Mar 31, 2021 4 min read

Why Insurance Supply Chains create Ethical Risks

Supply chains in the insurance sector can be a breeding ground for unethical behaviour. Sure, there are good firms out there, helping insurers deliver products and services to consumers. That in itself is not enough though, for good firms can make bad decisions, and supply chains can exacerbate this. So why should this be the case? What is it about supply chains that set off ethical warning lights? I’m going to look at four ways in which insurance supply chains put insurers at ethical risk.

Knowing Customers

Insurance supply chains are becoming more complex. Each link in the chain should of course contribute its own particular skills and experience. Added together, the customer journey begins to look pretty exceptional. However, appearance is not the same as execution. What all those links add is distance.

In ethics, distance from your customer can be a dangerous thing. It can detach a firm at one end of that chain (say an insurer manufacturing insurance products) from what the customer at the other end of that chain is experiencing. The more detached that customer is to the insurer, the more anonymous they become to decision makers at that insurer. They’re experienced less as people and more as revenue units.

That anonymity can be a breeding ground for unethical behaviours. Research shows that the more anonymous the customer becomes, the more likely it is that a firm will engage in self-interested ways. Two factors contribute to this.

Firstly, the distance in that supply chain makes it more difficult to know what your customers’ interests are. In which case, putting their interests first doesn’t happen. Instead, ‘insurer knows best’ attitudes move in and control the narrative, for example around ethical issues like fairness and conflicts of interest.

Secondly, that distance also makes it more difficult to know what your customers are experiencing. Feedback loops don’t work well across several layers of handover. As a result, the insurer becomes more detached from, less empathic to, its customers. When this happens, it’s more likely that bad decisions will happen, and less likely that they will be challenged.

This can often emerge in what behavioural ethics calls rationalisations – where someone is trying to explain away something. There’s a common one referred to as ‘the denial of loss’, in which people talk about ‘no one is going to be worse off, and who are these people anyway?’ They’re denying the possibility of there being a downside to a decision, but the basis upon which they’re doing it is ignorance of the customer.

Performance over Ethics

A second way in which supply chains generate ethical risk is through what holds those individual links together. We’re talking here about contracts, performance targets, delivery standards and the like. These create a web of hard and soft rules, incentives and tolerances. All fairly standard procurement stuff, you might think. However, what also emerges is a culture based more on ‘what we have to do’, and less on ‘what we should do’. Ethics struggles to get a look in, despite the presence of obligations like treating customers fairly. Those who seek to deliver more ethical decisions experience all this as something they have to push through, and only the most confident and concerned are likely to expend the energy required. What I call locked decision systems may  be efficient, but struggle to be fair.

Accountability Problems

Supply chains often bring together a number of different specialisms. The idea is that this then raises the overall quality of what the supply chain has been set up to deliver. All fine on paper, but less fine on outcomes. That’s because standards of accountability are harder to achieve, for two reasons.

The first is because of what is called siloed accountability. The complexity of supply chains results in greater compartmentalisation of actions and decisions. It’s all too easy for individuals, unable to see how an outcome could have resulted from their particular silo, to ignore it altogether.

The second is called diluted accountability. That complexity of supply chains also results in individuals feeling that their input, their decision, is so marginal as to obviate any responsibility for the consequences that collectively result. The view would be that ‘I can’t do anything wrong because my input is so marginal’.

What customers can then experience are ‘Kafkaesque’ situations where no one takes responsibility other than to suggest you speak to someone else. I believe such experiences help explain the regulator’s statistics for ‘successful’ claimants who still want to complain.

Destructive Demand

Destructive demand occurs when behaviours in a secondary market undermine behaviours in a primary market. So something that is normal in another sector, when made part of an insurance supply chain, starts to influence the norms of the links around it, causing standards to drift down. As a result, customers experience something quite different from what they expected from an insurer.

Supply chains are less obvious to customers than to the insurers who set them up, so what customers experience is still labelled insurance, rather than the sales, repair or replacement sector responsible for that link in the chain. Trust in the product declines, because of the decline in the service being experienced.

A lot of this boils down to culture. There are few links in insurance supply chains who are under obligations like insurers in respect of ethical culture. Yet while the supply chain is responsible for delivering their service, the insurer remains accountable for the outcomes generated. The more links there are in a supply chain, the harder it is to control for destructive demand.

Steps Forward

Insurance has had supply chains for a long time. Think of all those intermediaries both upstream and downstream of the insurer. They can build access, confidence and value in the market. Yet the sector knows that those distribution chains are a historic and ongoing source of reputational risk. Modern insurance supply chains, geared more towards claims, are in danger of replicating that reputational exposure.

So how can you start to contain and reduce those reputational exposures? Here are five suggestions…

  • Listen to what your customers want to tell you. Don’t rely on what you think they want.
  • Build ethics into the design and operation of your supply chain.
  • Monitor real customer experiences and the outcomes they result in.
  • Conduct regular due diligence on key ethical issues.
  • Operate a whistleblowing facility across your supply chain. And check regularly that it is working.

Am I asking for a lot here? I don’t think so. It draws on several years’ experience as head of insurance for Europe’s biggest vehicle fleet, moving, scrapping and repairing more vehicles per year than many insurers, pushing standards for what our customers experienced. A key part of getting that right was a strong representative voice for our customer base, plus tight accountability and transparency. Hard work, but worth it in the end.

Duncan Minty
Duncan Minty
Duncan has been researching and writing about ethics in insurance for over 20 years. As a Chartered Insurance Practitioner, he combines market knowledge with a strong and independent radar on ethics.
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