insurance community university ethics and the insurance industry 1

Insurance Community University

Ethics and the Insurance Industry

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Your Instructor Today

Laurie Infantino AFIS, CISC, CIC, CRIS, ACSR, CISR

President, Insurance Community Center


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What this class will cover

1. Background on “ethics” and “morality” from an historical and current day perspective

2. Ethics v. Morality3. The Ethical Requirement for Business

and Insurance4. Case Studies

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Background on “ethics” and “morality” from an historical and current day

perspective

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The Foundation of Ethics

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PlatoSocrates Aristotle


The Foundation of the “Unethical”Draco and Draconian• Greek statesman who laid down a code

of laws for Athens 621 B.C. that mandated death as punishment for minor crimes

• “Draconian" remains in use today as signifying a rule unflinchingly severe

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Ethics TODAY

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Jeff Skilling Jerry Sandusky OctomomEnron Penn State

Joe Paterno


• 2005 Spitzer as attorney general of NY filed suit against AIG and Hank Greenburg

• Spitzer was inaugurated on 1/1/07 as governor of NY promising to focus on ethical government and the economy.

• 2008 Involved in a prostitution Scandal

• Resigned 3/1208 resigned from Governor of NY

• 11/6/08 federal prosecutors declined to press charges

• He’s Back!!!

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Why Should We Study Ethics?

• High profile cases have raised the question of ethical behavior

• Businesses can no longer hide• Transparency is the new watchword• The public demands more from the

business relationships• In general there are higher standards

being placed on behavior (fiduciary?)

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Interesting Ethical/Moral Issues Today• Bailing on your mortgage• Declaring bankruptcy• Unemployment for the MAXIMUM time

available• Wage and Hour

• Non-exempt—overtime• Exempt—no overtime

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Polling Question #1

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Your insured has defaulted at the bank and the bank is foreclosing in the house. Your insured is staying in the house UNTIL they are kicked out. They are required by the bank to continue to carry insurance on the home BUT they have requested you cancel because they do not have the money and they do NOT want you to send notice to the bank. What will you do.


Foundation of Ethics

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• The philosophical background of ethics can be traced to Plato as espoused most notably in the ten books of The Republic (Republico).

• The Republic was patterned after much of the works of Socrates—a teacher of Plato and carried forward by Aristotle who was a student of Plato at the age of 17 in Athens (367BC).

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• Aristotle and his peers were among the first “ancient” philosophers who made a serious and systematic study of moral principles that he called ethics

• “Aristotle believed, our early training and current material circumstances will determine to a great extent our capacity to follow the right path.” Philosophy The Classics

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A Fable Worth Repeating


Socrates and Glaucon

• In The Republic, Plato recounts a dialogue between Socrates and Glaucon, Plato’s older brother.

• In it, Glaucon argues that only the fear of detection and punishment prevents a human being from breaking the law and doing evil for the sake of his own self-interest.

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• Glaucon thinks that this natural fact is demonstrated by the fable of the shepherd Gyges, who found a gold ring which made him invisible whenever he twisted it on his finger.

• On realizing the ring’s power, Gyges used it to seduce the queen, murder the king, and take the throne.

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• Glaucon’s claim then, is that every one of us, however law-abiding and good we might seem, would do as Gyges did, or something else in our self-interest, if we could avoid detection and punishment.

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Philosophy Branches

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Philosophy Branches

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What Does Ethics Mean?

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Ethics Defined

• Webster’s Dictionary: “The discipline dealing with what is good and bad and with moral duty and obligation” (personal statement)

• Golden Rule: “Do unto others what you would want them to do unto you”

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What is Ethics?

• Cambridge Dictionary of Philosophy, 1995: The word itself is sometimes used to refer to the set of rules, principles, or ways of thinking that guide, or claim authority to guide, the actions of a particular group; and sometimes it stands for the systematic study of reasoning about how we ought to act.

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Ethics Defined

• Ayn Rand, Russian-American novelist and philosopher (1905-1982): Ethics is a code of values which guide our choices and actions and determine the purpose and course of our lives.”

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Ethics Vs MoralityIt is not always that simple a

decision

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Ethics vs Morality

• Often these words are used interchangeably

• Morals define personal character• Ethics stress a social system to which

morals are applied. Ethics point to standards of code of behavior expected by the group to which individuals belong

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Polling Question #2

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Your insured has bought a foreclosed home and intends to rent it out. There is no one residing there currently and they have asked you for a quotation to insure the home. You gave your insured two quotations: one that is inexpensive based on it being occupied and the other more expensive if it is vacant. Your insured asks for the less expensive insurance and tells you to tell the company the home is occupied. What is the “ethical” thing to do?


