The world of insurance involves complex and thorny ethical decisions, as professionals in the field know. “Insurance ethics – an oxymoron?” is the provocative title of one recently published academic article – suggesting a profound contradiction between insurance practices and ethical principles. Another insurance researcher, Tom Baker, from the University of Pennsylvania Law School, has argued just the opposite: “insurance is a form of social responsibility”.
Yet the study of the specific problems of insurance ethics remains relatively undeveloped in the social sciences, just as insurance itself tends to fly beneath the academic radar. Gathered at the world headquarters of Munich Reinsurance recently, near the famous English Gardens in Munich, for two days in February, a small and interdisciplinary group of academics and insurance professionals from seven countries grappled with trying to understand what ethical behaviour and corporate social responsibility mean for insurance professionals, and to discuss some publications in progress on these themes. A generous grant from the Research Council of Norway and its SAMRISK program enabled these discussions. Below are short summaries of the key points in these papers about insurance ethics and corporate social responsibility. These might serve as an appetizer for reading the final versions of the papers, which will be forthcoming in a special issue of the Journal of Business Ethics in Spring 2012 at the latest.
There were three key themes in the papers. A first group of papers addressed insurance professional ethics, that is ways of understanding and addressing the particular ethical challenges facing groups such as actuaries, insurance lawyers and insurance marketers. A second group addresses the shared responsibilities of the insurance industry when it comes to the great challenges of our time, such as mega-size technological projects, and global poverty and sustainable development, and also in understanding the causes of and solutions to the problem of insurance fraud. A third group looked at the values and ethics at the core of insurance relationships: trust versus mistrust in insurance contracts and what equality, discrimination and solidarity actually mean in insurance risk pools.
Insurance professional ethics
A first way of developing the field of insurance ethics is to look at the challenges facing core professions involved in insurance such as actuaries, lawyers and marketers. Nicos Scordis from St John’s University in Manhattan presented the first paper, on the ethics of risk modeling. As Scordis explained, ‘risk modeling’ refers to the use of quantitative techniques to simulate hundreds of possible outcomes resulting from a managerial decision under a variety of interlocking assumptions. These hundreds of outcomes are then summarized in a probability distribution graph that shows the financial consequences of the managerial decision. According to Scordis, a risk modeling culture has evolved where the apparent exactness of pure mathematics is preferred to the imprecision of human behavior. As a result of this culture, such risk models tend to underestimate risk and present a veneer of certainty that is not always justified. This over-confidence about risk modelling had profound consequences in contributing to the recent financial crisis. In response to such problems, ethical codes for responsible risk modeling have been proposed. A critical evaluation of the risk modeling process, however, suggests that in practice, ethical principles are fluid and vague and depend on particular contexts. Thus, moral guides that provide explicit instructions for responsible behaviour are of limited practical value. Instead, Scordis is arguing in a pioneering article, Aristotle’s classical virtue of ”prudence” provides a framework for critical evaluation of current risk modeling practices, and a focus for the development of alternatives to the current practices that make models underestimate risk. Scordis took the concept of prudence out of the academic world of ethics and applied it, through examples and analysis, to identify five characteristics of prudent risk modeling. A prudent risk modeller, he argued, recognizes that people behave according to the particular ways in which economic incentives affect them, which means that identical assets, in terms of cash flow, may in fact have different values—depending on who holds them. A prudent risk modeller recognizes that all existing measures do a poor job in capturing interactions among risks, a critical component of risk models. A prudent risk modeller uses risk metrics that resonate with the way people think and feel about risk. A prudent risk modeller allows the questions posed by management to determine the scope of the model so that the model becomes a tool for helping managers understand uncertainty. Finally, a prudent risk modeller makes clear the consequences of decisions when the results of the model deviate from reality. Thus Scordis offers an important set of ethical guidelines for risk modeling in an uncertain era.
