This is the first of three posts that will explore ethical underwriting. It’s a term one rarely comes across in insurance circles, let alone amongst the insurance buying public. I’ve never come across it before and Victoria Pynchon, a Californian lawyer writing in 2008, thought it altogether non-existent:
I also have to tell you that I never once, not on a single occasion, in 25 years of legal practice, a decade of which was spent concentrating on insurance coverage issues, did I ever hear anyone ask whether any underwriting or claims practice was ethical!
I can’t imagine the European insurance market (or the intervening years) providing Victoria with a radically different experience, so it may indeed be a rare bird we’re looking for.
It makes sense to start by defining what we mean by ethical underwriting. Let’s try this definition to start with: how the practice of insurance underwriting rewards or penalises the behaviour of people and organisations in the business world.
An obvious starting point in our search for ethical underwriting would be in the realm of moral hazard. This is where the underwriter looks beyond the physical characteristics of a risk, to the myriad of non-physical factors which could influence the likely size and frequency of claims. A simple example would be in motor insurance, with the car representing the physical hazard and the driver representing the moral hazard, through their driving experience, convictions, accident record and the like. Equivalent examples from the world of commercial insurance could be the professional indemnity underwriter assessing certain characteristics of a firm of advisers or an employers’ liability underwriter looking at the profile of a manufacturing firm. They’re both looking for evidence of how the management of those companies are behaving when servicing clients or safeguarding employees.
Clearly, underwriting seems to perform a useful social function by applying a sliding scale of financial pressure on such firms, according to how well they’ve behaved within the context of the particular risk being insured. Hence improve and your premiums go down; fall back and your premiums go up. So might this suggest that underwriting has an intrinsically ethical side to it? It does after all cast a critical, structured eye over the behaviour of business people and organisations.
That could be reading more into plain, ordinary underwriting than seems sensible. After all, the underwriter is tasked with increasing premium income while keeping loss ratios low. Insurance is a business after all. If ‘management behaviour A’ achieved those things better than ‘management behaviour B’, then the underwriter will want to reflect ‘management behaviour A’ in the terms being offered, irrespective of whether A was judged more ethical than B.
It seems safe to say that underwriting and business ethics share some common interests, but not safe to say that that makes all underwriting ethical. Note the ‘all’ before underwriting, for my next post will explore examples of underwriting practices that we can feel safer assigning an ethical label to.