Honesty, The Answer to Ethics in Insurance

Sun, 03/16/2014 - 17:17
by Nate Christensen

Ethics have been debated for at least as long as written language has existed. Western philosophy believed a higher truth or a greater good existed that people should strive for. Eventually, philosophy morphed into differing ideas which proclaimed morals are a man made set of ideals that individuals should decide for themselves, not set by religion or culture. Regardless of how one determines their own ethics, they remain paramount to the trust that must exist between business and client for a marketplace to remain viable.

Economic theory varies on how this balance is accomplished. Some prescribe to the notion that whatever is in the best interest of the company is in the best interest of the customer. Others, believe the inverse theory, that whatever is in the best interest of the customer is in the best interest of the company. These represent only two of several economic beliefs that currently dominate academia. Insurance typifies the challenge to both ways of thinking. How can writing major risks at affordable rates help other insureds if the claims overwhelm the insurer and sends the company into insolvency? Several insurers have already expressed concern to the federal government about the losses likely to occur with the rollout of the Affordable Care Act. 

Underwriting finds itself precariously caught between sales agents trying to close a deal by providing the lowest price and the company policy to properly classify risk pools. My brother is a partner in a property and casualty brokerage and he often relays the cyclical nature in insurance pricing. When an insurer gets overly aggressive in setting premium they nearly always overexpose themselves and “hemorrhage money,” as he likes to say. The effect will then either be the insurer significantly raises prices or exits the market. This can be a tremendous disservice to the consumers in the marketplace because basic economics tells us the more firms operating in a market, the more competitive the pricing will be. An additional and potentially more detrimental result is the loss of trust between consumers and the industry.

The single biggest factor to being ethical, in my opinion, is honesty. While utilitarianism is not being espoused here, there is a degree of importance in the notion when applied to insurance. Risk management only works when the risk is spread over many insureds and the risk exposure of a group is relatively constant. Insurance, as an industry, offers consumers necessary products and services. Credibility is built by providing good products, but also trust, which is obtained through honest interactions. Customer honesty allows for proper risk disclosure. Salesperson honesty allows for proper risk classification. Underwriter honesty allows for company solvency and profitability. Company profitability assures the market remains viable and competitive. 

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