In addition to actuaries, lawyers represent a second key profession in the insurance world. Christian Lahnstein, an insurance lawyer with an interdisciplinary mindset (head of the Department of Risk, Liability and Insurance at Munich Re and host of the seminar), gave the academics insights from the point of view of a professional with a global view concerning the complex questions that arise due to the interactions in the intricate “chicken and egg” relationship between liability insurance and tort law. For example, as American insurance scholars Tom Baker and Sean Griffiths have pointed out, the existence of director’s and officer’s liability insurance in the United States drives and thoroughly shapes shareholder litigation in that country. Without liability insurance, tort law in that area would be something completely different. Lahnstein encouraged liability insurers to rethink and be more aware of their own role and responsibility in actively shaping tort law. For example, Lahnstein argued that insurance could likewise play a role in the development of tort law in emerging markets like Russia, China, India and Brazil, and that this was a benefit and should be encouraged.
The insurance industry’s share of societal responsibility
A second way of developing the field of insurance ethics could start with the point that insurance is fundamentally about risk and responsibility sharing in large groups or pools. We could then ask if what the specific ethical responsibilities of insurers and other parties should be in relation to such risk pools. As mentioned in the introduction, sharing responsibility for wise handling of risky technologies for instance, or poverty or sustainable development or crime prevention could be examples where wise and proactive insurance thinking could make a difference. A second group of papers can be read as illustrations of such an approach.
Alexandros-Andreas Kyrtsis, from the University of Athens, discussed the roles and responsibilities of insurers in relation to large scale technological projects, using the explosion of the Deepwater Horizon oil drilling platform in the Gulf of Mexico. He argued that the accident in April 2010, and resulting massive oil spill, was not due to any natural phenomena, but to unsound technological decisions and ethically questionable managerial practices. Politicians and state authorities had apparently failed to prevent such misconduct. But what about the insurance industry, who also had to suffer significant losses from these disasters? Shouldn’t they be interested in preventing catastrophic developments, and thus simultaneously acting for the benefit of the public and the natural environment? Kyrtsis argued that the lesson we can learn from the Deepwater Horizon explosion is that, although both insurers and involved businesses realized the risks to which they were exposed, they did not proceed to appropriate measures. This should be a cautionary reminder. However, there is no reason for despair. It seems that many people in risky industries, and in the insurance industry, realize that sticking to old practices of just calculating the probability of damage, and thus just reckoning the amount of money they would have to pay for repairing it, is neither good for them, nor for society or the environment. Harm can never be totally washed away with money. This is why experts increasingly adopt the view that both authorities and insurers should be preoccupied with bringing people in organizations to their senses by making them realize the ethical responsibility they bear when they make technical and managerial decisions. Especially insurers should connect their policies with looking more closely at the internal ethics of organizations, and thus monitor the conduct of managers and engineers long before something nasty happens. His argument was that insurance can be an institutional driver towards ethics of sound technological and operational risk management. Unethical behavior in sensitive operational settings originates from a lack of sufficient esteem for staff responsible for procedural efficiency. Insurance policies for such massive and risky projects should entail screening and monitoring of likely sources of such difficulties. Conditions are ripe for such innovations in the insurance industry. Kyrtsis suggested that the stories we get from the insurers and managers, who had to reflect on the cause of disasters, show that there is enough awareness for this necessity. It remains to make them talk openly about their concerns and transform their thoughts into appropriate business practices.[1]
One possible area for the insurance industry to show leadership is in promoting and supporting microinsurance initiatives in the developing world. Ralf Radermacher from the Micro-insurance Academy in New Delhi and Johannes Brinkmann from the BI Norwegian School of Management used the interesting topic of microinsurance as a context to address ethical questions regarding insurance. The societal responsibility of insurance becomes easier to explain and understand in smaller, simpler, less developed communities. The ethical riskiness of insurance marketing increases with the vulnerability of its customers. Microinsurance offers micro coverage for a micro premium to poor and vulnerable populations –typically (but not necessarily always) in developing countries. Examples of micro-insurable risks are health, death, crop failure, and property loss. Microinsurance uses the same technology of sustainable pool construction as conventional insurance – but to work effectively, its operations need to maximize simplicity, accessibility, affordability and flexibility. How might one ethically target the poor ethically as a market? Radermacher and Brinkmann promoted the importance of practically-based research based in actual working microinsurance projects. They highlighted how microinsurance offers a way of rediscovering the historical roots of insurance based in mutual aid in small, close-knit communities.
