Should one insure against employee dishonesty (or rather not)?
Insurance is among the most important institutions in present day society, as a provider of economic risk coverage and as a major player in financial markets. Insurance companies can be more or less profit-and-growth-minded, more or less responsibility and sustainability-minded. M. Power’s thesis of the risk management of everything (2004) could be matched and extended by a thesis of the insurability of everything (to be read with the same skepticism as Power’s thesis, in contrast to Beck who looks at his risk society as an uninsurability society). As all other profit and growth seeking business, insurance is risky and raises potentially ethical questions, and additionally and particularly, as a reflex of the risks it covers and how.
Developing an appropriate frame of reference for insurance business ethics can be useful (Brinkmann and Doyle 2014, Doyle 2011, Ferguson et al 2007, Baker and Simon 2002). But the primary question is of course if such a frame of reference works in test cases, in practice. One such test case could be microinsurance (Radermacher and Brinkmann 2011), as an example of how insurance can cover basic security needs among the poor, more or less ethically and responsibly. In this paper, it is suggested to take a look at employees as insurable risks, more narrowly at bank employees as risks, and even more narrowly so, through the lens of insurability and insurance ethics.
After these introductory remarks, our test case can be presented: Employee dishonesty insurance (subsequently ED insurance; other names used now and then are employee fraud insurance, employee infidelity insurance, crime insurance, or e.g. in German Vertrauensschadenversicherung). On the website of an insurance company which specializes on hedge fund insurance one finds the following presentation:
- “Fidelity insurance protects organizations from loss of money, securities, or inventory resulting from crime. Common Fidelity claims allege employee dishonesty, embezzlement, forgery, robbery, safe burglary, computer fraud, wire transfer fraud, counterfeiting, and other criminal acts.
- These schemes involve every possible angle, taking advantage of any potential weakness in your company’s financial controls. From fictitious employees, dummy accounts payable, non-existent suppliers to outright theft of money, securities and property. Fraud and embezzlement in the workplace is on the rise, occurring in even the best work environments.
- Liabilities covered by crime insurance usually fall into two categories, although many polices combine both types of coverage: money and security coverage (which is less of concern here in this paper) and employee dishonesty coverage (which) pays for losses caused by most dishonest acts of your employees, such as embezzlement and theft…”
If one wants to examine such a case as a business ethics case, there are several ways of approaching it, not least from which actor or stakeholder position.
- An insurance company might wonder if and how to market ED insurance, for example in more or less the same way as the competitors do it and because they do it. Perhaps, for creating attention, one could refer to white collar crime risks which have caused less frequent but XXL-size losses to their employers, such as Nick Leeson (1995, Barings Bank, 1.4 bn $), Kweku Adoboli (2011, UBS, 2 bn $), Jerome Kerviel (2008, Société Générale, 7.2 bn $). I am still working with identifying some good enough banking white collar crime statistics about smaller size and more frequent losses.
- Or one could take the position of a potential insurance client - a bank supervisory board member or a bank CEO or the head of other financial organization types (or even pick any other industry) and one sees or is told that other banks or employers have started buying such insurance, and wonder if one should follow their example.
- Or imagine you are an insurance broker who is approached by a potential ED insurance client who asks for your best advice, perhaps for a best offer and for negotiation assistance (since insurance companies cannot always be trusted, and perhaps you earn a commission).
- Or think that you could be an employee representative on a supervisory board and you receive confidential information about ED coverage plans and you are asked for your view (you are not permitted to discuss it with your constituency).
- With all these people wondering and not really liking to make a decision, no surprise, independent experts typically inherit the question, such as organization culture and ethical work climate experts, white collar crime criminologists, and, of course, business ethics experts.
For the rest of the paper, let’s mind our own business.
As business ethics experts we would suggest getting the facts and the risks as clear as possible, first (and suggest for facts academic research rather than consultancy advice?). For such facts, or rather for a look at fidelity insurance marketing arguments, try a few links, such as http://www.lloyds.com/news-and-insight/news-and-features/market-news/industry-news-2011/lloyds-takes-a-fresh-approach-to-crime-insurance , http://www.insurancejournal.tv/videos/3329/, http://www.insurancejournal.tv/videos/8061/, http://www.youtube.com/watch?v=AGXwCPkjYWg (Zurich insurance, in standard German)
With clear enough facts and risks (or without them), there are different alternatives for next steps.