Ethics vs Morality

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Ethics vs. Morality

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Ethics vs. Morality

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Ethics and Morality

• This conflict is often at issue in the workplace

• Example

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Consequences

When the stakes are higher,doing the right thing is harder.


Ethics of America Study

Josephson InstituteBiennial Report 2010

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Polling Question #3

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Have you ever cheated on an exam?


Polling Question #4

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Have you EVER lied to your parents?


Josephson Institute Survey

• On-Line• 6,930 respondents• Age groups

– 17 and under– 18-24– 25-40– 41-50– Over 50

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Age Matters

• Young generations more likely to engage in dishonest conduct

• 17 or under: 51% believe lying and cheating are necessary to succeed

• Over 50: 10%• 17 or under: 31% deceive boss

– Over 50: 8%

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Attitude Matters

• If the person holds a belief that lying and cheating are necessary (cynics) – that person more likely to lie and cheat

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Attitude Matters

• Cynics are: – Three times more likely to lie to a customer

(22% vs. 7%)– Inflate an expense claim (13% v. 4%), or

inflate an insurance claim (6% vs. 2%)– More than twice as likely to conceal or

distort information when communicating with their boss (24% vs. 10%)

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Inflating Insurance Claim

• Age– 18-24 (7%)– 25-40 (3%)– 41-50 (2%)– Over 50 (2%)

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Polling Question #5

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Your homeowner insured is both a client and a friend. She has a break in and has submitted a claim. You KNOW that she has a habit of buying cloths, wearing them, and then returning them. As you look down her list of items stolen you KNOW that many of the items she had returned to the store. What should you do?


Inflating Insurance Claim

• Attitude– Those who believe one has to lie or cheat

at least occasionally in order to succeed are three times more likely to cheat an insurance company (6% v. 2%)

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Ethics and Self Image

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Ethics and Self Image

• Percentage who said they are more ethical than most people they know: – Age: 17 or under (64%)– 18-24 (73%)– 25-40 (71%)– 41-50 (69%)– Over 50 (67%)

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Josephson Six Pillars of Character

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Influences on Behavior• Family, church, and school provide the

foundations for behavior early in life• Greed and power can both influence

one’s perception of acceptable behavior• Competition can drive behavior• The actions of business associates can

affect patterns of corporate behavior• Fear of discovery can adversely affect

individual behavior

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Common Rationalizations for Not Doing What’s Right• Everyone else does it• Nobody will care• The boss does it• No one will know• I don’t have time to do it right• That’s close enough• Some rules were meant to be broken• It’s not my job

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It is Often About Perceptions

Stereotyping

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Polling Question #6

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We may not want to admit that we cast judgment on people without knowing them, but most of us do from time to time. Which profession would you rank the “lowest” as far as ethical standards?


Gallup Results

• Congressman• Clergy• Lawyer• Insurance Agent• Car Sales Person

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2009


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2010


Ethics in the Workplace

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• Ethical behavior starts at the top• If leadership and management is not

ethical, neither will the organization be as a whole

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Polling Question #7

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Have you ever been asked by a boss to do something you thought was “unethical”?


Have you ever???????????

• Put something on an application that was not entirely true (500 feet)

• Not put something on an application because you thought it would result in a rejection (vacant building)

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Have you ever???????????

• Misrepresented– Mileage on a PAP– Existence of youthful drivers– Prior accidents/losses– Claims– Class Codes– Payroll– Age/Sq Footage of the building

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True Statement

• “I am not a really successful agent because I am just too honest”

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Ethics from the top down

• If ethics are poor at the top, that behavior is copied down through the organization

• Robert Noyce, inventor of the silicon chip• The time is always right to do what is right• Martin Luther King 1929-1968, American

leader of civil rights movement and Nobel Peace Prize winner

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• Ethical behavior starts at the top. If leadership and management is not ethical, neither will the organization be as a whole

• Every business should have a Code of Ethical Conduct

• Education of employees in ethical conduct is essential in preventing unethical conduct

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Ethics in the Workplace (Insurance)

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There is a fine line between Ethics and E & O


Ethics and Insurance

• The importance of ethics to the insurance professional– Insurance is a business of trust– Trust anticipates standards of behavior– Some standards of behavior are governed

by statute– Statutory obligations should not be the

reason for ethical behavior

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Ethics and Standard of Care

• Insurance agent/brokers must meet a standard of care acting in the capacity providing insurance products/solutions

• The standard of care is three pronged

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Standard of Care and Ethics

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Polling Question #8

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Have you EVER misrepresented anything to an insurance company?


