The top ethical risk for claims functions in 2019 will be conflicts of interest. That means every claims director in every insurer should be looking to include a conflicts risk assessment in their plans for 2019. Anyone in doubt should read about the huge fine issued this week by the UK regulator on Liberty Mutual. It provides an ideal business case for why the risks from conflicts of interest in insurance claims need to be assessed and addressed. Here’s an outline of how to get started.
It’s important from the outset to remember that there’s often nothing unethical about being in a conflict of interest. Insurance is full of conflicts of interest. Take them away and the market would struggle to survive. The real ethical question to be addressed is not how you avoid conflicts of interest. It’s how you recognise and respond to them.
Let’s be honest – recognising and responding to conflicts of interest has sometimes been a struggle for insurance firms. This has on occasions led to some firms treating conflicts of interest as if they were accusations, and so to be avoided at all costs. That’s a dangerous line to follow. It can lead to conflicts of interest just not being seen, or swept under the carpet. They are not accusations – they are just situations that need to be handled properly.
3 Types of Conflict of Interest
Let’s look at three types of conflicts of interest in insurance claims. We’ll start with the most obvious one, between the insurer and the policyholder. There’s a tension between the insurer wanting to run a profitable business, with claims as its biggest expense, and the policyholder wanting to get a full and fair settlement of their claim. In between them sits a policy wording, the details of which are much more understood by one side than the other.
This can lead to an atmosphere of unhealthy tension. One side is viewed as using their knowledge and power to cut claim settlements in order to raise profits. The other side is viewed as perennially seeking to get more out of their claim through exaggeration or fraud. Conflicts of interest go into a dangerous slide when these perceptions are left to feed into, and reinforce, the other.
A lot of insurers say they don’t sign up to this simple view, instead seeing a happy claimant as a profitable long term customer. Remember though that talking about such a commitment is one thing. Delivering on it is another. That requires careful attention to how that information asymmetry is managed and how a culture of honesty and integrity is maintained within the claims department. Conflicts of interest are very much a culture thing.
The Claims Supply Chain
A second type of conflict of interest lies in the various layers of the insurer’s claims supply chain. The supplier often seeks to justify its appointment with a keen eye on cost management and procedural fulfilment. The upshot of this is that the quality of work and the fair treatment of customers often struggle to be heard. That conflict between cost, quality and fairness will never disappear altogether. However an insurer who wants to turn claimants into happy customers needs to have claims staff who understand ethics and who are supported in working in non-financial ways.
The third layer of conflict of interest involves one insurer covering both parties to a claim. A similar version has an adjuster being on the panel of the insurers of both parties to a loss. This should be familiar ground to most insurers and adjusters, who should be responding to such situations with clear and well established procedures.
Historically, a simple structure to a claims management service meant that conflicts of interest were easily recognised and dealt with. This was because lines of control were shorter, clearer and closer to the customer. However many insurers now manage their claims through complex networks of product and service providers. Some are even prepared to outsource the whole lot. As a result, conflicts of interest in insurance claims have multiplied, both in size and complexity.
This has resulted in two trends. Firstly, the scope of conflicts of interest at play within a supply chain is often underestimated. And secondly, the controls put in place for conflicts of interest are often thought to be more effective than they really are. An eerie self confidence seems to exist at times around conflicts of interest within claims management. It’s not something that history indicates has always been earned.
Culture over Controls
To resolve such issues, some insurers may be tempted to introduce more detailed controls for managing conflicts of interest. They then resort to contract clauses to reinforce their adoption by suppliers. Of course controls needs to be adequate and training in their use tailored and focused. They are however only effective only up to a point. The lynch pin in their adoption and use is the ethical culture within the organisations concerned. And that is a matter for both sides’ senior management. Unless people want to use such controls and are supported in this by those senior people, they are always going to struggle for attention against more attractive issues like reward and recognition.
What can an Insurer Do Now?
So what can an insurer do now that would make a difference to their handling of conflicts of interest?
I mentioned earlier that one of the main problems has been too narrow a view of the conflicts of interest that need addressing. Tackling that is described in some detail in this free guide ‘How to assess conflict of interest risk’.
Senior management should maintain an active and ongoing involvement in their claims supply chains. As Liberty Mutual has now found out to its cost, delegating it to a board committee can turn into a huge source of ethical risk. Every claims director should be constructing their own ‘roadmap for leadership on ethics’.
And thirdly, I would encourage every compliance and audit person with an interest in claims to look beyond the analytics, data and costs. They need to seek out the behavioural issues that are causing some of the many good people in insurance claims to just not see the types of issues highlighted in the regulator’s final notice on Liberty Mutual. There needs to be more critical thinking in claims, and more critical friends pointing out the big ethical questions.