May 16, 2023 3 min read

Why Insurers must Manage their Ethical Debt

Many digital decision systems deployed in insurance carry unknown levels of ethical debt. Over the next 3 to 5 years, a lot of that ethical debt will need to be repaid. In some circumstances, the amount could be very substantial. So what should insurers do now to prepare for this?

ethical debt
Are insurers carrying an unsustainable level of ethical debit? 

Insurers are more familiar with ethical debt than they think. Consider the recent ban in the UK on price walking in personal lines insurance. The sector went from having almost every insurer using lifetime value modelling in pricing, to a complete ban on its use, within about three years.

That was expensive, in terms of time, expense and reputation. And just think of all those things that the executives and data teams could have been doing instead. It wasn’t a case of ‘move fast and break things’ – it was a case of ‘move slow and reassemble the pieces’.

Ethical debt exists when a digital decision system is designed and operated with insufficient attention to the ethical concerns associated with the decisions outputs being generated. So in our example above, ethical debt had been created by pricing systems being designed and operated with insufficient attention to fairness.

And it was a debt that was obviously going to be called in for payment - I wrote about the pricing super complaint eight months before it was submitted, and much earlier than that on pricing walking in general. It was also a debt the timing of whose repayment was outwith of insurers’ control. That was in the hands of a leading consumer group. They called it in.

This is the problem with ethical debt. Quantum can be big. The disruptive effect can be huge. It could be called in at any time. Publicity is widespread and few if any will defend having to pay it. It just feels like something an insurer would want to avoid.

The Biggest Ethical Debt Facing Insurers

Yet some insurers don’t seem to be able to break their habit. Attention to fairness, discrimination, autonomy and conflicts of interest in the design of digital decision systems in insurance seems to still have a long way to go. The UK market is currently under a lot of scrutiny in terms of discriminatory pricing. That could be an ethical debt several magnitudes greater than that of price walking. And recent research points to it still not being adequately addressed (more here).

There are insurers building data ethics teams to address these issues. These are insurers who aren’t prepared to carry unknown levels of disruptive ethical debt any longer. Yet are they having enough impact? Are they being heard / taken seriously? I can’t imagine it being an easy job to influence executive decisions on issues directly related to the bottom line.

At least they’re trying. Others are at best just watching, at worse looking for market opportunities in all this. When I read of US regulators having to mandate that insurers actually monitor for discriminatory outcomes, when I read of how many businesses are still not monitoring the outcomes from their AI systems, then what I see are firms willing to run unknown levels of ethical debt.

The ones being kept in the dark of course are the investors whose funds are being played with. Yet I wonder whether at some point in time, firms thought to be carrying high levels of ethical debt might become targets for short selling. All it needs is for some research into the ethical issues and how and when they might be called out. Again, lack of control and no options around a repayment plan.

Simple Steps

So what should insurers do? It’s fairly simple:

  • understand the ethical issues involved;
  • estimate their financial impact if unaddressed;
  • assess the likely path to their realisation;
  • manage their mitigation.

Start with discriminatory pricing, as it’s a clear and present danger. And challenge yourselves on those four steps. Some insurers operate with very closed cultures and are at risk of just not hearing what they need to hear.

I recall, from around 30 years ago, reading an article in a leading UK newspaper about a firm who had introduced carbon emissions as a mandatory item in its project protocols. The reporter had asked how the amount was to be calculated and the response was that they didn’t really know – it just felt like the right thing to do, and that their people would work something out. Your firm might have similar concerns about ethical debt. They need to respond in the same way as the carbon emissions firm – just do it, because it will come out at some point.

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.
Great! You’ve successfully signed up.
Welcome back! You've successfully signed in.
You've successfully subscribed to Ethics and Insurance.
Your link has expired.
Success! Check your email for magic link to sign-in.
Success! Your billing info has been updated.
Your billing was not updated.