Basics of Standard of Care

• Based on Regulations– Compliance with such issues as GLBA,

Privacy Acts, authority as an agent/broker

• To the Insurance Company– Verify account qualifies– Full disclosure of material facts– That you are honest and accurate– Live up to and within your contract

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Basics of Standard of Care

• To the Insurance Customer– Ordinary care to obtain the coverages they

have requested (identify exposure, explain to the client, follow their instructions)

– Increase your standards as the customer requires

• Make sure you are up to the challenge!• NEVER stop growing / learning

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Code of Ethics


Implementing the Code of Conduct• Make sure senior management endorses• Circulate Code to all employees• Regularly review Code with employees

(e.g. performance reviews)• Incorporate as part of new employee

orientation• Publicize code externally• Enforce the Code

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Your Code of Ethics

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Your Code of Ethics

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Your Code of Ethics

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Your Code of Ethics

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Your Code of Ethics

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End of Part One

• Remember, both parts are necessary to complete the series.

• Both sections complete the Education requirements.

• See you tomorrow, same time, same station.

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Approaches to Ethical Behavior


Ethical Decision Making

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Polling Question #9

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Does your website “Honestly” represent what your company is all about?


Ethical Decisions Occur In Every Phase Of The Insurance Transaction

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Ethical Decisions Occur In Every Phase Of The Insurance Transaction

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“Ethical” Case Studies

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The Case Of The Best Set Of Drivers--Ever

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About the Application


The Case Of The Best Set Of Drivers--Ever• The insurance agent had several large

accounts all of which had fleets of vehicles

• One of the accounts had a fleet of drivers with excellent driving records and accordingly, the BAP was easy to place and very well priced

• One of the other accounts the broker wrote had the opposite—terrible drivers

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The Case Of The Best Set Of Drivers--Ever• The agent had a great idea—use the

listing of good drivers on the second account

• How could he get caught—it was with a different carrier and he had the MVRs to submit

• This way he could get his insured a good rate and save his account

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Rationals

• Situation Based: The agent knew the company would never really check. He had slipped some by before

• Rule Based: He knew this was not right but as long as he wasn’t caught he would be ok

• People Based: His role is to do the best for his client and that what he was doing

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Outcome

• The office manager found the mis-statements on the file and forced the agent to re-submit

• The client was forced to get rid of some drivers

• At renewal the client found a new agent that would lie for him

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The Case of the Deep Fat Fryer

Renewal Application

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• The insured was a chain of sandwich shops located in office buildings

• The sandwich shops did no cooking other than to warm up food in a microwave

• Their insurance was placed with an insurance company that offered a modified restaurant package specifically for businesses that did not do cooking

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• At the second renewal, the insured told their agent that they were doing deep fat frying at their location at Universal Studios– They were limiting it to frying French fries

they could serve with their sandwiches

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• The agent at renewal chose not to include this information on the application because the frying would disqualify them from the program for their entire risk

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• The insured suffered a major fire at the Universal Studio location doing damage to their leased premises; equipment and subsequent fire damage to the building

• The insurance company denied coverage based on the “increased hazard” section of the policy

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• Company further alleged that they would never had written the account with the frying

• Additionally the insured had not adequately protected the premises with an approved Ansul system.

• The client told the company they had advised the agent

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Outcome

• Insurance Agent was held responsible for misrepresentation

• Claim was $950,000

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The Young Driver

You Should Not Have Told Me

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The Young Driver

• Sally and Beth had been friends since childhood and shared raising their kids together

• Sally also wrote all the personal lines insurance for Beth

• One day Beth called up Sally to share the news that their son, Ryan, had just gotten his driver’s license

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The Young Driver

• Sally was glad to hear the news but now faced the ethical decision as to whether she should tell her excited friend she needed to add him to their policy

• And we all know what that was going to cost!

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The Young Driver

• Situation-based: You were just told this by a friend. You know that the son is covered automatically on the policy Beth has and she can save some money until renewal when the company requires the updated information

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The Young Driver

• Rule Based: The rule is that all licensed drivers should be reported to the insurance company. That is an obligation you have to the carrier and that is, after all, how they charge adequate premium. Many companies are obligating the insured by application to notify.

