This is the second of three (it may become four) posts that will explore ethical underwriting. The first post looked at how insurers take moral hazard into account when underwriting a risk and whether this attention to the behaviours of the insured overlapped with ethical underwriting. They seemed to share some common interests, but that didn’t seem enough to give all underwriting an ethical dimension.
Are there examples from general insurance underwriting that have a clearer ethical dimension? An article by a Canadian underwriter, Rob Bickerton, is a good starting point. It illustrates how the ethical characteristics of financial institutions could influence the terms given for bond policies (such policies provide cover against dishonesty and fraud). He proposes that the existance, and extent of embeddedness, of corporate value statements and codes of ethics should be underwriting factors for such bonds. The nature of remuneration policies and the availability and takeup of tailored ethical training resources are two other examples he suggests ethical underwriting should take note of.
So where qualitative factors such as management standards, and the business systems linked with them, are particularly influential to the terms being offered, ethical considerations become a valid part of the underwriter’s toolkit. However, the quality of management is important to all commercial insurance covers, so there could be a sliding scale here, with a baseline of some ethical behaviour indicators common to all covers, while with certain combinations of policy type and business sector, a more detailed set of ethical considerations take on significance.
And it is with such examples that we see some space opening up between moral hazard and ethical underwriting. The latter moves beyond moral hazard by relying on the way in which the ethical infrastructure that a firm has assembled starts to influence the culture of the firm and from that, the attitudes it takes to loss prevention, and from that, the fewer claims it needs to make, and from that, the premiums it has to pay.
What other types of policy might benefit from the approach Rob Bickerton advocates for bond policies? Professional Indemnity and Directors and Officers cover come to mind. Please feel free to leave a comment with other suggestions.
In a later post, I’ll outline some factors that might be used in ethical underwriting. In the meantime, I’d like to look at one particular indicator of an ethical culture within a firm. Is membership of a relevant professional body an ethical underwriting factor for the professional indemnity risk of a professional services firm? Is the number of chartered title holders on the firm’s board an indicator of its ethical knowledge and capacity? In other words, could the standards of professional bodies be used as some form of proxy for the ethical capacity of member firms and individuals?
Let’s bring those questions closer to home. Might a Chartered Insurer be willing to reflect the chartered status of an insurance broker in the renewal terms it offers for its PI or D&O renewal? After all, both insurer and insured would be meeting similar conditions on qualified personnel and ethical standards.
A very significant player in the UK insurance market is already talking openly about using indicators of ethical behaviour to assess risks.
Wouldn’t it be rather ironic then to see the UK insurance market, on the subject of assessing risks from management behaviour, being led by its regulator? A case of the cart pulling the horse perhaps?