An underwriter will invariably design and price a particular type of policy with at least one eye on how it’s going to be distributed to its target market. The intangible nature of the product itself allows it to be packaged, bundled or bolted on in many different ways. This has resulted in quite innovative, as well as quite pernicious, ways of distributing insurance. The ethical questions that arise most often are centred around the themes of fairness and information asymmetry.
The dimension of fairness that matters most in insurance distribution is that of equal access. This doesn’t mean that all policies should be available for everyone, but that all people should have an equal opportunity to access a policy that suits them. Fairness in the distribution of insurance must therefore be seen as an ethical issue for the market as a whole. Are all sectors of society able to access an insurance policy to meet their needs, or to put it another way, is the market able to cover all of the many types of risk transfer situations that society would like cover for?
That’s a tough challenge and for some policyholders, and some types of risk, it may be a challenge too far. Someone’s claims history may be so poor, or something’s exposure to loss so high, that losses are no longer going to be fortuitous, making insurance an inappropriate risk transfer solution. Remember that ‘merit’ is another dimension of fairness that shouldn’t be lost sight of.
Many challenges are however more often of our own making, created by outmoded perceptions of what is and is not right, what is and is not possible. Some of the most significant innovations in insurance have been when those perceptions are put aside and new thinking allowed a foothold. Microinsurance is a classic example of how insurance distribution has being revisited with fresh and innovative ideas. Perhaps that’s why a survey earlier this year by PwC found that nearly two thirds of global insurance CEOs linked ethical culture with innovation within their firms.
Let’s move on from this market level view and look at a company level for other ethical themes in how insurance is distributed.
Access to insurance needs to be balanced fairly over all distribution channels. Insurers should for example make extensive use of the internet, but that should not be at the expense of other channels. While every underwriter has a computer, every policyholder does not. Equally, distributing to your target market using social-demographics and IP addresses could make sense on an IT whiteboard, but holds a number of unseen dangers to an insurer’s reputation. Your distribution strategy needs to fit within a wider understanding of all channels and how, and by whom, and why, they’re used.
The pricing of any one given product should be balanced fairly across all distribution channels. Different channels can of course have different distribution costs but the difference, taking the various forms of expense into account, should be minimal in relation to the price of risk. Pricing strategies that exploit one distribution channel at the expense of another, based for example on different levels of renewal inertia, would be hard pressed to pass any ethical assessment, as they rely on information asymmetries and undermine arguments that insurance should be bought on something other than price. Dual pricing, as it is called, is not a sign of a functional and professional market.
And finally, products should be rated fairly for all types of buyers. A channel targeting an audience of sophisticated buyers should be underwritten with the same set of principles as a channel targeting an audience for which insurance is a relative mystery. Exploiting varying levels of information asymmetry across different channels is unethical and undermines market confidence. The problems this can cause grow exponentially when the insurer, or as is more often the case, a distribution partner, builds a sales script around just such weaknesses.
Underwriters are manufacturers of insurance products and, as every product liability underwriter will testify, the responsibilities of manufacturers do not stop at the ‘factory door’. They extend down distribution channels to the point of sale and then beyond that in how customers experience what they’ve been sold. That’s why underwriters need to have distribution on their ethical radars.