Jun 5, 2023 5 min read

Are You Tracking Conflicts of Interest Properly?

Conflicts of interest are everywhere in insurance. There isn’t a part of the market where their influence is not significant. Yet they come in many different forms. This makes it important to track them properly, to understand concentrations, recognise trends and monitor mitigation outcomes.

conflicts of interest
The tracking of conflicts of interest is not quite as high tech as this, yet

In tracking conflicts of interest (COIs), you’re essentially looking for two gaps. The first is between the risks that exist and the risks that you are tracking. And the second is between your anticipated mitigation outcomes and your actual mitigation outcomes. It is in relation to these two gaps that a lot of your attention should be concentrated.

A key step then in tracking conflicts of interest is the COI risk assessment that should have been carried out at the outset. This usually involves some form of social network analysis (SNA). Most mid to large insurers have a SNA expert within their firm, as part of their counter fraud team. That person just needs to be reorientated from looking out, to looking inside their own firm.

I would go so far as to say that without a decent COI risk assessment, an insurer’s tracking of conflicts of interest is going to be fundamentally flawed. The COI outcomes being tracked mean nothing without a mapping of where the risks lie.

First Questions

As in any tracking of risk information, four essential questions need to be asked at the outset. These will help you understand something about the completeness and reliability of what you’re seeing coming through.

  • is there a single definition of what your firm means by a conflict of interest? If there isn’t, it’s likely that your teams are following their own interpretations.
  • do your reporting boundaries cover all firms within your group, or just those of its core business? Given that many firms have quite complex corporate structures (and have them for a reason), the boundaries need to be very carefully thought through.
  • how are conflicts of interest perceived within the firm? Are they talked about as if they are accusations, something that has gone wrong? Or are they talked about as situations that need to be addressed? Tone matters.
  • are conflicts of interest only tracked where there’s some form of financial interest involved? Or are non-financial interests picked up too, such as influence, access, promotion or status?

Each of these four questions will tell you something about whether your COIs are being under reported. Tightening up on these issues will give you a more realistic picture of what exactly is happening.

Four Categories

Given that all conflicts of interests stem from some form of relationship, it makes sense to track the type of relationship against which the COIs are emerging. Four categories of relationship should be used and each conflict of interest allocated to one of them.

  • organisational : these stem from how the firm is organised, and from how its products are designed, distributed and sold;
  • financial : these stem from the financial risks and rewards that can influence behaviours and decisions;
  • family : these stem from the influence that family ties can have;
  • personal : these stem from the influence that someone's personal interests can have.

Sometimes a conflict of interest can appear to fall into more than one category. This is best handled by a) finding the proximate cause of the conflict, and b) following a particular method to create a consistency.  

Once you’ve decided which category a conflict of interest falls into, you then need to ascribe three different characteristics to it. These will help you break down the COIs being reported along lines that will tell you a lot about the spread and concentration of risk. These categories have been drawn from leading texts on business ethics in financial services.

Characteristic 1

The first characteristic of a COI is whether it is an actual, potential or perceived conflict of interest.

  • an actual conflict of interest is when an individual actually does act against the interest of someone whose interests they should be representing;
  • a potential conflict of interest is when it is possible that an actual conflict of interest could occur;
  • a perceived conflict of interest is when one party feels that another party is not acting in their interests (when that other party should be doing so), but in fact, it turns out that no such conflict exists, or it's being adequately managed.

In my experience, it's around this characteristic that most confusion about COIs happens. It is more common than you may think to find insurers not recognising the existence of actual conflicts of interest or perceived conflicts of interest. That’s why it is important (as noted above) to check what people understand about what exactly a COI is.

Characteristic 2

The second characteristic of a COI is whether it is a personal or impersonal conflict of interest.

  • a personal conflict of interest occurs when the interest (of person 1) that is interfering with the performance of an obligation to someone (person 2) carries with it some sort of gain for person 1. Bear in mind that a personal conflict of interest is not just about people – it applies to firms too.
  • an impersonal conflict of interest occurs when the two interests in conflict are both being served by the same person or the same firm of the person involved.

If you think about how insurance markets are structured, and how insurance as a product works, it becomes obvious that there are going to be more personal than impersonal COIs in insurance. However, that doesn't mean that impersonal conflicts of interest cannot in some way be significant.

Characteristic 3

The third characteristics of a COI is whether it is an individual or organisational conflict of interest.

  • an individual conflict of interest occurs when the interest interfering with the performance of the commitment realises some form of gain for a particular individual.
  • an organisational conflict of interest occurs when the interest interfering with the performance of the commitment realises some form of gain for an organisation.

There’s a common adage that urges people to ‘follow the money’. This characteristic of COIs does just that.

Two Final Thoughts

You may think this seems all a bit faffy; more labels than a spring sale. Yet remember that very first sentence: conflicts of interest are everywhere in insurance. If something is everywhere, you need to start breaking it down in order to find concentrations and gaps, what is working and not working. Sure, by all means label them as claims or counter fraud as well, but first, use these categories and characteristics. They will show you what sort of levers are being pulled and pushed, by whom and for what reason. By doing so, it helps you find the source and hence the best mitigating solution.

A final point worth remembering is that tracking COIs needs to be done with a critical and somewhat independent eye. People can sometimes be too close to COIs to fully realise them for what they are. At the same time, you need someone who understands the ins and outs of the business, and someone who is willing to diplomatically call out a COI for what it actually is. There can often be some seriously vested interests in how they are recognised and managed. This then makes the tracking of COIs something that leaders in the firm need to fully support.

Duncan Minty
Duncan Minty
Duncan has been researching and writing about ethics in insurance for over 20 years. As a Chartered Insurance Practitioner, he combines market knowledge with a strong and independent radar on ethics.
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