the many good people working in insurance would be to protest that this is something they would never countenance. And that’s understandable, but it’s not enough. They have to show the evidence to back up that claim. They have to show that the decisions made within their firm really do not result in discriminatory outcomes for consumers.
Some of you will ask why this is necessary, given that discrimination is so out of line with market thinking. Well, I’m afraid the picture is not so rosy. A number of sources have confirmed to me how discrimination is happening within certain core insurer functions. What’s more, people outside of the sector are seeing evidence of discriminatory outcomes. And to cap all this, in a May 2019 report, the UK Treasury Committee told the FCA in no uncertain terms the following:
“The Committee is concerned that, despite the FCA telling the Committee that a number of (insurance) firms could not give it assurance straight away that their pricing data is compliant with the Equality Act, the FCA did not choose to ask for more information.”
Expect the regulator to come knocking, not just for that evidence, but also for the supporting evidence from within the firm’s risk management framework, that the firm itself has been monitoring this. Your firm does have evidence of such oversight, doesn’t it?
Back in January 2015, I published this blog post about a short survey I had conducted, of how six insurers in the UK market handled equality in policy terms. Read it and then think how your firm would respond to a call from the regulator tomorrow. Those six insurers were unable, or unwilling, to point to policy based equality commitments relating to customers. Their focus was almost entirely on employees, which is important of course, but only half of the story. Their legal obligations cover the public too, from proposers through to claimants.
(Postscript – I’ve explored this issue in more detail in a subsequent post – here)
Claims is Bigger than Pricing
I’ve written in the past about the ethical risks that insurers are generating through their use of data and analytics to assess claims, to settle claims and then to re-underwrite claimants (more here). Yes, we hear about the clever uses of analytics to better service claimants, to settle claims faster, and of course that’s great. What we’re not hearing about, but I expect to do so over the next 6 to 24 months, are the various ways in which data and analytics are being used to ‘optimise’ claims settlements. Take that as shorthand for reducing claims settlements.
Hold on though, you may ask. What about the fair treatment and the best interests of customers? Surely claims people are working within those rules? Good question, for several of the practices that I’ve been told about would fail those tests. So what is actually happening in insurers? What are the three lines of defence doing in relation to such claims practices? What sort of oversight is the Senior Management Function for claims providing?
There’s a lot of self engineered complicatedness in claims. And we occasionally hear a claims director bemoan the challenges inherent in managing all that. Yet that complicatedness is of insurers’ own making. Addressing it will not be. The media, civil society organisations and politicians are all likely to become involved as the outcomes being experienced come under increasing scrutiny. All it takes is a trigger to start that rolling, just as happened in pricing.
When might the trigger for claims analytics happen? That’s difficult to assess, but what I can say is that it will come not much later than when the National Association of Insurance Commissioners in the US issue the findings of their investigation into ‘predictive analytics in claims’. International collaboration amongst insurance regulators is now the norm, and the FCA keeps a close watch on what comes out of US studies like this.
So really, the whole question of claims analytics is about when, not whether. And I believe that when it emerges, the impact on insurers’ reputations will be greater than that of pricing.
(Postscript – I’ve explored this issue in more detail in a subsequent post – here )
An Exposure of Enormous Proportions
We know that the FCA takes a keen interest in culture. And we know that in medium to large firms, there are not one but several sub-cultures. Those sub-cultures will vary, because of a multitude of factors. And the multi-functional nature of insurers makes them particularly prone to sub-cultures.
One of the most powerful sub-cultures within insurers can be found in their counter-fraud function. They have a strong mission – to tackle fraud. They have a strong case for doing so – fraud is wrong. And they are a strategic priority at many insurers. This and more are huge influences to ‘how things get done round here’.
These influences also form a double edged sword. Just as they focus minds, they also create blindsides. Getting the job done becomes the absolute imperative. How the job gets done seems at times to be discounted. Nothing else would seem to explain some of the counter-fraud practices that I’ve been told about. I’ve literally hung my head in my hands at times.
The peculiarly closed culture in counter-fraud functions is then reinforced on a sector level, with the unregulated Insurance Fraud Bureau overseen solely by insurance people and their legal partners. Out of this comes a reputational and financial exposure of enormous proportions.
Is this on the FCA’s radar? Of that I am absolutely certain. The Liberty Mutual case made sure of that. What is less certain is just where it sits on that regulatory radar. Near? Far? It’s unclear, if for no other reason than there are so many other things on that radar already.
Organising a Response
As I said at the start of this post, 2020 is going to be an eventful year. Insurers who have made the effort to understand the ethical challenges and prepared their response will ride these events as they emerge. Those insurers who prefer to wait and see will struggle, for fire-fighting events like the five outlined above is doing to be difficult. They’re too complex, too embedded, too interwoven to just pull a smooth response out of the corporate PR hat.
Over the next few posts on the ‘Ethics and Insurance’ blog, I will be looking into these ethical challenges in more detail and outlining how insurers can start organising their response.