- One alternative could be to look at textbook business ethics for inspiration, that is first ask and then elaborate and answer more or less general business ethics case questions, such as legal, ethical, and gut feeling acceptability, or fair and wise balancing of legitimate stakeholder interests, evaluation in the light of of relevant (and consistent or contradictory) normative ethical theory, using descriptive ethical research for listening constructive-critically to decision makers and decision takers (such as mapping their views about the moral acceptability or moral intensity of such insurance).
- Or one could (more or less eclectically) look at published business ethics research and try to relate the case to special interest fields such as HRM ethics, ethical climate in organizations, financial industry and professional ethics, insurance industry and professional ethics (the last mentioned specialty looks most relevant but at the same time most underdeveloped). 
In accordance with the promise of the paper, insurance business ethics, the last mentioned alternative will be chosen. We’ll search for the general (is there and what is insurance business ethics, or what could it/ should it be about?) in the particular (employee dishonesty insurance as a test case), and for the useful (advice, recommendations: what could and what should one do?) in the general (business ethics, insurance business ethics). For the time being and as a start, the following questions seem most worthwhile:
- Who are the primary parties or stakeholders and to what extent are their interests complementary or conflicting, more or less legitimate? Is it sufficient to distinguish the insured employer and the insurer, or is it fruitful to differentiate further – e.g. among good risks and bad risks (and to price the coverage accordingly)? Is it advisable or inacceptable to omit the employees as insured risks and as stakeholders, perhaps even to keep the existence of such ED insurance coverage a secret?
- Since insurance basically is about risk and responsibility sharing (Brinkmann, 2007, 2013): Does any of the parties carry a primary responsibility or if not, how do the parties share their responsibility[vi] and in case for what:
- for risk management? (such as selecting low risk and excluding high risk employees; furthering an ethical work climate by trust-building and by soft social control; is the business type in its own way, e.g. speculative investment banking, which would invite employees to opportunism and self-interest maximization on behalf of the bank, accordingly pay a commission as an incentive, but then forbids their employees self-interest maximization for their own self-interest)
- for unwilled side-effects of developing, marketing and signing up for such ED coverage? (risking moral hazard rather than exploiting moral opportunity, by meta-communication of distrust rather than trust)?
- What are the key ethical arguments, e.g. for and against ED insurance, and what are the practical implications of how the questions above are answered? Should one offer or sell the answers to the parties or tell them that the problems are all theirs and that it is important with a deep and long enough dialogue for encouraging them to find their own answers, with their own good reasons?
Appendix (organizational risk management)
Effective I/C or ERM means: Source: http://csqa.blogspot.no/2006/04/kc-922-coso-enterprise-risk-management.html
Baker, T. and J. Simon: 2002, eds.,Embracing Risk, Chicago Univ Press, Chicago, 33-51
Beck, U.: 1992: Risk Society: Towards a New Modernity, Sage, London etc
Brinkmann, J.: 2007, Responsibility Sharing (Elements of a Framework for Understanding Insurance, in Ferguson et al., 2007, Research in Ethical Issues in Organizations, 7, Elsevier, Amsterdam, 2007, 85‐113
Brinkmann, J.: 2013, Combining Risk and Responsibility Perspectives: First Steps, Journal of Business Ethics 2013, 112, 567-583
Brinkmann, J.and A. Doyle: 2014, Rediscovering the Normative Core of Insurance, paper in progress.
Doyle, A.: 2011, Introduction: Insurance and Business Ethics, Journal of Business Ethics, vol 103 (Supplement 1; Special Issue on Insurance and Business Ethics), 1-5.
Ferguson, W., P. Primeaux, P. Flanagan: 2007, eds., Insurance Ethics for a More Ethical World, Research in Ethical Issues in Organizations, 7, Elsevier, Amsterdam
Power, M.: 2004, The Risk Management of Everything, Demos, London http://www.demos.co.uk/files/riskmanagementofeverything.pdf
Radermacher,R. and J. Brinkmann: 2011, Insurance for the Poor? – First Thoughts about Microinsurance Business Ethics, Journal of Business Ethics, vol 103, 63-76
 Updated handout to a presentation at the European Business Ethics Network (EBEN) Annual conference, Lille/France 2013. To begin with, this paper and presentation was planned as a joint project with Michael Häuser, FinanceRisk Assekuranz Makler GmbH. Since the plan didn’t work out, Michael doesn’t carry any responsibility for premises or conclusions of this paper, apart from the joint discovery of a reallly interesting topic.
