This series on the ethical responsibilities associated with underwriting will draw to a close with a question that is somewhat broad, but quite central to the role of insurance today: does an insurance policy have to deliver social value? And what does that mean anyway?
The idea of ‘social value’ has gained some impressive headlines over the last few years in relation to the wider financial services community: the Governor of the Bank of England has described some banking activities as “socially useless” and the then Chairman of the Financial Services Authority talked about some forms of financial innovation being of “very dubious social value”.
So to what extent does ‘social value’ apply to insurance? The above two quotes certainly indicate that those in authority see it applying to insurance just as much as any other financial product. Indeed, the close contact insurance has with all strands of society, often at times of loss, would presuppose that that contact delivers some form of value to both sides.
Let’s consider then how insurance adds value to society? Risk transfer, risk pooling and risk management would surely top the list. Over the last few centuries, these mechanisms have helped individuals and businesses take on risks they would otherwise have been unable to face along and to then manage the impact of those losses that did occur. It’s also helped reduce losses by guiding policyholders on how to prevent losses happening in the first place. As a result, insurance has helped society to progress more strongly and confidently, and become more stable and better off.
We can see from this that social value represents not just the financial contribution that the buying and selling of a product makes to the economic well being of society (important though that certainly is), but also a broader contribution that has allowed society to more easily give expression to its higher ambitions of progress, equality and creativity.
So for an insurance policy to add value to society, it should perform some form of (to stick with our original trio for simplicity) risk pooling, risk transfer and risk management for the individuals or businesses seeking protection in some way or another. And perhaps not just one or two of these attributes, but all three, even if the latter just takes the form of a policy warranty.
An underwriter needs to ensure that some form of ‘social value’ is embedded in the policies they’re responsible for. For example, there needs to be some genuine form of risk transfer involved. Insurance policies designed largely for tax or compliance avoidance can hardly be thought of as ethical. The classic example of this is ‘dead peasant insurance’, popular with many large US companies in the 1980s and 1990s and the subject of much litigation since.
Such concerns are just as valid today as twenty years ago – to quote the then Chairman of the FSA in 2011: “A depressingly large proportion of what is labelled ‘innovative product structuring’ is based on tax management activities”. Yes, he was talking about banking, but no one sees the insurance sector as immune to similar pressures.
Social value can be a tricky thing to nail down at times, yet it seems to be central to why insurance has become so embedded in our personal and commercial lives. It needs to be protected, but there’s little with which you can measure it, other than through an essentially ‘professional’ perspective on ‘why we do what we do’. It seems to relate to the ‘public interest’ remit of organisations like the Chartered Insurance Institute.
I want to end by looking at this overall series of blogs on ‘ethics and underwriting’. How should someone involved in underwriting make use of the five topics I’ve covered (product design, underwriting fairness, distribution, client information and social value)?
They’re essentially an aid to breaking out of ‘existing group think’, for standing back and asking the bigger, (perhaps) more challenging questions. The regulator continues to look closely at the ethical culture within insurance and has talked about everyone needing to ‘understand why you do what you do’. I recommend using these five topics to help map out the big picture of the ethical culture within your underwriting department and as an aid to preparing suitably reflective responses for when the regulator comes knocking.