Bill Lesch from the University of North Dakota (co-authoring with Johannes Brinkmann) offered a novel perspective on the question of insurance fraud. Lesch and Brinkman aimed to provide a starting point for understanding the current motivations and practices by both parties which result in market inefficiencies due to cheating and bad faith, and to outline ways in which society can begin to repair what have become expensive and unethical practices which appear to be in a permanent and harmful spiral. In media coverage, and when the insurance industry talks about it, insurance abuse is first identified by its worse cases, organized insurance fraud, and then presented in a blame and shame mode, where the insurance customers are the bad guys, while the insurance industry is the good guy, fighting on the side of the honest customers. And, as we all know and as research shows, many insurance customers rationalize insurance abuse in blaming and shaming terms, too, suggesting that the industry is cheating them and thus insurers get the abuse and the cheating they deserve. Lesch and Brinkmann argued that both sides need to recognize that consumers and insurance companies have co-created this environment, and are co-responsible for it. Neither operates in isolation from the other, and both parties must be willing to recognize today’s occasional dysfunctional patterns of behavior for what they can be: destructive to the concept of insurance and harmful to the ideals of a society predicated on solidarity.
As Lesch and Brinkman see it, the interesting question is in what ways could everyone address insurance abuse more constructively (and avoid a vicious cycle of blaming and shaming which destroys insurance’s potential as a means of creating community). Insurance marketing is ideally about where companies meet their customers for maximizing joint benefits, or as it is called in modern marketing theory: co-creation of value. A key point is that it takes two parties to create value and that it takes two parties to destroy it.
The ethical core of insurance relationships
Last but not least one could develop an understanding of insurance ethics starting out from various typical ends values, such as security or sustainable development, or means values such as solidarity, or fair distribution of rights and duties, or trust. The task could be to isolate and then to elaborate indispensable basic values or principles - as the foundation or key to successful insurance technologies and insurance relationships. Two of the seminar papers could be placed within such a framework in progress.
Two sociologists from the University of Helsinki, Turo-Kimmo Lehtonen and Jyri Liukko, dealt with a different set of ethical challenges for insurers: the challenges of defining what constitutes equality and discrimination in the insurance context. They argued that insurance can be thought of as producing what sociologists call ‘solidarity’ among everyone in risk pool, so that those in the pool become a community of people sharing risk. What makes insurance special is the particular way in which it links solidarity and discrimination. On the one hand, private insurance especially is based on inequality as it discriminates between insureds by classifying them into different risk groups. This results in different prices on the basis of such risk factors as age, gender, health and disability. In some cases the practice of discrimination can lead to the total exclusion of some people from insurance coverage. At the same time, insurance has a built-in connection to solidarity: when taking out an insurance policy, one participates in the risk pool within which each member is responsible for others’ risks. The combination of technical efficiency and group solidarity made insurance a successful tool for government in welfare societies during the 20th century. From the point of view of business ethics, however, it is interesting that the connection between insurance and solidarity is not limited to social welfare and social insurance, but is evident in relation to private insurance as well. At the same time however, it is important to understand that insurance creates very particular kinds of solidarity. The main questions the Finnish sociologists asked then were: What does solidarity mean in different insurance situations? How are the limits of solidarity defined and justified?
