‘Fairness’ crops up a lot in insurance regulation – the chief executive of the UK regulator said recently that the dominant theme for 21st century financial services would be fairness. And the insurance industry in its announcements often seeks to reassure consumers that this new rating factor or that tweak of cover is the fairest way forward.
And this emphasis on fairness will become an ever more common occurance over the next few years, as markets are restructured and the availability of cover revisited. Is there a danger that ‘fairness’ might become a term oversupplied with hot air, floating free of the reality that many policyholders encounter on the ground?
I’ve put together two simple tests that an underwriting or claims director can use when weighing up the fairness of a particular decision. I’ll use the availability of flood insurance as the context against which to illustrate these ideas.
Let’s start with weighing up the fairness of a particular decision. To weigh up how fair that decision really is, you should consider what decision you would make if you didn’t know anything about the particular consequences of that decision for yourself.
So, using our flood insurance example, you wouldn’t know anything about where your own house was located, or its exposure to, or history of, flooding. You wouldn’t know whether you had sufficient financial resources to fall back on should you find cover for flood unavailable. And you wouldn’t know anything about the insurance market, nor about the wider economic and political issues surrounding floor defences and the availability of insurance cover. You would make your decision about underwriting flood insurance from behind a complete veil of ignorance.
The consequences of that decision for you could fall anywhere on the scale between complete disaster and totally unaffected. In taking that decision, you have to weigh up whether you would personally be prepared to accept the consequences of your decision, not knowing how great or small they might be.
It is of course hugely difficult to detach ourselves to this extent, but what it does highlight is that the fairness of a decision is hugely influenced by our own personal willingness to accept the worst, as well as the best, consequences of our decision. It tilts us towards minimising the worse outcomes of our decision, even perhaps at the expense of reducing the best outcomes, for we are nervous about the risk of suffering those worst outcomes ourselves.
This idea of fairness helps us avoid seeing things from too narrow and self interested a perspective, something that I believe the insurance sector can struggle with at times.
In reality of course, many decisions present an array of alternatives, so how do you choose from them from behind that veil of ignorance. How should you compare the fairness of them all? I’ll look at that in a concluding post in a few days time.