How to Improve Insurance Industry Ethics

April 8, 2015

Support from leaders at the top of organizations is the key to improving the ethical climate in the insurance industry, according to a new survey of industry professionals.

Punishing bad actors is one of the least effective strategies, the survey found.

Also, the survey uncovered a disconnect between how insurance professionals see themselves and how they think the public sees them when it comes to ethical behavior.

The survey by the Institutes and CPCU Society asked 3,000 members of their online community which factor would be most important in ensuring ethical behavior. Forty (40) percent of respondents said demonstrating leadership support would have the greatest impact, while 38 percent said integrating ethics into company goals would be best.

Only 8 percent said punishment for unethical behavior would have the greatest impact.

“Our members are sending a clear message that risk management and insurance executives need to lead by example on ethics,” said Peter L. Miller, president and chief executive officer of The Institutes. “Leaders should not only tell associates that ethics is a priority, but they also need to exhibit that ideal every day.”

At the same time, while more than 90 percent of respondents said that they believe insurance professionals are already largely ethical, 55 percent said they believe the public views their industry as largely unethical.

More than 80 percent of respondents said the key to improving public perceptions of ethics within the insurance industry is enhancing the public’s understanding of how insurance works.

“This is striking evidence that many professionals believe their profession has an undeservedly negative reputation. All of us in the industry have a role in changing that perception, and we need to work together to accomplish that,” said Jane Wahl, president and chair of the CPCU Society Leadership Council.

Some within the industry are being recognized for their ethical practices. Last month The Ethisphere Institute, which promotes standards of ethical business practices, published its list of the 2015 World’s Most Ethical Companies. The latest list includes 132 companies across the globe. Property/casualty insurers Allstate and The Hartford, and insurance brokerage firm Arthur J. Gallagher, were on the list.

Academics have looked at how individuals perceive their own ethics. Researchers at the University of Utah, Duke, Notre Dame and Harvard Business School published a paper on the psychological processes of individuals and how they come to see themselves as ethical people. “The Ethical Mirage: A Temporal Explanation as to Why We Aren’t as Ethical as We Think We Are” was published in Research in Organizational Behavior in 2010.

“Companies typically don’t do bad things because they have bad people,” said Kristina A. Diekmann, Ph.D., University of Utah professor of management and one of the four authors of the paper. When people imagine what they would do in certain situations, they think about what they should do. But when it comes to actually making decisions, “people tend to focus on what they want to do,” according to Diekmann.

For example, individuals know they should behave ethically when negotiating with a client, but during the actual negotiation with that client, their desire to close a deal may cause them to make misleading statements and later justify doing so to others.

Diekmann said organizations can break the cycle of unethical behavior by enforcing procedures that reduce the likelihood of unethical behavior.

At the Top

Leadership on ethics is a concern for all industries. In 2012, Ernst & Young published results of a survey that found a growing number of chief financial executives at leading firms (not only insurance) around the world see ethics as an obstacle to be circumvented. Of the 400 chief financial officers quizzed, 15 percent admitted they would be willing to pay bribes to secure business and 4 percent said they would be willing to misstate financial performance.

“This group of executives is not large in absolute numbers but, given their responsibility, they represent a huge risk to their businesses and their boards,” Ernst & Young said about its findings.

The 2014 Risk Management Benchmarking Survey conducted by the Federation of European Risk Management Associations (FERMA) revealed that insurance and risk professionals at corporations are positioned to affect leadership as they are closer than ever to top decision-makers, with 84 percent of them reporting to the board or top management. And they are involved in discussions on ethics, compliance and legal issues, and internal audits and controls, according to the survey.

Day-to-Day Jobs

The Institutes/CPCU organizations polled 130,000 insurance and risk management members of The Institutes Community during the second week of March to mark the 25th anniversary of Ethics Awareness Month.

Additional results of the Institute/CPCU survey included:

  • 84 percent said they strongly agree that ethics play a major role in their day-to-day jobs.
  • 41 percent, a plurality, said pressure to meet business objectives is the factor that makes it most difficult to uphold their ethical standards.
  • 62 percent said the primary reason the industry needs to act ethically is that it is the right thing to do; 14 percent said the primary reason is that customers will not trust professionals without it.
  • 48 percent of respondents said the industry is acting more ethically than it did a decade ago, 11 percent said it is not, and 41 percent said there is no difference.
  • More than 50 percent said they think the industry will become more ethical in the next decade, 36 percent said it will stay the same, and 12 percent said it would become less ethical.

Of those respondents who said the industry is acting more ethically than 10 years ago, improving education, transparency through technology, and increased regulatory and media scrutiny were common reasons cited by respondents.

“With use of today’s technology, the underwriting side of insurance is definitely more transparent,” said Terri McKane, an agent and a quality control coordinator at American Strategic Insurance. “With the impact of social media on everyday life, being ethical is the only way to go.”

Other respondents were more ambivalent about the role technology has played in ethics.

“Electronics enhance the ability to work faster and smarter; however, the personal touch is lost,” said Susan Golla, a vice president at brokerage McGriff, Seibels & Williams. “So although many processes are more transparent, the opportunity to remember that we are a people-oriented business can be lost in transaction tracking.”

The Institutes offer the CPCU designation program; associate designation programs in claims, risk management, underwriting and reinsurance; and continuing education courses.

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