A very interesting example is the decision, in March 2011, by the European Court of Justice to ban insurance discrimination on the basis of gender. The prohibition of this widespread underwriting practice represents a radical shift towards a new conception of equality and solidarity between women and men. Requiring equal prices for both sexes creates what these sociologists call ‘subsidizing solidarity’ towards men, in life insurance for example. Until now, men have been paying more for their life insurance policies because on average, they die earlier than women. From now on, being a woman will no longer be allowed to form a separate risk category; women cannot benefit from causing less risk than men for the whole risk pool. The ethical and sociological questions raised by this shift are profound – on what bases is it justified to discriminate then? It might be argued that men should pay more for automobile insurance, because the fact they have a higher rate of accidents than women is the result of their more risky driving style. What about paying more for life insurance? How much is the shorter life expectancy of men a result of their own choices? Such questions will be very topical in the aftermath of the decision by the European Court of Justice prohibiting different risk rating by gender.
It has been said that if there is trust there is no need of a precise contract, and if there is mistrust a precise contract will not help either. If one assumes that the fine print in an insurance contract communicates mistrust, then one risks that such mistrust becomes contagious and mutual. Øyvind Kvalnes, Norwegian School of Management BI, presented a paper which was co-authored with PhD student Bjørn Bakken. They addressed the insurance industry’s practice of producing lengthy insurance documents, with much fine print stating the minute details of the circumstances under which the insurance does and does not apply. They discussed if this might represent counter-productive incentives for customers. Kvalnes and Bakken applied Thomas Pogge’s conception of loopholes in moralities to explore how insurance documents might possibly have unfortunate effects. Moral hazard, involved the unintended creation of incentives for risky behaviour, is a familiar concern to insurance. Insurance lawyers design insurance contracts to minimize risk by identifying and repairing loopholes but create as a side effect an unfortunate justification strategy for consumers. Anything the conditions are silent about, becomes acceptable to the consumers; in other words, spelling out in the finest detail the “letter of the law” can sometimes paradoxically increase rather than decrease moral hazard. Furthermore, other participants in the conference argued that if customers perceive that the promise of insurance is violated in the fine print, this may contribute to a moral climate in which it is easier for consumers to rationalize fraud (cf. the paper by Lesch and Brinkmann).
Next steps
We were inspired by the discussions at the seminar, which were as much about raising questions as about offering answers. While the full papers are being revised and edited for the special issue of the Journal of Business Ethics (forthcoming in early 2012), two next steps should be considered: working towards a clear and consistent framework for insurance industry and professional ethics, and developing small, realistic action research projects where the practical relevance of interdisciplinary insurance research could be explored, in close cooperation with those in the insurance and reinsurance industry who see the benefits of such research. Insurance is a form of societal responsibility, but only when it achieves a successful balance of business and ethical considerations. Nice words, but what counts are the deeds that should follow.
Johannes Brinkmann and Aaron Doyle are both affiliated with ROFF, the BI centre for risk and insurance research, see www.bi.no/roff. Brinkmann is a professor of business ethics at the Norwegian School of Management BI in Oslo (see http://home.bi.no/fgl92025/), Email: johannes.brinkmann@bi.no. while Doyle is an associate professor of sociology at Carleton University in Ottawa (see http://www1.carleton.ca/socanth/faculty/doyle-aaron/) Email: aaron.doyle@bi.no.
[1] In discussing such an environmental catastrophe, it is fitting to mention here that Dr. Astrid Zwick, Head of Corporate Responsibility as part of Munich Re’s Central Division Group Development, participated in the workshop. She discussed with us the “Principles for Sustainable Insurance” (which had been drafted in the PSI workgroup chaired by Munich Re) as a global best practice framework by the Insurance Working Group of the UN Environment Program Finance Initiative. These suggest that insurance industry responsibilities extend to a global commitment by the industry to systematically consider environmental, social and governance issues, to raise awareness on these issues, to reduce risk, and to develop solutions.