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The Young Driver

• People Based: Why lose a friend over this. It was just told to you as a friend. Beth did not call to add Ryan on the policy to begin with.

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The 5PM Friday Certificate of Insurance

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The 5PM Friday Certificate of Insurance• You are the last one left in the office• Your client walks in the front door• He needs a certificate “now” or he will

lose the deal• You tell him to wait and you’ll issue the

cert• You pull his file and realize it with an E &

S Broker

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The 5PM Friday Certificate of Insurance• Trying a long shot, you call the carrier

and actually get someone this late on a Friday!

• But they tell you only the E&S broker listed on the account has the carrier’s authorization to issue the certificate.

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The 5PM Friday Certificate of Insurance• Hanging up, you stare at your desk • You are certain the broker will issue the

certificate on Monday without any problem, but what are you to do about your anxious client who is waiting in the outer office?

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The 5PM Friday Certificate of Insurance• Situation-based: Past experience

indicates that the broker, if there, would issue the certificate; you have no doubt that if the broker were in your position, he would elect to help the client, and since possible pain of delay is far in excess of possible downside of not helping client, go ahead and issue certificate.

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The 5PM Friday Certificate of Insurance• Rule-based: You have no authority to

issue the certificate, so regardless of the consequences (including potential loss of a valuable client), you must refuse to do so

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The 5PM Friday Certificate of Insurance• People-based: Let’s make an exception

—after all look at that distraught client. Procedures are valid for normal situations. The client’s position, you have no doubt you would deeply appreciate the professional service of your agent stepping in to help you out, so you should do the same.

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The Competition Has Pulled One On You

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The Competition Has Pulled One On You• Your client has told you he is shopping

with other brokers• You arrive for your appointment to

present your renewal quotation and your client tells you he has received a better price

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The Competition Has Pulled One On You• You ask if you might see it and he agrees

to show you• You realize you represent that same

carrier and know it is a great program• You are certain your client does not

qualify for this program and that the agent trying to steal the account has not told the insurance company the whole truth

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The Competition Has Pulled One On You• Situation-based: Even though the carrier

may never find out, the prospect is really getting an unfair advantage; if the carrier does find out, the other agent’s reputation and future ability to place business with that carrier is likely to be impaired. Contact agent’s supervisor – settle the matter quietly? Withdraw his erroneous proposal?

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The Competition Has Pulled One On You• Rule-based: The underwriting rules has

a valid purpose and this insurance should never have been offered. Since you represent this company too, you have an obligation to the carrier to let them know of the misrepresentation before it is too late.

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One The Competition Has Pulled On You• People-based: Don’t you owe some

responsibility to your “old” client. After all he is saving money and it is not his fault. When you were new you did the same thing and you are certainly glad no one took away one of your few accounts over such an error.

• What goes around comes around!

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I Forgot to Market to That Insurance Company

Should that cost me this account?

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I Forgot to Market to That Insurance Company• Your insured is very cost conscience and

has asked you to search the market for the “best deal”

• You went to several insurance companies and thought you had found the best deal

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I Forgot to Market to That Insurance Company• The day before your meeting with the

client, your insured calls to tell you he heard that Cheap and Easy Insurance has really good rates according to his friend– You did not get a quote from company

Cheap and Easy and it is too late for you to ask them as the appointment is tomorrow and the policy renews in a week

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I Forgot to Market to That Insurance Company• What do you tell your client at the

meeting?– Yeah, I checked with them and they didn’t

like your loss potential– Sorry, but they were not on my contact list

and I did not contact them

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I Forgot to Market to That Insurance Company

– I know the market and they would not be a good fit for you

– I’ll do a better job next year, but it is too late this year

• Is honesty the best policy in this case?• “Relativity applies to physics, not

ethics”Albert Einstein

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Disclaimer

Insurance forms and endorsements vary based on insurance company; changes in edition dates; regulations; court decisions; and state

jurisdiction. This instructional materials provided by Insight is intended as a general guideline and any interpretations provided by Insight do not

modify or revise insurance policy language. The authors of these materials, Insight Insurance Consultants is a division of Insight Consulting

and Management Inc. In providing these materials, Insight assumes neither liability nor responsibility to any person or business with respect to any loss that is alleged to be caused directly or indirectly as a result of

the instructional materials provided. Copyright 2010 – 2011 All Rights Reserved

www.insurancecommunitycenter.comLaurie: 714.803.5830 [email protected]

Marjorie: 714.206.9583 [email protected]

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