The current debate about the future of flood insurance brings together seven points that nicely crystallise around what is widely considered to be the central issue in the ethics of insurance: the question of fairness in how underwriting parameters are set. In this last of four posts, I’ll bring those several issues together into one place.
- Insurers should be transparent about why a policyholder’s premium is increasing or their cover reducing. Keeping policyholders informed allows them to weigh up the costs and benefits of taking various risk reduction decisions.
- Insurers should also be transparent about the assumptions being made when processing a policyholder’s quotation request, so that policyholders don’t inadvertently loose cover around what some might consider to be a key feature of their policy.
- There should be a limit to the degree to which some policyholders with little exposure to a particular peril cross subsidise other policyholders who have significant exposure to that same peril.
- There should also be a limit to which the size of insurance pools are reduced. The sharing of risk is a fundamental part to what defines insurance.
- Insurers should be even in how they weigh up the contribution of individual perils to a policy’s overall risk. This would ensure that the various streams of cross subsidy between individual perils are recognised in how overall premiums and cover are finalised.
- It is important to insurers, policyholders and the public at large that policyholders receive positive encouragement to reduce the risk their policy presents. If an insurer can determine a policy’s risk at the micro level, it should also recognise risk reduction measures at that same level.
- Insurance has become part of the fabric of a stable and prosperous society. This places insurers under a responsibility to keep as few people as possible from being excluded from the insured community through little to no fault of their own.
Factors such as these are the foundations upon which the ethics of insurance are built. The challenge for both insurers and the Government is not to loose sight of them in the midst of some tough negotiating, for, over time, they will be played out and the fairness of general insurance in the eyes of the public will be hugely influenced by how they have been handled.