The ethical issues that matter most to insurance underwriting don’t just emerge when the policy is rated and distributed. They emerge at various points along the life cycle of a typical policy and so it’s at the beginning of that life cycle that we start, with the bringing together of insured perils and policy terms at the product design stage.
In ethical terms, this is a vital stage of the underwriting process. How well the ethical issues are handled at this product design stage will have a huge influence on the ethical ups and downs associated with the policy later on. For example, mis-selling problems can often trace their roots back to how the product in question was designed.
So what should an underwriter look for when thinking about the ethics of designing an insurance policy? Here are five factors worth considering.
Firstly, how well targetted is the policy? Has the policy’s target market been identified and their insurance needs researched? Do the policy’s proposed perils and terms reflect those needs? Policies that don’t reflect the particular needs of the market segment they’re to be sold to are more likely to give rise to mis-selling problems later on.
Secondly, how adequate are the policy’s perils and limits? To what extent does the policy reflect the nature and scale of the exposures it’s being packaged to cater for. So for example, if the policy covers certain medical expenses, are the limits of indemnity on offer suitable for the range of exposures in those circumstances? And if not (or if the fit is more nuanced than obvious), how well can the cover be clearly explained in the policy’s branding and packaging?
Thirdly, on a scale between simple and complex, does the policy reflect the capabilities of those who are expected to be buying it? Some risks are complex and need complex covers, designed, sold and bought by specialists: the capabilities of those involved seem to be in balance. That’s not always the case however. Some policies have been criticised for being unnecessarily complex for their target market, with more than a little suspicion that they were designed in this way to generate more profitable revenue.
Fourthly, do the policy’s perils and premium add up to something of value to the typical policyholder? Can the policyholder quite readily see value in paying that premium to cover those perils to that extent? Covers should of course be priced so as to generate a reasonable profit over time, and while some covers may turn out to be more profitable than others, in overall terms, levels of profit should not be exploitative. Some lines of business have been found to have had such low loss ratios that they’ve subsequently been judged as unethical.
And lastly, with what level of transparency has the policy been designed? Is it easy for a policyholder to recognise how well balanced are the perils with the premiums? Is the clarity of the policy’s front end matched by its back end terms and conditions? Or does the cover turn out to give with one hand and then take away with another?
These five factors (targeted, adequacy, complexity, value and transparency) allow the product designer to assess their prototype policy from a number of different directions and, of equal importance, to more easily document what they have found and then done about it. Those overseeing product development can incorporate them into their sign-off process and report more confidently to their management board that issues such as ethics and fairness have been adequately addressed.