 Internet source no longer responding [acc september 2013] http://www.insurehedge.com/html/Fidelity_Insurance.asp
 Cf. also http://legal-dictionary.thefreedictionary.com/Fidelity+Insurance “An agreement whereby, for a designated sum of money, one party agrees to guarantee the loyalty and honesty of an agent, officer, or employee of an employer by promising to compensate the employer for losses incurred as a result of the disloyalty or dishonesty of such individuals…” (West's Encyclopedia of American Law, 2e, 2008)
 Such insurance “pays for money and securities taken by burglary, robbery, theft, disappearance and destruction” (ibid)
 For less convincing videos in English see e.g. http://www.youtube.com/watch?v=m1989-DWfCQ , http://www.youtube.com/watch?v=0erCXp_IpW4, http://www.jwsuretybonds.com/info/videos/general/what-are-fidelity-bonds.htm (on the really simple side)
 The suggestion is so to speak to look at the overlap of HRM ethics, of (large) organization ethics and of banking industry and professional ethics:
- ·About HRM ethics see e.g. J.R. Deckop, 2006, ed., Human Resource Management Ethics, Information Age Publishing, Charlotte NC
- ·Organisation ethics again overlaps with corporate governance and/or enterprise risk management perspectives and internal control and organizational climate auditing, see e.g. “In accounting and auditing, internal control is defined as a process affected by an organization's structure, work and authority flows, people and management information systems, designed to help the organization accomplish specific goals or objectives. It is a means by which an organization's resources are directed, monitored, and measured. It plays an important role in preventing and detecting fraud and protecting the organization's resources, both physical (e.g., machinery and property) and intangible (e.g., reputation or intellectual property such as trademarks). At the organizational level, internal control objectives relate to the reliability of financial reporting, timely feedback on the achievement of operational or strategic goals, and compliance with laws and regulations…” http://en.wikipedia.org/wiki/Internal_control About soft vs hard internal controls see e.g. http://aymanoninternalaudit.wordpress.com/2011/04/27/soft-controls-better-than-hard-controls-%E2%80%A6/, and also once more the appendix of this article
- As an introduction to banking or financial industry ethics see e.g. C. Cosgrove-Sacks and P.H. Dembinski, 2012, eds., Trust and Ethics in Finance. Innovative ideas from the Robin Cosgrove Prize, Globethics, Geneva (downloadable: http://www.globethics.net/c/document_library/get_file?uuid=2ae8b194-cd34-4bef-8288-4f1765ac132c&groupId=4289936 ) or J.R. Boatright, 2014, Ethics in Finance, 3rd edition
- Cf as a quick and cheap Wikipedia reference about banking: “A bank is a financial institution and a financial intermediary that accepts deposits and channels those deposits into lending activities, either directly by loaning or indirectly through capital markets. A bank is the connection between customers that have capital deficits and customers with capital surpluses… Banks' activities can be divided into retail banking, dealing directly with individuals and small businesses; business banking, providing services to mid-market business; corporate banking, directed at large business entities; private banking, providing wealth management services to high net worth individuals and families; and investment banking, relating to activities on the financial markets. Most banks are profit-making, private enterprises. However, some are owned by government, or are non-profit organizations.” (Source: http://en.wikipedia.org/wiki/Bank) When it comes to insurability, the follow-up question is (ibid.): “Banks face a number of risks in order to conduct their business, and how well these risks are managed and understood is a key driver behind profitability, and how much capital a bank is required to hold. Some of the main risks faced by banks include:
- Credit risk: risk of loss,arising from a borrower who does not make payments as promised.
- Liquidity risk: risk that a given security or asset cannot be traded quickly enough in the market to prevent a loss (or make the required profit).
- Market risk: risk that the value of a portfolio, either an investment portfolio or a trading portfolio, will decrease due to the change in value of the market risk factors.
- Operational risk: risk arising from execution of a company's business functions.
- Reputational risk: a type of risk related to the trustworthiness of business.
- Macroeconomic risk: risks related to the aggregate economy the bank is operating in…” (source http://en.wikipedia.org/wiki/Bank )
 E.g. in a climate of solidarity, of cynicism, or somewhere in-between, cf typology